ECO 2013 Study Guide - Quiz Guide: Market Failure, Absolute Advantage, Human Capital
Study Guide Unit 1
Define economics
Economics is the study of the ways individuals, firms, and society make decisions to allocate
limited resources for competing wants. It assumes that people are rational, self-interested, and
respond to incentives.
What is scarcity?
Problem of having unlimited human wants in a world of limited resources. Society has
insufficient productive resources to fulfill all human wants and needs. Unlimited wants clash
with limited resources. Economics focuses on the allocation of scarce resources.
Why do we face tradeoffs?
A tradeoff is a situation that involves losing one quality or aspect of something in return for
gaining another quality or aspect. To get one thing, we usually have to give up another thing.
What are incentives?
Incentives are what motivates people to behave a certain way. Usually involve money, but can
involve goods and services.
What is macro vs micro economics?
Microeconomics is the study of decision making by individuals, businesses, and industries.
Macroeconomics is the study of broader issues in the economy, such as inflation,
unemployment, and national output.
What do we mean when we discuss a "model"?
In economics, all other relevant factors or variables are held constant. Models are crafted from
new ideas, then tested against real world data. Economists create models that include the
assumption of ceteris paribus (held constant). All markets are in equilibrium, opportunity costs
are minimized, markets are free of intervention, all else is held constant.
What is equity?
Equity is the fairness of various issues and policies.
What is efficiency?
Efficiency is how well resources are used and allocated.
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Study Guide Unit 1
What is production efficiency?
Production efficiency is an economic level at which the economy can no longer produce
additional amounts of a good without lowering the production level of another product. Goods
and services are produced at their lowest possible resource (opportunity) cost. This happens
when an economy is operating along its production possibility frontier.
What is allocative efficiency?
Allocative efficiency is when the mix of goods and services produced is what society desires.
What is opportunity cost?
The cost of a good in terms of another that must be given up.
What is meant by the word marginal?
Marginal is used to indicate the change in some benefit or cost when an additional unit is
produced.
What is market failure?
A situation in which the allocation of goods and services is not efficient. There exists another
conceivable outcome where an individual may be made better-off without making someone
else worse-off.
What is meant by a linear relationship?
A relationship between two variables that is illustrated by a straight line.
What is an absolute advantage?
The ability of a party (individual, firm, or country) to produce a greater quantity of a good,
product, or service than competitors, using the same amount of resources. Produce more of a
given product using less of a given resource.
What is production?
The process of converting factors of production to outputs. Factors include land, labor, capital,
ideas.
What is distribution?
The way total output, income, or wealth is distributed among individuals or among the factors
of production.
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Document Summary
Economics is the study of the ways individuals, firms, and society make decisions to allocate limited resources for competing wants. It assumes that people are rational, self-interested, and respond to incentives. Problem of having unlimited human wants in a world of limited resources. Society has insufficient productive resources to fulfill all human wants and needs. Economics focuses on the allocation of scarce resources. A tradeoff is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. To get one thing, we usually have to give up another thing. Incentives are what motivates people to behave a certain way. Usually involve money, but can involve goods and services. Microeconomics is the study of decision making by individuals, businesses, and industries. Macroeconomics is the study of broader issues in the economy, such as inflation, unemployment, and national output. In economics, all other relevant factors or variables are held constant.