Exam 1 Review: Principles of Economics

Flashcards covering key concepts from Chapter 2 (Thinking like an Economist) and Chapter 3 (Interdependence and the Gains of Trade) for Exam 1 review, in a fill-in-the-blank style.

Economics is the study of how society manages its resources.

scarce

The concept that society has limited resources and therefore cannot produce all the goods and services people wish to have is known as __.

scarcity

The highest-valued alternative that must be given up to obtain some item is called the .

opportunity cost

The visual model of the economy that shows how dollars flow through markets among households and firms is the .

Circular Flow Diagram

A Production Possibilities Frontier (PPF) that is __ indicates a constant opportunity cost.

linear

A Production Possibilities Frontier (PPF) that is __ indicates an increasing opportunity cost.

bowed outward

Points located directly on the Production Possibilities Frontier represent __ levels of production.

efficient

Points located inside the Production Possibilities Frontier represent __ levels of production.

inefficient

Points located outside the Production Possibilities Frontier are characterized as __.

impossible

__ causes the Production Possibilities Frontier to shift outward.

Economic growth

A producer who can produce a good using a smaller quantity of inputs than another producer has an __.

absolute advantage

A producer who can produce a good at a lower opportunity cost than another producer has a __.

comparative advantage

Countries should __ in producing goods for which they have a comparative advantage.

specialize

The rate at which one good is exchanged for another, or the price of trade, is known as the __.

terms of trade

Mutually advantageous trade is possible as long as the terms of trade lie between the __ of the two trading partners.

opportunity costs

Through international trade, countries can achieve consumption possibilities that lie their production possibilities frontiers.

outside