Econ: Unit 1
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Sept 2026
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59 Terms
Q: What is scarcity?
A: resources are limited while human wants are unlimited
Q: Why does scarcity force people to make choices?
A: Because there are not enough resources to satisfy every want
Q: What is a scarce resource?
A: A resource that is limited in supply
Q: What are the 4 factors of production?
A:
Land → natural resources
Labor → human work
Capital → tools, machines, buildings used to produce goods
Entrepreneurship → organizing resources and taking business risks
Q: What is an example of capital?
A: A factory, computer, oven, or machine used to produce goods/services.
Q: What are the 3 basic economic questions every economy must answer?
What to produce?
How to produce it?
For whom to produce it?
Q: What is a command economy?
A: An economy where the government makes most major decisions about production and resource allocation.
Q: What is a market economy?
A: An economy where individuals and businesses make most economic decisions
Q: What is a mixed economy?
A: An economy that combines market forces with government involvement.
Q: What is resource allocation?
A: Deciding how scarce resources will be distributed and used.
Q: What does a production possibilities curve show?
A: The maximum combinations of two goods/services an economy can produce using its available resources and technology efficiently.
Q: What does a point ON the PPC represent?
A: Efficiency — resources are being used fully and effectively.
Q: What does a point INSIDE the PPC represent?
A: Inefficiency — the economy is not fully using its available resources.
Q: What does a point OUTSIDE the PPC represent?
A: A combination that is currently unattainable with the economy’s existing resources and technology.
Q: What is a trade-off?
A: giving up some of something to get more.
Q: What is opportunity cost on a PPC?
The amount of one good that must be given up to produce more of the other good.
Q: How do you calculate opportunity cost from a table?
A:Opportunity cost = what you give up ÷ what you gain
Example: If producing 10 more computers requires giving up 20 phones:
20 ÷ 10 = 2 phones per computer.
Q: What does an outward shift of the PPC mean?
A: Economic growth — the economy can produce more than before.
Q: What can cause the PPC to shift outward?
A: better resources or increased productivity.
Q: What can cause the PPC to shift inward?
A: A decrease in available resources or destruction of productive capacity.
Q: What does a bowed-out PPC usually indicate?
A: Increasing opportunity costs — producing more of one good requires giving up increasingly larger amounts of the other good.
Q: What does a straight-line PPC indicate?
A: Constant opportunity costs.
Q: What is absolute advantage?
A: The ability to produce more of a good using the same resources than another producer.
Q: What is comparative advantage?
A: The ability to produce something at a lower opportunity cost than another producer.
⭐ MEMORIZE THIS:
Absolute = ?
Comparative = ?
Absolute = who can produce MORE.
Comparative = who gives up LESS.
Q: Which advantage determines who should specialize?
A: Comparative advantage.
Q: Why does specialization according to comparative advantage lead to gains from trade?
A: Each producer specializes in what they have the lowest opportunity cost for, allowing total production and potential consumption to increase through trade.
Q: Can someone have an absolute advantage in both goods but still benefit from trade?
A: Yes. Comparative advantage depends on opportunity cost, not simply who produces more.
Q: How do you find comparative advantage?
A: Calculate the opportunity cost of producing each good for each producer. Whoever has the lower opportunity cost has the comparative advantage.
Q: What makes terms of trade mutually beneficial?
A: The trading price must fall between the two producers’ opportunity costs.
Q: What is specialization?
A: When a person, business, or country focuses on producing the good/service in which they have a comparative advantage.
Q: What is opportunity cost?
A: The value of the next-best alternative you give up when making a choice.
Q: What is an explicit cost?
A direct monetary cost of a decision.
Q: What is an implicit cost?
A: The value of something you give up without directly paying money.
What is total net benefit?
A: Total benefits − Total costs
Q: What is the optimal decision?
A: The choice that maximizes total net benefits.
Q: What does “utility” mean for consumers?
A: The satisfaction or benefit consumers receive
Q: What does “total revenue” mean for firms?
A: The total money a firm receives from selling its goods/services.
Q: What does “marginal” mean in economics?
A: The additional or extra amount resulting from one more unit of an activity.
Q: What is marginal benefit?
A: The additional benefit from doing or consuming one more unit.
Q: What is marginal cost?
A: The additional cost from doing or producing one more unit.
Q: What is marginal analysis?
A: Comparing the marginal benefit of an additional action with its marginal cost.
Q: When should you do one more unit of something?
A: When marginal benefit > marginal cost.
Q: When should you NOT do one more unit?
A: When marginal cost > marginal benefit.
Q: What is the optimal quantity?
A: The quantity where marginal benefit = marginal cost, which maximizes total net benefits.
If MB = $10 and MC = $7, should you do one more unit?
YES, because the additional benefit is greater than the additional cost.
Q: What is diminishing marginal utility?
A: As a person consumes more units of a good, the additional satisfaction from each additional unit generally decreases.
Q: Example of diminishing marginal utility?
A: Your first slice of pizza may provide a lot of satisfaction, while your fourth slice provides less additional satisfaction.
Q: How should consumers allocate limited income?
A: They should allocate spending so that the marginal utility per dollar spent is equal across the goods.
Q: What is the key consumer-choice rule?
A: Consumers maximize utility when the marginal utility of the last dollar spent on each good is equal.
Q: What is a sunk cost?
A: A cost that has already been paid/incurred and cannot be recovered.
Q: What is the sunk cost fallacy?
A: Making a decision based on costs that cannot be changed, instead of considering the costs and benefits going forward.
Q: Should sunk costs affect a future decision?
A: No. Decisions should be based on future costs and benefits, not costs that have already been determined.
Q: Example of the sunk cost fallacy?
A: You paid for a movie but aren’t enjoying it. Continuing only because you already paid is a sunk-cost mistake. The ticket money is already gone.
Q: Explain why every decision has an opportunity cost.
A: Resources are scarce, so choosing one option means giving up the next-best alternative. The value of that alternative is the opportunity cost.
54. Q: Explain how comparative advantage creates gains from trade.
A: Producers should specialize in goods for which they have the lowest opportunity cost.
Q: Explain how a PPC demonstrates scarcity and trade-offs.
A: A PPC shows that resources are limited, so producing more of one good requires giving up some of another.
Q: Explain how to make an economically optimal decision.
A: Compare the marginal benefit with the marginal cost. Continue an activity when MB > MC and stop increasing it when MC exceeds MB. The optimal quantity occurs where MB = MC.