Unit 1: Introductory Economic Concepts
Study Guide for the Test on ___________________________________
Terms to Know ….
Scarcity
Markets
choices
alternatives
efficiency
equity
incentive
command economy
Opportunity cost
market economy
broad social goals
Productivity
utility
factors of production (a.k.a. resources, inputs)
land (natural resources)
labor (human resources)
capital (capital resources)
Graphs/Diagrams to Know , Be Able to Draw, and Use for Economic Analysis …
Production Possibilities Frontier Graph … what causes a ppf to shift (increase or decrease)?
Circular Flow Diagram
Practice Questions
1. What do economists mean by the term, the “invisible hand”?
2. Explain why people face trade offs.
3. Explain what rational means, and how it applies to economics.
4. What are the broad social goals as they relate to economics?
5. What does it mean to say that economics, as a study, has no inherent “morality”?
6. What is the difference between a market economy and a command economy?
7. What is the opportunity cost of seeing a movie?
8. Describe some of the trade-offs faced by each of the following:
a. A family deciding whether or not to buy a new car
b. A member of Congress deciding how much to spend on national parks
c. A company president deciding whether to open a new factory.
d. A teacher deciding how much to prepare for class.
9. Explain the difference between equity and efficiency. What does this have to do with the study of economics?
10. The Social Security system provides income for people over age 65. If a recipient of Social Security decides to
work and earn some income, the amount he or she receives in Social Security benefits is typically reduced.
a. How does the provision of Social Security affect people’s incentive to save while working?
b. How does the reduction in benefits associated with higher earnings affect people’s incentive to work
past age 65?
11. Draw and explain a production possibilities frontier graph for an economy that produces milk and cookies. What
happens to this frontier if a disease kills half of the economy’s cow population?
12. Draw a circular flow diagram. Identify the parts of themodel that correspond to the flow of goods and services
and the flow of dollars for each of the following activities:
a. Selena pays a storekeeper $3 for a quart of milk.
b. Stuart earns $8.50 per hour working at a fast-food restaurant.
c. Shanna spends $10.00 to see a movie.
d. Sally earns $10,000 from her 10 percent ownership in Acme Industrial.