Chapter 1
INTRODUCTION
The Chapter in a Nutshell
1. The source of an economy’s scarcity problem is that people have limited resources to satisfy
their unlimited material wants.
2. Resources, or factors of production are inputs used in the production of goods and services.
They include land, labor, capital, and entrepreneurship.
3. The reality of scarcity forces us to make choices that involve giving up another opportunity to
do or use something else. Economists use the term opportunity cost to denote the value of the
best alternative sacrificed.
4. A production possibilities curve illustrates graphically the maximum combinations of two
goods that an economy can produce, given its available resources and technology. An
economy located along its production possibilities curve operates at maximum efficiency.
5. As we move along an outward-bowed production possibilities curve, opportunity costs
increase as more of a good is produced. Increasing opportunity costs occur because resources
are not completely adaptable to alternative uses.
6. Economic growth entails an outward shift in an economy's production possibilities curve so
that more of all goods can be produced. It is made possible by an increase in an economy's
resource base or technological advance.
7. Economic sanctions are government imposed limitations placed on trade and financial
relations among nations. The nation initiating the sanctions, the imposing nation, hopes that
economic hardship caused by caused by sanctions will inspire the target nation to alter its
political or military policies. Economic sanctions can force a target nation to locate beneath
its production possibilities curve and can even cause the target nation's production
possibilities curve to shift inward.
Chapter Objectives
After reading this chapter, you should be able to:
1. Discuss the nature of economics and the economic way of thinking.
2. Explain how the concept of scarcity relates to the concept of opportunity cost.
3. Develop a production possibilities curve that shows the combinations of goods which an
economy can produce.
4. Discuss what it means for an economy to operate at maximum efficiency.
5. Identify the causes of economic growth and decline.
6. Describe the purpose and effects of economic sanctions.
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2
Chapter 1: Introduction
Knowledge Check
Key Concept Quiz
1. economics
_____ a. involves value judgments
2. positive economics
_____ b. value of the best alternative sacrificed
3. normative economics
_____ c. study of choice under conditions of scarcity
4. opportunity cost
_____ d. is the ratio of an industry’s production to its
capacity
5. efficiency
6. law of increasing opportunity
cost
7. economic sanctions
8. capacity utilization rate
9. models
10. circular flow model
_____ e. describes the facts of the economy
_____ f. shows the interaction of households and
businesses
_____ g. bowed out production possibilities curve
_____ h. points along the production possibilities
curve
_____ i. complete bans on trade
_____ j. simplified presentations of the real world
Multiple Choice Questions
1. Opportunity cost is the
a. price of a good or service
b. all out-of-pocket costs
c. value of the best alternative sacrifice
price that exceeds market price.
2. A movement along the production possibilities curve is a movement from
a. one efficient point to another
b. an inefficient point to an efficient one
c. an efficient point to an inefficient one
one inefficient point to another
3. The best point on the production possibilities curve is
a. the one in the middle
b. the extreme point on the horizontal axis
c. the extreme point on the vertical axis
impossible to determine without knowledge of society’s preferences.
Chapter 1: Introduction
3
4. Along a production possibilities curve, an increase in the production of one good is always
associated with
a. a decrease in the production of the other good
b. an increase in the production of the other good
c. no change in the production of the other good
all of the above
5. When the production possibility curve has a constant slope, the opportunity cost of producing
one good is
a. constant
b. increasing
c. decreasing
increasing at a constant rate
6. Positive economics
a. describes the facts of the economy
b. does not allow for empirical testing
c. involves value judgements
is identical to normative economics
7. The law of increasing costs implies that
a. resources are scarce
b. resources are not used efficiently
c. resources are not completely adaptable to alternative uses
resources are costly
8. Economic growth occurs when
a. resources increase
b. resources are not used efficiently
c. resources are not completely adaptable to alternative uses
resources decrease
9. Economic sanctions may be
a. government-imposed regulations
b. complete bans on trade
c. used to combat international terrorism
all of the above
10. Economics is a study of
a. choice under conditions of scarcity
b. decisions made by households and firms
c. the overall performance of an economy
all of the above
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Chapter 1: Introduction
11. A nation that emphasizes production of capital goods
a. grows more rapidly than another that emphasizes production of consumer goods
b. sacrifices future consumption
c. does not necessarily face a tradeoff between present and future consumption
must always import consumer goods
The figure below shows hypothetical production possibilities curves for U.S. computer and
automobile production. Answer the next three questions on the basis of this information.
Production Possibilities Curves
Automobiles
E

