Name: ____________________________________________________________________________________________
Unit 1: Basic Economic Concepts
CHAPTER 1 – The Ten Principles of Economics

Scarcity – is the fundamental problem facing all people; ______________________ wants but
_______________________ resources to satisfy those wants
The Basic Economic Problem:

Humans' wants and needs are ______________________, while the resources needed to satisfy those wants and
needs are ______________________ and ______________________

What makes something scarce?
o
Something is scarce when it is both __________________ and _____________________
o
Scarcity applies to ___________________; no one can have an endless supply of everything
Item
Scarce or Not
1. Lebron James
2. Oil
3. The Ebola Virus
4. Coastal Georgia
-
Application Question

List three things that you feel are scarce in your life, what has caused them to become scarce?
1. _____________________________________________________________________________________
2. _____________________________________________________________________________________
3. _____________________________________________________________________________________

Economics – the study of ____________________; how humans manage _______________________________
o
“Oikonomos” (Greek) “One who manages a household”
1
How People Make Decisions
Principle 1: People face trade-offs
Choice
Alternative Choices
What you would have done if you
didn’t come to class
1. Coming to
Economics
1.
1.
2.
Class
3.
Trade-Offs

Trade-off – a ____________________________ that must be made to obtain ______________________________


We always ___________________________________ to get something else
“There is ___________________________________________________________________________.”
Principle 2: The cost of something is what you give up to get it

Opportunity Cost – used by economists to measure the __________________________________________; value
of the most _________________________________________________________

Next best alternative ___________________________________________________(Highest__________________________________ forgone)
-
Individuals and Trade-Offs – ____________________or________________________
-
Society and Trade-Offs – “____________________or________________________”, military or consumer goods
Principle 3: Rational people think at the margin

Margin - an ____________________________ unit, ________________or________________________;

Marginal change - _________________adjustments/change

Marginal ___________________________ > Marginal ____________________________
Alternatives
Criteria
Immediate
Long-Term
Satisfaction
Benefits
Entertaining
Immediate
Necessary for
Financial Benefits
Long-term
success
Sleep
Economics
2
Principle 4: People respond to incentives

Incentive - something that influences a person to act;
positive (_________________________________) or negative (_________________________________________)

Government often tries to “dangle a carrot” to get markets to act

Law of unintended consequences - outcomes that are not the outcomes intended by a particular action

Seatbelt law – people drive faster
How the People Interact
Principle 5: Trade can make everyone better off

Specialization - an individual or nation ______________________________________________________________

Allows each country to focus on activities that _____________________________________________

People/countries can buy a greater variety of goods and services at _______________ cost
Principle 6: Markets are usually a good way to organize economic activity

Market – _______________ and ___________________ meet to exchange
________________ and ___________________

Voluntary Exchange – free transaction where both parties are l___________________________________________

Market Economy (capitalism/free _________________________) – economic decisions,
________________________________produce, ________________________________ produce it,
________________________________produce it for, are made through by individuals based on exchange of goods
and services

Adam Smith’s _________________________

Command Economy (________________________________) – contrast of market economies;
________________________________________________(central planners) allocate economy’s scarce resources
Principle 7: Governments can sometimes improve market outcomes

Role of Government

Externality - impact of one person’s actions on the well-being of a bystander
o

Classic externality - _________________
Enforce the rules
o
Business _____________________, maintain fair _____________________, produce
_____________________, fair _____________________, protect
_____________________________________etc.
3
Principle 8: A country’s standard of living depends on its ability to produce goods and services

Productivity – Quantity of goods & services produced from __________________________________________


2009 - US worker avg. per capita GDP was 46,436 India was $1030
Higher ______________________________ – Higher ______________________________________
Principle 9: Prices rise when the government prints too much money

Inflation - An increase in the ______________________________________________________________________

Growth in quantity of money ___________________ the value of money

Hyperinflation in Germany after WWI, Zimbabwe dead currency in 2009
Principle 10: Society faces a short-run trade-off between inflation and unemployment

