WGU Principles of Economics - D089

What are the three fundamental questions every economy must answer?

What to produce, how to produce it, and for whom to produce it

A property owner has 500 acres of flat land and has been approached by two different businesses. One business wants to drill for oil, and the other wants to raise cattle.

Which fundamental question does this scenario represent?

What to produce?

A well-established company has been producing goods and wants to create a new line of production. The company needs to decide whether it should use a current factory or find a new location.

Which fundamental question does this scenario represent?

How to produce it?

To address environmental concerns, Congress is considering a bill that would increase the price of electricity generated by coal. Increasing the price of electricity creates a problem for low-income households.

Which fundamental question does this scenario represent?

For whom to produce?

What are the four economic principles that address how people make decisions?

Everyone faces tradeoffs, The cost of something is determined by what someone gives up to get it, Rational people think at the margin, People respond to incentives

Opportunity cost

The next best alternative that is given up when a choice is made

What does “rational people think at the margin” mean?

People make better decisions when they consider if the additional benefit they gain from one more unit is greater than the additional cost of that extra unit of a good or service

Marginal benefit

The additional benefit you gain from consuming one more of something

Marginal cost

The additional cost you incur from consuming one more of something

A sales manager offers a higher percentage of commission for a product that is not selling well.

Which principle of economics does this scenario represent?

Principle 4: People respond to incentives

A farmer is really good at growing corn and exchanges the corn for meat and supplies.

Which principle of economics does this scenario represent?

Principle 5: Trade can leave everyone in a better position

Multiple producers and consumers exchange goods and services.

Which principle of economics does this scenario represent?

Principle 6: Markets are a sound method of organizing economic activity

Companies face regulation when they create a monopoly in their industry.

Which principle of economics does this scenario represent?

Principle 7: Governments sometimes have the ability to better market outcomes

What is a consequence of a government printing more money?

Increased inflation

Economic systems

How an economy distributes scarce resources

Traditional economy

A system where individuals make decisions based on traditions, beliefs, and customs

Command economy

A system where the government makes all the decisions (centralized)

Market economy

A system where businesses make decisions based on consumer demand (decentralized)

Mixed economy

A system where businesses make decisions based on consumer demand, but the government makes decisions in terms of regulations, consumer safety, and environment

What is a benefit of using a traditional economic system?

Everyone knows their role in the market

Which characteristic is associated with a command economy?

Competition is limited

What is an advantage of a market economy?

Innovation is encouraged and rewarded

What is a disadvantage of a mixed economic system?

Freedom of choice can fluctuate from too much to too little

Positive economics

Focuses on analyzing economic behavior and avoiding economic value judgments

Normative economics

Focuses on what the outcome of the economy or goals of public policy should be

Positive statements

Facts that can be tested

Normative statements

Opinions that express value or judgements about economic fairness

Which economic framework would a student use to study inflation in a country over past years?

Macroeconomics

Which economic framework would a student use to explain past price changes in a specific industry?

Microeconomics

Economic indicator

A statistic about an economic activity

Which economic reasoning is used in deciding among public policy goals?

Normative statements because fairness of outcomes should be considered

Which economic reasoning is involved when someone wants to study a country's output of gross domestic product (GDP)?

Macroeconomic theory

Natural resources

Things found in nature that may be used to produce goods and services

Labor

The human effort that can be applied to the production of goods and services

Capital

A factor of production that has been created for use in the production of other goods and services

Entrepreneur

A person operating within a market economy who looks for ways to make profits by finding new ways in which the factors of production may be organized

Natural resources factor payment

Rent for land or buildings

Labor factor payment

Salaries and wages

Capital factor payment

Interest and dividends

Entrepreneur factor payment

Profit

What are the four factors of production?

Natural resources, labor, capital, entrepreneurship

Which criterion must be satisfied to include capital as a physical good or intellectual discovery?

It has been produced already and is used for producing other goods and services

Why is technology an important part of entrepreneurship?

Entrepreneurs use technology to best organize production