Economics 102: Macroeconomics Ch 1. Scarcity, Choice, and the Production Possibilities Curve

Economy

• the management of the resources of a country

• is a system in which suppliers produce the goods and services

The Basic Economic Problem

needs and wants are unlimited, but resources are scarce

Resources (the factors of production)

include land, labor, capital and entrepreneurship

Scarcity

insufficient resources to satisfy everyone’s needs and wants

Economics

is the social science that studies how people use scarce resources to satisfy unlimited needs and wants

Incentives

are rewards that motivate people to behave in certain ways

Scarcity means:

1. the price of a good is set too low

2. a shortage of resources, goods, or services

3. not having enough of a resource, good, or service to satisfy all wants at a zero price

4. there is too much competition in the market

5. the government is spending too much

not having enough of a resource, good, or service to satisfy all wants at a zero price

Because resources are scarce, but wants are not:

1. government must help businesses allocate resources

2. prices of goods and services are high

3. unemployment exists

4. consumers must make choices

5. governments must collect taxes

consumers must make choices

Economics is best described as the study of:

1. how businesses maximize profits

2. how banking works

3. how markets find resources

4. is the social science that studies how people use scarce resources to satisfy unlimited needs and wants.

5. how goods and services are produced

is the social science that studies how people use scarce resources to satisfy unlimited needs and wants.

Economics looks at

1. how businesses use unlimited resources to satisfy unlimited consumer wants

2. how people use unlimited resources to satisfy their unlimited wants

3. how people use scarce resources to satisfy unlimited wants

4. how people use unlimited resources to satisfy limited wants

5. how governments satisfy business demand

how people use scarce resources to satisfy unlimited wants

The perpetual problem in economics is:

1. the inability of people to work together effectively.

2. the gap between the income of the upper and lower socioeconomic classes

3. how to supply enough to earn a consistent profit

4. the inability to efficiently use resources.

5. the inability to satisfy everyone's wants with the resources available.

the inability to satisfy everyone's wants with the resources available.

Opportunity Cost

is what must be given up in order to take an opportunity. it’s not the opportunity we chose, but the value of the next best alternative we didn’t choose

• every choice has a value to you

• is the value of the opportunity lost

Value has 2 Parts

1. Benefits

2. Cost

Scarcity

creates choice, and every choice has a value to us. that value can be looked at in terms of benefits and cost

Josie decided to go to college full-time instead of working. Which of the following is the opportunity cost of going to college for Josie?

1. The final benefit of graduating from college.

2. The cost of college tuition.

3. The income she will earn in the future for being a college graduate.

4. The income she would have earned by working.

The income she would have earned by working.

Which of the following best describes opportunity cost?

1. How much better off you are because you made a decision.

2. The value to you of the next best (alternative) action you could have taken.

3. The dollar value of the decision you made.

4. How much you have to pay for the opportunity you choose.

The value to you of the next best (alternative) action you could have taken.

Assume that you have two hours to spend at the mall. You can either visit the bookstore or enjoy a movie at the theater. The opportunity cost of watching a movie is equivalent to which of the following?

1. The time it takes to walk from the parking lot to the movie theater.

2. The time you could have spent visiting the bookstore.

3. The cost of the movie ticket.

4. The time you spent watching the movie.

The time you could have spent visiting the bookstore.

Assume that land can be used either for producing corn or producing soybeans. The opportunity cost of converting an acre from producing corn to producing soybeans is equal to which of the following?

1. The amount by which corn production decreases.

2. The profits created by the extra soybean production.

3. The amount of soybeans produced.

4. The market value of the extra soybeans.

The amount by which corn production decreases.

During the time Mary spent studying macroeconomics, she could have instead either made brownies or played the piano. She thinks to herself that if she wasn't studying, then she would have made brownies. In this case, her opportunity cost of studying is equal to which of the following?

1. The amount of time Mary spent studying.

2. The cost of the ingredients needed to make brownies.

3. The value of playing the piano.

4. The value of making brownies, which is her next best alternative.

The value of making brownies, which is her next best alternative.

Best Economical Choice?

calculating the opportunity cost of each choice

Opportunity Cost

reveals the value in any decision

Economics

is all about getting the best results with the least amount of effort or producing a larger quantity of one thing with the same amount of resources

Calculating Opportunity Cost

can be used for any major choice. 2 goods or economy-wide level between capital & consumer goods

Which of the following people has the highest opportunity cost of earning a college degree, if they must give up their present job?

1. Sue, who is a chef earning $25,000

2. Moe, who is unemployed

3. Larry, who is a Navy Seal earning $40,000

4. Curly, who is a salesman earning $60,000

Curly, who is a salesman earning $60,000

With the same amount of resources, Country A can produce 25 tons of chicken or 50 tons of wheat. What is Country A's opportunity cost of producing 1 ton of wheat?

1. ½ ton of chicken

2. 25 tons of wheat

3. 25 tons of chicken

4. 2 tons of chicken

½ ton of chicken

In one hour, Sally can complete 4 reports or she can write 8 computer programs. Calculate the opportunity cost for this scenario.

1. Writing one report and forgoing 4 computer programs

2. Writing one report and forgoing 5 computer programs

3. Writing one report and forgoing 3 computer programs

4. Writing one report and forgoing 2 computer programs

Writing one report and forgoing 2 computer programs

Assuming there are only two countries, Country A can produce 10 tons of wheat or 20 tons of rice, while Country B can produce 5 tons of wheat or 15 tons of rice. Which country has the highest opportunity cost for producing 1 ton of rice?