Long-run effect of monetary injection is ________________________________________________

Short-run effects of monetary injections:
1. Stimulates ______________________________
2. Higher _______________________________ for goods and services
3. Firms – profits ______________________________, produce more _____________________ and
______________________, hire __________________________________________
4. Lower ______________________________________
CHAPTER 2 – Thinking Like an Economist
 Macroeconomics – study of the _____________________________, structure, ___________________________ and
_______________________________of the economy as a ________________________
 Microeconomics – study of the decisions of individuals; _______________________________ and
_____________________ and their _______________________________
 Economics is a _________________________
o Devise _________________, collect and analyze data, make ____________________________
 Economic Models –_______________________________, graphs and _______________________________ are
used to represent human _____________________________ and economic ____________________________
4
Factors of Production

Factors of Production - resources required to produce____________________________________________
Factor of
Description
Examples
Production

______________________resources not created by human effort
that are used to produce goods and services

The "______________________________________".

Labor – ____________________ and ____________________ that
a person devotes to producing goods and services.

Labor resources are those provided by the ____________________
and ____________________ of men and women.
1. Physical – also known as
__________________________________, human made objects
that are used to ______________________________________
2. Human capital – _________________,
_________________________ and specialized
_____________________________________
3. Financial Capital - __________________ used by
___________________________ and
_______________________________ to buy what they need to
______________________ their ____________________ or
___________________

Entrepreneurs – ambitious
_________________________________ who organize the
factors of production to
___________________________________________________

Entrepreneurs are the "________________________" who
produce
a
good
or
service
that
they
believe
________________________________________________
5
will
Goods and Services

Good – a _________________________________________________________________________ product


i.e. – Automobiles, Video Games, Cell Phones, CD’s, Tickle Me Elmo, etc…
Service – a __________________________________________________________________ that is
performed for someone else

i.e – ______________________________, Stock Broker, ______________________________,
Dentist, ______________________________, etc..
Needs vs. Wants

Need – a _______________________________________________________________________________


Eg. Food, ________________________________________________________
Want – not a basic requirement __________________________________________, a means of expressing
a ____________________

