Unit 1 Collegeboard Basic Economic Concepts Test Review

What is scarcity in economics?

Scarcity is the fundamental concept of economics, referring to the limited nature of resources in relation to unlimited wants, needs, and desires.

Why are individuals and societies forced to make decisions?

Because resources are scarce.

What is the definition of economics?

Economics is a behavioral science concerned with how scarce resources are allocated among unlimited wants, needs, and desires.

What are the two conditions for a good or service to be considered scarce?

A good or service must be both limited and wanted.

What is a tradeoff?

A tradeoff is giving something up for something else, such as sacrificing an hour of running to study for a math test.

What are resources in the context of economics?

Resources are items that are used to produce goods and are both limited and wanted.

What are the four factors of production?

The four factors of production are entrepreneurship, capital, labor, and land.

What does land encompass in economic terms?

Land encompasses natural resources, and the payment for land is rent.

How is labor defined in economics?

Labor is human effort based on workers, and the payment for labor is wages.

What does capital include?

Capital includes physical, financial, and human capital, with payment for capital being interest.

What is entrepreneurship?

Entrepreneurship is the ability to combine resources to satisfy societal wants, needs, and desires, requiring risk-taking and decision-making, with profit as the payment.

What is opportunity cost?

Opportunity cost is the highest valued foregone alternative to any decision made, essentially representing what you could have done or earned instead.

What is the Production Possibilities Frontier (PPF)?

The PPF is a model used to visualize tradeoffs in allocating resources, showing potential output combinations of two goods on a coordinate plane.

What does the Production Possibilities Curve illustrate?

The curve illustrates concepts of opportunity costs, tradeoffs, efficiency, inefficiency, economic growth, economic contraction, and underutilized resources.

What factors can cause the Production Possibilities Curve to shift?

The curve can shift due to changes in production, productivity, or technology.

What does an outward shift of the Production Possibilities Curve indicate?

An outward shift indicates economic growth.

How does the shape of the Production Possibilities Curve relate to opportunity costs?

The shape depends on whether the opportunity cost is constant, increasing, or decreasing.

What does the Production Possibilities Curve reflect about an economy?

It reflects the productive capacity of an economy and whether resources are being used efficiently.

What is the significance of tradeoffs in the context of opportunity costs?

Tradeoffs exist because of scarcity, and they highlight the need to forego one option for another.

What does the Production Possibilities Curve help to visualize?

It helps visualize the tradeoffs and opportunity costs associated with resource allocation in a world of scarcity.

What does it mean to be efficient in an economic context?

It means that you cannot produce more of one good without decreasing the production of another good.

What does a linear Production Possibility Curve (PPC) indicate?

It indicates constant opportunity cost.

What does a concave PPC indicate?

It indicates increasing opportunity cost.

What is absolute advantage?

It describes a situation where an individual, business, or nation can produce more of a good than others with the same resources.

What is comparative advantage?

It describes a situation where an individual, business, or nation can produce a good at a lower opportunity cost than others.

How is opportunity cost calculated for output?

Opportunity Cost (A) = good A / good B.

How is opportunity cost calculated for input?

Opportunity Cost (A) = good B / good A.

What determines who can produce more efficiently?

Comparative advantage.

What are the terms of trade?

They are the agreed-upon exchange rate of two goods between producers.

How do we determine if terms of trade are mutually beneficial?

If the terms of trade fall between the opportunity costs of the two producers.

What is the Law of Demand?

It states that as the price of a good increases, the quantity demanded decreases, holding other factors constant.

What is the Quantity Demanded?

It is the actual amount of a good or service consumers are willing and able to buy at a specific price.

What does a demand curve represent?

It is a graphical representation showing the relationship between quantity demanded and price.

What factors can affect demand according to MERIT?

Market Size, Expectations, Related Prices (complements and substitutes).

What happens to the demand for sugar when the price of a latte increases?

The demand for sugar decreases as they are complements.

What is the significance of calculating opportunity costs in trade?

It helps determine the terms of trade and whether trade will be mutually beneficial.

What is the outcome of trade based on comparative advantage?

It results in greater overall output of both goods and gains from trade for both producers.

What should you never assume about absolute and comparative advantage?

Never assume they exist without doing the math to prove it.

What does the ability to consume beyond production possibilities curve indicate?

It indicates that trade has allowed for increased consumption beyond individual productive capacities.

What is a competitive market?

A market with many buyers and sellers of the same good or service, where no firm can influence the price.

What is the relationship between price and quantity demanded?

They are inverses of each other; as price increases, quantity demanded decreases.

What is the role of expectations in demand?

Expectations can influence consumer behavior and demand for goods.

What happens to the demand for a frappe when the price of a latte increases?

The demand for a frappe increases due to the substitution effect.

How do normal goods and inferior goods respond to changes in income?

If income increases, the demand for normal goods increases, while the demand for inferior goods decreases.

What does MERIT stand for in relation to demand?

Market size, Expectations, Related prices, Income, Tastes.

What does a rightward shift in the demand curve indicate?

An increase in demand.

What is the Quantity Supplied?

The actual amount of a good or service that sellers are willing to sell at a specific price.

What does the Law of Supply state?

With other things being equal, price and supply are positively related.

What happens to supply when the price of a good increases?

The supply will increase.

What is the supply curve?

A graphical representation of supply in a competitive market.

What does a movement along the supply curve indicate?

A change in the quantity supplied due to a change in the good's price.

What does TRICE stand for in relation to supply?

Technology, Related Prices, Input Prices, Competition, Expectations.

How do input prices affect supply?

Input prices have an inverse relationship with supply.

What is market equilibrium?

The point where supply and demand intersect on a graph.

How does MERIT affect market equilibrium?

Changes in MERIT cause the demand curve to shift, resulting in a new market equilibrium.

How does TRICE affect market equilibrium?

Changes in TRICE cause the supply curve to shift, resulting in a new market equilibrium.

What occurs in the pear market if apples are announced to be unhealthy?

An increase in demand for pears will occur.

What is a surplus in the market?

A surplus occurs when the price exceeds the equilibrium level, resulting in quantity supplied exceeding quantity demanded.

What is a shortage in the market?

A shortage occurs when the price is below the equilibrium level, resulting in quantity demanded exceeding quantity supplied.

What is a price floor?

The minimum price set by the government, such as minimum wage.

What is a price ceiling?

The maximum price set by the government, such as rent-controlled housing.

What is the relationship between supply and competition?

An increase in competition typically leads to an increase in supply.

What happens to supply if the price of heating oil increases?

Suppliers will supply more heating oil and less natural gas.

What is the effect of expectations on supply?

If producers expect prices to rise, they may increase supply in anticipation.

What is the significance of the supply curve moving to the right?

It indicates an increase in supply and price.