1. Country A up to 1/2 ton then it is Country B

2. Both countries are the same

3. Country A

4. Country B

Country A

It takes Joan 1 hour to make a pizza and 2 hours to make a cake. Joan's opportunity cost of making a pizza is which of the following?

1. ½ of a cake

2. 2 pizzas

3. ½ pizzas

4. 2 cakes

½ of a cake

Production Possibilities Model

a visual model of scarcity and efficiency

Important Assumptions

how much of each good should we produce in order to produce them in the most efficient way?

1. resources are used to maximize capacity

2. resources are scarce

3. technology remains constant

Production Possibilities Curve

shows the opportunity costs of producing two goods in an economy

Economy

that is perfectly efficient will produce on the curve, instead of inside (or below) the curve

The Law of Opportunity Costs

the curve is bowed outwards

Which is TRUE of points located outside of the production possibility curve?

1. They are profitable.

2. They are more efficient than average.

3. They demonstrate unlimited capacity.

4. They are less efficient than average.

5. They are unattainable.

They are unattainable.

When a point is on the production possibilities curve, how can we interpret this point compared to points inside the curve?

1. It is not efficient.

2. It is less efficient than all other points.

3. It is not obtainable or possible.

4. It is more efficient than the other points.

5. It is equally efficient as all other points.

It is more efficient than the other points.

The production possibilities curve for two goods is bowed outward because _____.

1. there are no opportunity costs

2. of decreasing opportunity costs

3. of increasing opportunity costs

4. it depends on what you produce

5. the opportunity costs stay the same

of increasing opportunity costs

What does the production possibilities model show?

1. That all production is inefficient.

2. How we can lower fixed costs.

3. How we can produce two goods efficiently.

4. How we can produce three goods efficiently.

5. What the probability is of earning a profit.

How we can produce two goods efficiently.

A point that is located inside the production possibility curve is:

1. Inefficient

2. More efficient than points on the curve

3. Equally efficient as all other points

4. Efficient

5. Unattainable

Inefficient

The Production Possibilities Frontier (PPF)

how people and nations should decide what goods to produce, how much to produce, & for whom they should produce it

The Production Possibilities Curve

illustrates all possible combinations of how we can produce these two goods, given the constraints, including the fact that resources are scarce

Shifts in the Curve are Caused by:

1. Advances in technology

2. Changes in resources

3. More education/training (human capital)

4. Changes in the labor force

Changes in Technology

• improves productivity, output increases

• output decreases, possibilities curve shifts downward

Changes in Resources

natural disasters and other setbacks will cause the possibilities curve to shift inward

Education Training

Human Capital

• education = knowledge = increased productivity

• production possibilities curve shifts outward

Increase in Labor Force

• production possibilities curve shifts outward

• more people working = more production

Decrease in Labor Force

• more people NOT working = decrease output of the nation

• production possibilities curve shifts inward

Consumer Goods

final goods that are purchased directly by consumers

Capital Goods

the machinery, tools & equipment used to produce consumer goods

Provided that other factors remain the same, which of the following would shift an economy's production possibilities curve to the left?

1. An increase in the Social Security retirement age

2. Dramatic increases in economic growth

3. The country discovers a new energy source

4. The country experiences a major natural disaster affecting its capital goods

5. a major increase in the number of people in the labor force

The country experiences a major natural disaster affecting its capital goods

Outward shifts (to the right) in the production possibilities curve will result in which of the following?

1. Increased productivity

2. Decreases in regulation

3. No change in productivity

4. Decreased productivity

5. Increased regulation

Increased productivity

All of the following factors impact an economy's production possibility curve except

1. a technological advance

2. a newly-discovered energy source

3. an increase in the resources available in the economy

4. technological stagnation

5. increases in the population

technological stagnation

Investments in which of these do more to increase economic growth?

1. Capital goods

2. Neither consumer goods nor capital goods affect economic growth.

3. Consumer goods

4. Both consumer goods and capital goods contribute equally to economic growth.

Capital goods

Why doesn't the output continue to increase on the production possibilities curve?

1. The curve does go to infinity

2. Because of constraints to resources

3. Because price will hold it down

4. Because possibility is always finite

5. Because this would give an absolute advantage

Because of constraints to resources

opportunity cost

the benefit or value you give up by picking one course of action over another

capital structure

how a company finances its operations

equity

the infusion of capital into a business through the sale of shares of common stock or preferred stock to investors

Carl owns a computer company. On any given day, he can produce either 500 desktop computers or 300 laptops. What's his opportunity cost if he decides to produce 500 desktops?

1. 300 laptop computers

2. There's no opportunity cost because he can make more desktops than laptops.

3. 800 laptop computers

4. 500 desktops

300 laptop computers

A CFO can invest company profits in stocks with projected returns of 10%, or use the money to add a new assembly line, projected to yield 14% after payment of the debt. What is the opportunity cost of investing in stocks instead of the factory upgrade?

1. 4%

2. 14%

3. 10%

4. 24%

4%

You can invest in the stock market with an expected return of 9% or invest in the bond market with an expected return of 6%. What's your opportunity cost if you invest in bonds?

1. 6%

2. 3%

3. 0%

4. 9%

3%

How can opportunity cost be best described?

1. It is the amount of time that is lost by a company when production remains idle

2. It is the cost involved with selling a product

3. The value or benefit given up in pursuing an alternative course of action

4. The cost that is associated with expenditure of goods

The value or benefit given up in pursuing an alternative course of action

Which of the following may be a component of a company's capital structure?

I. Long-term debt

II. Short-term debt

III. Equity

1. I, II and III

2. II and III

3. I and III

4. I and II

I, II and III