Question

unit 1 test study guide

1. label the points where underutilizing, efficient, and unattainable take place on a production possibilities cu graph.

(image of a production possibilities curve graph with axes: quantity of butter produced (x - axis) and quantity of guns produced (y - axis), with points a, b, c, d)

1. why does scarcity exist?
2. what is an example of an entrepreneur?
3. describe the four factors of production (land, labor, capital, and entrepreneurship)
4. what are the different ways to allocate scarce resources? give a brief explanation of each.
5. define what rational decision - making is.
6. what are positive and negative incentives? give an example of each.
7. what are the three basic questions in economics?
8. example of voluntary exchange?

Explanation:

1. Point labels:

• Point A: Resources are not being used to full potential, so this is underutilizing.
• Points B, D, C: These lie directly on the production possibilities curve, representing maximum efficient output, so this is efficient.
• Point E: This lies outside the curve, meaning the output level cannot be achieved with current resources, so this is unattainable.

1. Scarcity cause: Scarcity exists because human wants and needs are unlimited, but the resources (land, labor, capital, entrepreneurship) used to satisfy them are limited.
2. Entrepreneur example: A person who starts and runs their own independent coffee shop, managing all aspects of the business from sourcing beans to hiring staff.
3. Four factors of production:

• Land: Natural resources used in production, e.g., farmland, oil reserves, forests.
• Labor: Physical and mental effort of workers used to produce goods/services, e.g., factory workers, teachers.
• Capital: Man-made tools and equipment used in production, e.g., manufacturing machines, office computers.
• Entrepreneurship: The ability to organize the other three factors, take risks, and create new businesses or products, e.g., startup founders.

1. Resource allocation methods:

• Market system: Resources are allocated based on supply and demand, with prices signaling value and guiding production/consumption.
• Command system: A central authority (like a government) decides how resources are distributed and what is produced.
• Traditional system: Resources are allocated based on long-standing customs, traditions, and cultural norms (common in small, rural communities).
• Lottery: Resources are assigned randomly, giving all parties an equal chance of receiving them.

1. Rational decision-making: A process where individuals or entities make choices by comparing the marginal costs and marginal benefits of each option, selecting the option that maximizes their net benefit.
2. Incentives:

• Positive incentives: Rewards that encourage a desired behavior, e.g., a bonus for meeting a work sales target.
• Negative incentives: Penalties that discourage an undesired behavior, e.g., a fine for speeding in a car.

1. Three basic economic questions:

• What goods and services should be produced?
• How should these goods and services be produced?
• Who should receive the produced goods and services?

1. Voluntary exchange example: A customer pays a bookstore $20 for a novel; both parties agree to the trade because each values what they receive more than what they give up.

Answer:

1.

• Underutilizing: Point A
• Efficient: Points B, D, C
• Unattainable: Point E

1. Unlimited wants + limited resources cause scarcity.
2. An independent coffee shop owner.

4.

• Land: Natural production resources (e.g., farmland)
• Labor: Worker effort (e.g., factory staff)
• Capital: Man-made production tools (e.g., machines)
• Entrepreneurship: Risk-taking organizer of factors (e.g., startup founders)

5.

• Market system: Supply/demand and prices guide allocation.
• Command system: Central authority (government) controls allocation.
• Traditional system: Allocation follows cultural customs.
• Lottery: Resources assigned randomly.

1. Choosing options to maximize net benefit via cost-benefit comparison.

7.

• Positive incentives: Rewards for desired behavior (e.g., work sales bonus)
• Negative incentives: Penalties for undesired behavior (e.g., speeding fine)

8.

• What goods/services to produce?
• How to produce these goods/services?
• Who gets the produced goods/services?

1. A customer buying a novel from a bookstore for $20.