econ fundamentals quiz

economics

the study of scarcity and choice

opportunity cost

the value of the next best alternative forgone

sunk cost

a cost has already been incurred, and cannot be recovered. This cost should not be considered when making future decisions.

utility

the satisfaction that we get from consuming goods and services

resources

land, labor, capital, entrepreneurship

land

natural resources used in the production process

labor

physical and mental work effort contributed by people

capital

manufactured resources, including factories, tools, machinery

entrepreneurial ability

making strategic decisions to bring resources together in the face of risk

market economy

decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions.

command economy

industry is publicly owned and a central authority makes production and consumption decisions.

production possibilities curve

graphically illustrate the significance of scarcity and opportunity cost.

law of increasing opportunity cost

as you produce more of one item, the amount of a second item you must give up increases with each additional step

productive efficiency

Producing goods in the least costly way

allocative efficiency

Producing the combination of goods and services most wanted by society

optimal resource allocation

when the marginal benefit equals the marginal cost

marginal benefit

the gain of doing something one more time

marginal cost

the cost of doing something one more time

marginal utility

the gain of doing something one more time

marginal utility formula

Δ total utility/ Δ quantity

utility maximization

a consumer should allocate their money income so the last dollar they spend on each product provides the same amount of additional utility.

utility maximization formula

marginal utility of A/price of A = marginal utility of B/price of B, where the denominators are equal

law of diminishing marginal utility

the additional satisfaction a consumer gets from one more unit of a good or service declines as the amount of that good or service consumed rises.

specialization

a situation in which different people each engage in the different task that he or she is good at performing.

absolute advantage

when someone can produce more of that good than someone else (given the same amount of resources).

comparative advantage

when someone can produce that good at a lower opportunity cost than someone else.

output question, oreo

time is set, amount produced is given/changing

input question, double

amount produced is set, time is given/changing

favorable terms of trade

a ratio that falls between the two producers’ opportunity costs