E.g. cheeseburger, __________________________________________________________________
Goods and Services Chart
Item Advertised
Good/Service
Want/Need
Market
Classify the Factors of Production in the following scenario:
• You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the
owner that entered it into her computer. The information came up on the chief baker’s monitor in the kitchen and
he assigned it to one of his cooks. The cook used his knowledge of mixing dough out of salt, flour, eggs, and milk.
The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese,
and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a
cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your
door.
1. Owner _________________________________
2. Computer _________________________________
3. Chief baker’s monitor _________________________________
4. Kitchen _________________________________
5. Cooks _________________________________
6. Knowledge of mixing dough _________________________________
7. Salt, flour, eggs, and milk _________________________________
8. Sink _________________________________
9. Tomato sauce, cheese, and sausage _________________________________
10. Oven _________________________________
11. Cardboard box _________________________________
12. Delivery person _________________________________
13. Company car _________________________________
6
Households and Firms
 Household – ____________________________ or ____________________________________ living in a
residence; consumers of goods/services
 Firm – _____________________________________________ that uses resources (________________) to
produce an economic product (output), which it then sells
 Product Markets – ______________________________ and _________________________ interact; producers
sell their goods and services to _________________________________
o _________________________, Amazon, the mall, _____________________________, Babies R Us, etc.
o Households are _______________________________ of goods and services
o Firms are _________________________________ of goods and services
 Factor Markets – the markets where productive resources (____________) are bought and sold
o Labor - Firms (businesses) ____________________ workers and pay them ________________________
o Land - ________________________________________ land
o Capital - Use money from ____________________________________________
(_______________________, investment, etc) to purchase _____________________________________
 Circular-flow diagram – visual model a __________________________________economy, simplified into
______________________________ and _________________________ communicating in the
________________________ and ________________________ markets
___________________________________________________________________________________________
o Shows how dollars and stuff flows in an economy from households to firms and vice versa.
o Shows the flow of _________________________ and ____________________________ from and to
_________________________and _________________________
5
8
3
7
6
13
1
2
14
10
11
4
7
12
9
Personal Circular Flow Model
Circular Flow of Economic Activity
8
*Fill out the circular flow of economic activity, using the following information:
Elisa and Marcella are sisters living in the same house in Glynn County. This afternoon, Elisa is hungry and decides to eat
at a restaurant known as Cilantros. As she enters Cilantros she notices that the restaurant offers a variety of goods, such
as tacos, burritos and fajitas. She decides to purchase a chicken fajita, which costs her $9.49. She returns home feeling
full and satisfied. Upon entering her house, she says goodbye to her sister Marcella who is leaving to apply for jobs.
Marcella is bound and determined to become a salesperson. The first job that she applies at is Books-a-Million, which is
looking to hire a number of positions. While applying for the job the manager shows her around the store. She notices
that there are many other factors involved in the production of the bookstore. There are stockers putting books on the
shelves, people selling coffee, and cashiers using registers to complete transactions. Books-a-Million ultimately hires
Marcella as a salesperson and after one week of work pays her $200 dollars for her service. As a result of her inquiring
mind, she asks the manager what additional expenses the store endures monthly. The manager tells her that they pay a
lease of $3000, $2200 in electric, and $400 in water to keep the store functioning. Elisa and Marcella both talk daily
about the freedoms they enjoy in the market economy.
1. When Cilantros sold the chicken fajita to Elisa, they completed a transaction in which market?__________________
2. When Books-a-Million hired Marcela, they completed a transaction in which market?_________________________
3. In the Circular Flow model, is the flow of money is represented by the outer arrows, or the inner arrows?
__________________________________
4. In the Circular Flow model, are the flow of goods and services represented by the outer arrows or inner arrows?
__________________________________
5. When Books-a-Million pays Marcela each week, they completed a transaction in which market? ________________
9
Circular Flow Practice Review
1. Fill in the blanks below what is represented by each letter below:
A.
B.
C.
D.
E.
F.
G.
H.
2.
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
In the Factor (Resource) Market:
a. What do firms bring to the market? _______________________________________________
b. What do most households bring to the market? ____________________________________________
3. In the Product Market:
a. What do firms bring to the market? _______________________________________________
b. What do most households bring to the market? ____________________________________________
4. Based on the above circular flow, what letter sequences represent the voluntary exchange of money for goods
and services? ________ to _________ and _________ to __________
5. Based on the above circular flow, what letter sequences represent the voluntary exchange of labor and wages?
________ to _________ and _________ to __________
6. What arrows represent the flow of money? ____________________________________
7. What arrows represent the flow of inputs and outputs? _______________________________
10
Graph after each round:
Links
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
Round
1
Smiles
Links
2
3
4
5
0
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
Smiles
1. What resources were scarce in the activity? ________________________________________________________
2. What was the opportunity cost of producing all smiles? ______________________________________________
3. What was the opportunity cost of producing all links? ________________________________________________
4. When did you experience underutilization/inefficiency? ______________________________________________
5. How does this relate to the real world? ___________________________________________________________
6. What allowed you to produce at a point outside the curve? ___________________________________________
7. How does this relate to the real world?____________________________________________________________

Production Possibilities Curve Model – shows/illustrates the possible ________________________ of
____________________ that can be produced given the __________________________________________
o

Used to visually represent __________________ and ____________________________________
Individual PPF – ________________________________
o
Constant opportunity cost - _________________ shape of the curve represents a
_____________________/__________________________________ tradeoff between two goods

Society’s PPF – social tradeoffs
o
Shape of the curve is generally _________________________
o
Law of increasing opportunity cost - as production _________________________, the cost to produce a
_________________________of that product increases as well.

Some resources are specialized to only efficiently produce one product so using those specialized
resources on a different product is inefficient
11
What does it show?

