Term
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Definition
| unlimited wants vs. limited resources |
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Term
| how can the basic economic problem be solved? |
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Definition
| can never be solved; can be reduced by using all resources in an efficient way with the most appropriate level of technology and engages in international specialization and trade |
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Term
| how are resources classified? |
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Definition
| non-human resources: natural resources (land) or man-made resources (capital); human resources: labor - physical and mental efforts-and entrepreneurship-the ability to combine all resources with existing resource prices, resource productivities, technology, and market demands-to produce a good or service |
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Term
| how do we classify the payments to the owners of economic resources? |
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Definition
| Payments to land are rent; payments to capital are interest; payments to labor are wages and salaries; payments to profits are entrepreneurship |
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Term
| Difference between microeconomics and macroeconomics |
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Definition
| micro: studies individual components of the economy in detail (households and business firms); macro: studies overall performance of the economy (unemployment, inflation, and economic growth) |
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Term
| positive and normative economics |
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Definition
| positive economics: encompasses both descriptive economics and economic theory and focuses on how the economy actually functions; normative economics: involves value judgments (norms),economic policy and focuses on what ought to be |
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Term
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Definition
| a mathematical representation of the most fundamental workings or casual forces at work in the economy; focus is on cause and effect |
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Term
| why are economic models developed? |
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Definition
| models are developed to predict and explain economic behavior |
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Term
| how are economic models tested? |
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Definition
| must be tested in the real world |
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Term
| basic economic questions that societies must answer |
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Definition
| what to produce; how to produce it; for whom the output is produced |
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Term
| production possibilities schedule |
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Definition
| shows the combination of X and Y that can be produced under conditions of maximum production; to achieve max production: economy must use all resources (full employment), use each resource in most efficient way and utilize most appropriate level of technology |
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Term
| what determines the position and slope of the PPS? |
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Definition
| endpoints of the PPS are determined by size and quality of the resource base and level of technology; slope is determined by the extent to which resources are or are not equally adaptable to the production of different goods |
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Term
| what would the PPS look like if resources were not substitutable at all in the production of two products? |
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Definition
| when all resources that could be used to produce X and to produce Y are used for that purpose the PPS could collapse into a single point |
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Term
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Definition
| foregone alternative; they are measured by what is given up if any additional unit of any one product is produced |
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Term
| circumstances that must exist for an economy to operate on its PPS |
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Definition
| full employment, maximum efficiency of resource use and use of the most appropriate level of technology |
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Term
| factors that cause an economy to operate inside its PPS |
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Definition
| the absence of any of these three (full employment, maximum efficiency of resource use and use of the most appropriate level of technology)would cause production to occur inside the PPS |
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Term
| factors that cause an economy to operate outside its PPS |
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Definition
| nothing can permit an economy to produce outside its PPS |
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Term
| factors that cause the PPS to shift outward over time |
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Definition
| an increase in the number of resources, an increase in the quality of resources, or a change in technology |
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Term
| costs that a "growth-oriented" economy must be prepared to experience |
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Definition
| a major growth strategy is to reduce current consumption levels to free up resources for the production of capital goods |
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Term
| how changes in technology can alter the PPS and opportunity costs |
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Definition
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Term
| what determines the pattern of international specialization and trade? |
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Definition
| International specialization: determined by comparing the opportunity cost of producing a single good in both countries |
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Term
| benefits of specialization and trade |
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Definition
| both trading partner countries can enjoy a higher standard of living |
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Term
| resistance to specialization and trade among countries |
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Definition
| international specialization and trade creates both households who gain and who lose; substantial costs; economies become less self sufficient and more interdependent; does not allow for change |
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Term
| how is the PPS derived if land of differential quality and opportunity costs is used? |
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Definition
| two types of land, each product must always be produced with the lowest opportunity cost |
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Term
| why are the upper and lower loops of the circular flow identically equal? |
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Definition
| profits are always calculated as the difference between total revenues and the amounts paid for land, labor and capital |
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Term
| two roles that households and firms play in a market economy |
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Definition
| households: buyers; firms: sellers |
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Term
| characteristics of a market economy |
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Definition
| private property rights; limited government; role of self-interest in economic decision-making; specialization and division of labor; the use of money to avoid barter exchange |
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Term
| why does the use of money increase specialization and exchange in a market economy? what impact does specialization have on economic economy? |
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Definition
| using money facilitates specialization and division of labor and increases the efficiency with resources used |
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Term
| behavior of households and business firms in a market economy |
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Definition
| households: greatest economic satisfaction from their limited incomes; firms: maximizing their profits |
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Term
| normal and inferior goods |
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Definition
| normal: product shifts to the right; inferior: product shifts to the left |
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Term
| factors that cause the demand schedule to shift |
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Definition
| change in household income; change in price of related goods; change in expectations about future prices; change in tastes and preferences; change in number of households in market |
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Term
| a factor that causes movement along a given demand schedule |
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Definition
| change in the price of the product |
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Term
| determinants of supply of a product |
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Definition
| a price of the product; the level of technology; resource prices; expectations about the future prices; change in price of another product that uses the same resources; number of suppliers in the market; |
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