Economics Review Flashcards (Chapter 1-5)

A set of practice questions covering core concepts from chapters 1–5, focusing on the basic principles of economics, scarcity, production, GDP, and market mechanisms.

What is economics?

The science of choice; the study of how individuals and organizations make decisions when resources are scarce.

What does scarcity mean in economics?

Resources are limited while human wants are unlimited, leading to trade-offs.

List the five factors of production.

Natural resources, labor, physical capital, human capital, entrepreneurship.

What is opportunity cost?

What you sacrifice to get something.

What are the three key economic questions?

What products to produce, how to produce them, and who consumes the products.

What is the difference between positive and normative analysis?

Positive: what is or what will be; normative: what ought to be.

What is an economic model?

A simplified representation of an economic environment, often using graphs.

What does ceteris paribus mean in economic analysis?

All other relevant variables are held fixed.

What is a marginal change?

A small, one-unit change in a variable.

What does ’thinking at the margin’ mean?

Analyzing how a small additional change affects costs and benefits to guide decisions.

What does it mean that rational people respond to incentives?

People act in their own self-interest and adjust behavior when costs or benefits change.

What is the Marginal Principle?

Increase an activity as long as marginal benefit exceeds marginal cost; stop where MB = MC.

What is the principle of diminishing returns?

When increasing one input while holding others fixed, output eventually grows at a decreasing rate.

What is the Real-Nominal Principle?

Real value (purchasing power) matters; nominal value is the face value.

What is GDP?

The total market value of final goods and services produced within a country in a given year.

What is the difference between intermediate goods and final goods?

Intermediate goods are inputs used to produce final goods; final goods are purchased by end users; counting avoids double counting.

What is the GDP deflator?

An index measuring how prices of goods and services included in GDP change over time; deflator = (Nominal GDP / Real GDP) × 100.

What are the four components of GDP?

Consumption, investment, government purchases, net exports.

What does the circular flow illustrate?

Production generates income; households provide labor and capital; firms pay wages, rents, interest, profits; households spend on goods and services.

What is national income in relation to GDP?

National income equals GDP plus net income earned abroad minus depreciation.

What is GNP?

GDP plus net income earned abroad.

What is the difference between real GDP and nominal GDP?

Nominal GDP uses current prices; real GDP uses constant prices to remove price changes.

Why is GDP not a perfect measure of welfare?

It excludes nonmarket activities, leisure, the underground economy, and environmental effects.

What are the phases of the business cycle?

Peak, recession, trough, and expansion.

What is the Production Possibilities Curve (PPC)?

A curve showing the trade-offs and opportunity costs for an economy producing two goods; bowed outward due to increasing opportunity costs.

What causes the PPC to shift outward?

An increase in resources or technological progress.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than another producer.

What are some roles of government in a market economy?

Establishing rules for exchange, enforcing property rights, providing public goods, reducing uncertainty, addressing market failures.

What is the invisible hand concept?

Individuals pursuing their own interests can unintentionally promote society’s overall welfare through markets.

What is intellectual property’s treatment in GDP (modern change)?

Since 2013, intellectual property products like R&D, software, and new works are counted as investment expenditures.

Why are markets considered virtuous compared to central planning?

Markets use dispersed information, contracts, prices to coordinate decisions, leading to efficient allocation of resources.