That nothing is ____________and that everything has an ______________________________________

If society wants ______________ of one thing then it must ___________________ something in return

Used to visually represent _______________________________

What basic economic concepts can it be used to model?

_________________________

_________________________

_________________________

_________________________

_________________________

_________________________
Efficiency, Underutilization, Growth

Efficiency – using resources in such a way as to _____________________________________________________
o

Points ____________________________
Underutilization (Inefficiency) – using fewer resources than an ________________________________________
___________________________________________________________________________________________
o

Point ________ (Inefficient use of resources)
Growth (future technology) – the change in ability to ________________________________, reflects a
________________________________________________________

New __________________________________________ (usually as a result of new technology)
Basics of the production possibilities frontier model
12
Review - Guns or Butter PPF Application Questions
1. How many guns can be produced when no butter is produced? ____________
2. How much butter can be produced when no guns are produced? ___________
3. Imagine that a country wants to go from producing 0 guns to 40 Guns. What is the opportunity cost in terms of
butter? ____________
4. What would it say about this society if the production decision was to produce at the (45, 20) point; assuming
that it takes 30 units of butter to provide basic foodstuffs to society and 40 units of Guns to protect their
society?_____________________________________________________________________________________
13
Production Possibility Frontier Exercise
Consider the following production possibilities. Graph these production possibilities on the figure and connect the points
to form a Production Possibilities Frontier.
200
180
160
140
120
100
0
80
60
40
20
5
10 15 20 25 30 35 40 45 50 55 60
Opportunity Cost and Production Possibility Analysis
Using the PPF you graphed in the figure above, what is the opportunity cost to produce wool coats (in terms of TVs) for
each of the following moves:
1. AtoB __________________
2. BtoC __________________
3. CtoD __________________
4. DtoE __________________
Answer the following True/False questions based on this figure.
1. If the economy were restricted to PPF0, point c would represent
full employment. _______________________________
2. From PPF0, a shift in the PPF curve to PPF1 could be caused by
an underutilization in the production of TVs.
_______________________________
3. Production at point f is not feasible no matter which PPF is
applicable. _______________________________
4. If the economy moves from point a to point c on PPF0, the
necessary reduction in wool coats to produce more TVs is
referred to as opportunity costs.__________________________
5. Devoting more resources to the production of TVs causes the
PPF to shift from PPF0 to PPF2. ____________________________
14
Production Possibilities Plotting and Analysis
Shoes
40
35
30
25
20
15
10
5
10
20
30
40
50
15
60
70
CD Players
PPF Practice 1
1. What do points Q, R, T and V represent? _____________________________________________________________
2. What does an efficient use of resources mean? ________________________________________________________
3. How much food and computers are being produced at point R?

Food ______________

Computers ______________
4. If we move from point T to V, how many computers are gained and how much food is lost?