F

G 
H
PPC1
0
Computers
PPC0
12. Suppose that PPC0 is the initial production possibilities curve. If the U.S. economy is at point
H, then:
a. it is operating at maximum capacity and cannot produce more of both goods
b. it realizes unemployment or underproduction, and thus is capable of producing more of
both goods
c. the opportunity cost of computers is increasing and the opportunity cost of autos is
decreasing
the opportunity cost of computers is decreasing and the opportunity cost of autos is
increasing
13. If we slide downward along curve PPC0, from E to F to G, then:
a. there is a technological improvement in auto production but not in computer production
b. the opportunity cost of computers increases in terms of autos sacrificed
c. we are sure that resources are fully substitutable from auto production to computer
production
d. there is unemployment of computer workers, but not auto workers
Chapter 1: Introduction
5
14. If the production possibilities curve shifts outward from PPC0 to PPC1, then:
a. the economy moves from unemployment to full employment
b. the opportunity cost of producing both autos and computers decreases
c. there is an increases in resources which permits more autos and computers to be
produced
there is a technological improvement which permits the production of more computers, but
not more autos
15. When resources are not fully substitutable from one industry to another, the production
possibilities schedule appears as a (an)
a.
b.
c.
d.
downward sloping straight line
upward sloping straight line
curve that is bowed inward
curve that is bowed outward
16. The cornerstones of economics include all of the following except
a.
b.
c.
d.
every choice has a cost
people make better choices by thinking at the margin
people are characterized by rational self interest
people have unlimited resources to satisfy their limited wants
17. The opportunity cost of a new baseball stadium for the New York Yankees is
a. the wages paid to construction workers who build the stadium
b. the increased property taxes for owners of the stadium
c. other goods that must be sacrificed to construct the stadium
d. interest that must be paid on money borrowed by the stadium’s owners
18. The production possibilities curve would shift outward for all of the following reasons
except
a. an improvement in technology
b. an increase in resources
c. a rise in labor productivity
d. a reduction in the unemployment rate
19. Which question best concerns normative economics?
a.
b.
c.
d.
Why do major league baseball players earn more than high school teachers?
Do tariffs on steel imports protect the jobs of American steelworkers?
Should the minimum wage be increased to help teenage workers?
Will falling business taxes result in more investment spending?
20. Points inside the production possibilities curve are
a.
b.
c.
d.
attainable, but not efficient
attainable, and efficient
unattainable, but not efficient
unattainable, and efficient
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Chapter 1: Introduction
True-False Questions
1.
T
F
The opportunity cost of a good or service is the cost of the other
alternative.
2.
T
F
Models and theories are used to explain and predict.
3.
T
F
Positive economics involves value judgements.
4.
T
F
Normative economics allows for empirical testing.
5.
T
F
Scarcity of resources forces economists to recognize opportunity costs of
production.
6.
T
F
The production possibilities curve is always downward-sloping.
7.
T
F
An upward-sloping production possibilities curve would indicate that
there are no opportunity costs.
8.
T
F
When the technology improves, the production possibilities curve shifts
inward.
9.
T
F
All points along the production possibilities curve are efficient.
10.
T
F
The capacity utilization rate measures the ratio of an industry’s
production to its capacity.
11.
T
F
A production possibilities curve that is bowed outward reflects the law of
increasing opportunity cost.
12.
T
F
Future and present consumption involves tradeoffs.
13.
T
F
All economic sanctions are consistently effective.
14.
T
F
The law of increasing opportunity costs suggests that resources are
completely adaptable to alternative uses.
15.
T
F
Economics is founded on the assumption of rational self-interest by
people.
16.
T
F
If Mary states that unemployment benefits should be increased, she is
making a normative statement.
17.
T
F
The source of the scarcity problem is that resources are unlimited and
people have limited material wants.
18.
T
F
The factors of production include money, land, labor, and
entrepreneurship.
19.
T
F
Economic growth results in the production possibilities curve becoming
flatter.
20.
T
F
Successful economic sanctions levied against Iraq tend to force Iraq to
operate inside of its production possibilities curve in the short run, while
its entire curve shifts inward in the long run.
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Chapter 1: Introduction
Application Questions
1. The following table and diagram describes the production possibilities curve for a society.
Lentils
Wheat
Lentils
A
0
900
B
200
850
C
400
700
1000
A

800
B


C
H
600
D

D
600
500
E
800
0
400
PPC
G
200
0
200
400
600
E

800
1000 Wheat
a. If society is at point B, what is the opportunity cost of producing 200 additional units of
wheat?
b. What is the opportunity cost of changing from exclusive production of lentils (A) to
producing 400 units of wheat (C)?
c. Why should society not produce at point G? Is there a possibility of society ever
producing this combination?
d. Can society produce at point H? Will it ever be possible to produce this combination?
e. As society moves from point A to E, what is happening to the opportunity costs of
production? Calculate the changing opportunity costs as you move from one
combination to the next, beginning with A?
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Chapter 1: Introduction
15. The following production schedule describes a new range of combinations for the products
described in question 1 above: wheat and lentils.
Wheat
Lentils
A
0
800
B
200
600
C
400
400
D
600
200
E
800
0
a. What is the most important difference between the production schedule described in
question 1 and this one?
b. What is the shape of the production possibility schedule that describes the information
in the above table?
Answers to Knowledge Check Questions
Key Concept Answers
1.
c
6.
g
2.
e
7.
i
3.
a
8.
j
4.
b
9.
k
5.
h
10. d
Multiple Choice Answers
1.
c
5.
a
2.
a
6.
a
3.
d
7.
c
4.
a
8.
a
9.
10.
11.
12.
d
a
a
b
13. b
14. d
15. d
16. d
17.
18.
19.
20.
c
d
c
a
Chapter 1: Introduction
True-False Answers
1.
T
6.
T
2.
T
7.
T
3.
F
8.
F
4.
F
9.
T
5.
T
10. T
11.
12.
13.
14.
15.
T
T
F
F
T
16.
17.
18.
19.
20.
T
F
F
F
T
Application Question Answers
1. a. 150 units of lentils
b.
200 units of lentils
c.
Producing at point G is inefficient. Yes, society could produce this combination if
resources are lost or technology is downgraded. This may occur when economic
sanctions are imposed.
d.
Producing at point H is infeasible. Yes, if society’s resource base expands or if there are
advances in technology.
e.
Opportunity costs keep increasing.
A to B .............50 units of lentils
B to C ...........150 units of lentils
C to D ...........200 units of lentils
D to E ...........500 units of lentils
2. a. The opportunity costs remain constant.
b. The production possibility schedule is a straight line.
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