Computers gained ___________

Food lost ____________
5. What is the term used to describe the cost of increasing one item in order to produce the other item?
________________________________________
6. What terms could be used to describe this PPF if production was at the 5, 5 point of the graph?
_______________________________________________________________________________________________
7. What might have caused the condition in the previous question? __________________________________________
8. Illustrate economic growth by labeling a “z” point on the PPC diagram above.
9. What are some factors that might contribute to economic growth? ________________________________________
_______________________________________________________________________________________________
16
1. The opportunity cost of increasing production of Good A from 0 units to 1 unit is the loss of _______ unit(s) of Good B.
2. The opportunity cost of increasing production of Good A from 1 unit to 2 units is the loss of _______ unit(s) of Good B.
3. The opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of _______ unit(s) of Good B.
4. The opportunity cost of increasing production of Good A from 0 units to 2 units is the loss of _______ unit(s) of Good B.
5. The opportunity cost of increasing production of Good A from 0 units to 3 units is the loss of _______ unit(s) of Good B.
6. The opportunity cost of increasing production of Good B from 11 units to 12 units is the loss of _______ unit(s) of Good A.
7. The opportunity cost of increasing production of Good B from 0 units to 11 units is the loss of _______ unit(s) of Good A.
8. Draw your own PPF showing the tradeoff between 2 decisions.
17
PPF Practice 2
For the following Production Possibilities Model, curve “BB” is your starting point. For each of the following questions,
indicate the curve you choose with two letters.
1. Suppose massive new sources of oil and coal are found within the economy and there are major technological
innovations in both capital and consumers goods in the economy. Which curve in the diagram would represent
the new production possibility curve?__________
2. Suppose there is a major technological breakthrough in ONLY the consumer goods industry, and the new
technology is widely adopted. Which curve in the diagram would represent the new production possibilities
curve? __________
3. Suppose there is a major disaster in the economy, which causes the economy to produce significantly less
capital goods and consumer goods. Which 2 letter curve represents the most likely production possibilities
curve? ___________
4. If “BB” represents a country’s current production possibilities frontier, what can you say about a point like x?
________________________________________________________________
5. If “BB” represents a country’s current production possibility frontier, what can you say about a point like y?
__________________________________________________________________
6. Imagine a society that produces both military goods (guns) and consumer goods (butter).
a. Draw a production possibilities frontier for guns and butter.
b. Show a point that is impossible for the economy to achieve (a). Show a point that is feasible but
inefficient (b)
18
PPF Practice 3
1. The following data give the production possibilities of an economy that produces two types of goods, cloth
(horizontal axis) and wheat (vertical axis). Cloth
80
Graph the production possibilities frontier.
Production
Possibilities
A
B
C
D
E
F
G
Cloth
Wheat
0
5
15
30
50
75
80
100
90
80
65
55
30
0
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
1. Indicate by drawing an 'X' a point where production is currently unattainable.
Wheat
2. To achieve this currently unattainable production combination, what must happen? _______________
___________________________________________________________________________________
3. Indicate by drawing a 'Y' a point where production is currently inefficient; where the economy is currently
underutilizing its resources.
4. Calculate the per-unit opportunity cost of an increase in the production of cloth, or the production of
wheat, in each of the following cases.
a. Point A to Point B? Increase ___________ cloth, cost ____________ wheat
b. Point E to Point F? Increase ___________ cloth, cost ____________ wheat
c. Point C to Point D? Increase ___________ cloth, cost ____________ wheat
5. In each of the following cases, circle what will most likely happen to the production possibilities frontier.
a. There is a new tractor invented which improves wheat farming techniques

Shift outward from the original curve/shift inward from the original curve
b. The productivity of all workers decrease

Shift outward from the original curve/shift inward from the original curve
c. A new technology makes it more efficient to cut wheat and make cloth
d. Shift outward from the original curve/shift inward from the original curve
19
Practice Questions to accompany Mankiw’s: Principles of Economics
Chapter 2 Practice Review
1. Use the following model to answer the questions below:
a. If box A of this circular-flow diagram represents households, then which box represents firms? ___________
b. If the outer loop of this circular-flow diagram represents flows of dollars, then the inner loop
includes__________________________________
c. If box C of this circular-flow diagram represents the product market then box D represents the
_____________________________
d. If Box A of this circular-flow diagram were to represent firms, then which box represents households?
______________
e. If households are sellers in the markets represented by Box D of this circular-flow diagram, then box C must
represent the market for ___________________________________
f. If households are buyers in the markets represented by Box C of this circular-flow diagram, then firms are the
_______________________ in box C.
2. The following schedule provides information about the production possibilities frontier of Athletic Country.
- Exhibit 1
a. If Athletic Country currently produces 100 bats
and 400 rackets, what is the opportunity cost of
an additional 100 bats?
__________________________
b. If Athletic Country currently produces 300 bats
and 300 rackets, what is the opportunity cost of
an additional 100 bats?
__________________________
c. Why does the additional production of 100 bats
in part (b) cause a greater trade-off than the
additional production of 100 bats in part (b)? __________________________________________________________
d. Is the production of 200 bats and 200 rackets efficient? Explain. _________________________
____________________________________________________________________________
20