Economics Review Questions and Key Terms for Understanding Resource Allocation

1. Write down the following Review Questions into your notebook. They can be answered using your notes. 1) What is the difference between a Need and a Want? 2) List and describe the 4 Factors of Production in Economics. 3) What are 2 strategies for dealing with scarce resources? 4) Describe the 5 steps in making a Rational Decision. 5) Explain the difference between a marginal benefit and a marginal cost and provide a real life example. 6) Describe one strategy a business or government can use to allocate scarce resources. 7) What incentive do businesses have to produce their goods and services? 8) List the benefits of Voluntary Exchange. 9) What are the weaknesses of a Command Economy? 10) What are the strengths of a Market Economy? 11) According to a Market economy, what role should the government play? 12) What is a Market Failure? Why is it a failure? 13) How are inputs related to outputs? 14) How does the Production Possibilities Curve show economic growth? 15) What are Capital Investments? What 2 things are invested in?

2. Essential Question What are the 4 Factors of Production in Economics? Words to Know Scarcity Human Capital Physical Capital Resource Allocation

3. What is Economics? - Economics is the study of how individuals, businesses, and nations can best allocate resources. - This allocation is dependent upon the needs and wants of society.

4. Wants vs. Needs - A want is something that is desired. (Example: tickets to a movie or a CD) - A need is something is biologically important. (Example: food, bathroom)

5. Factors of Production To produce those things that we need/want, resources must be put together, these resources are called Factors of Production. 1) Land 2) Labor 3) Capital 4) Entrepreneurs

6. Land These are natural resources and man-made resources (already built on that land).

7. Labor These are the mental and physical efforts of humans (skilled and unskilled).

8. Capital Man-made resources: physical capital (machines and tools) and human capital (skills and experience).

9. Entrepreneurs These are people who take a risk to pull Land, Labor, and Capital together to create a business. Steve Jobs Mark Zuckerberg Dave Thomas Oprah Winfrey

10. Dealing with Scarcity Scarcity is the basic problem, how do we deal with it? Governments and businesses handle resource allocation, the distribution of resources based upon needs and wants. To prevent scarcity, you should either...

11. Essential Question How is Rational Decision Making related to the concept of Scarcity? Words to Know Trade offs Opportunity Cost Cost-Benefit Analysis Production Possibilities Curve

12. Decision Making Scenario Tom takes a date to the football game. He decides to go to the concessions stand at half time. He asks his date, Melissa, what she would like, and then hurries to beat the rush. Melissa wants a soda and nachos. Tom, being really hungry, would like a hot dog, nachos, and a soda. He sees the price list. Looking at his wallet. Tom realizes he has only $5.00. Tom is facing the basic economic problem. Because of his limited resources (his money), he is forced to make a decision that requires him to choose between options that are all less than ideal.

13. Step 1: Define the problem.

14. Step 2: List the alternatives.

15. Step 3: State the criteria (priorities) Step 3: State the criteria

16. Step 4: Evaluate the alternatives Each of Tom's 3 Options involves a trade off (the act of giving up one thing of value to gain another of value). The actual value of that alternative option that has been lost is called the opportunity cost.

17. Determining Trade Off and Opportunity Costs

18. Step 5: Make a rational decision Cost-Benefit Analysis is the process taken to make a rational decision. It includes examining to see if the marginal benefit (the additional benefit) outweighs the marginal cost (additional cost).

19. Examining Possibilities To chart the amount of production with scarce resources, you can create a Production Possibilities Curve. Anything along the line is efficient production. Above the line is impossible to reach and below is inefficient use.

21. Essential Question What role do incentives play in exchange? Words to Know Division of Labor Specialization Voluntary Exchange

22. Role of Exchange - Producers (businesses) purchase scarce resources and produce items for sale and exchange it with consumers (individuals) who purchase them at a reasonable price. - This is the basis for the U.S. economy. It relies on voluntary exchange (the free, without force, exchange of goods, services, and resources).

23. Benefits of Voluntary Exchange Encourages 3 things... 1) Productivity 2) Efficiency 3) Inventions (new machines) and Innovation (new ideas)

24. Role of Incentives What incentive do businesses have to produce goods and services? - How do they increase their profits? 1) Cut production costs by increasing productivity. 2) Raise prices on their goods and services.

25. How do you increase productivity? *Combine Specialization and Division of Labor* 1) Division of Labor is where you divide the production of an item into smaller tasks. 2) Specialization is the process of devoting resources to a single specific task.

26. House Construction Architect Surveyor Mason (Foundations) Plumber Electrician Roofer Dry Wall Carpenter Painter Insulation Landscaper Real Estate Agent

27. Essential Question What are the 3 Fundamental Questions of Economics? How does the 3 main economic systems answer them? Words to Know Mixed Economy Laissez-faire Equity

28. What do we produce? - Do we make guns? - Good for defense but you can't eat it. - How about butter? - Good for food, but you can't hunt with it.

29. How do we produce? - Which would be easier/efficient to harvest a farm crop?

30. For whom to produce? - What group of people should get the products? The Workers? The Military? The Rich? The Poor? The Government?

31. Traditional Economy - Economy based on cultural and ritualistic history. - Example: Many Native American tribes and early Humans. Strength Everyone knows their station or job. Weakness No new ideas or inventions.

32. Command Economy - The government controls and plans out everything, little to no private businesses. - Goal is to provide equity (output is meant to be distributed equally among the citizenry). - Examples: Former Soviet Union, Cuba, North Korea, Saudi Arabia.

33. Strengths 1) Can immediately change production. Weaknesses 1) No Freedoms or flexibility 2) No need to make people happy 3) Massive government 4) Highly oppressive

34. Market Economy - Based upon the idea of laissez-faire, meaning that the government plays little or no role in the economy. - People make the decisions about how to answer the questions of production. - Examples: Most modern countries.

35. Strengths 1) Changes with the Times 2) Large variety 3) Little or no government interference Weaknesses 1) Only rewards those who are productive 2) Vulnerable to market crashes

36. Mixed Economies - In recent years, Command Economies and Market Economies have taken on a mixture of both. Examples: China.

37. Essential Question What effect does Government control over resources have on producers and consumers? Words to Know Regulation Capitalism Public Goods and Services Transfer payments

38. Capitalism - The U.S. has a Market, or Capitalist, Economy. Prices are determined by Supply/Demand or Voluntary Exchange. - According to Capitalism, the Government should only have 4 roles within the Economy.

39. 1) Provide Public Goods/Services These are goods/services provided by the government.

40. 2) Redistribute Income - Not everyone can be wealthy, to help support those who cannot the government provides an economic 'safety net'. - Transfer Payments - money given without the intention of being repaid. - Examples: Social Security, Medicare/aid, Welfare

41. 3) Prevent/Resolve Market Failures - If producers pass the cost of their production off to consumers, it limits what consumers can purchase. Examples The New Deal The Great Depression Private Bailouts BP Oil Spill Market Failure Government Action

42. Effects of Control When the Governments makes laws to control companies it is called, regulation. If these laws are removed it is called deregulation. - Both options can have positive and negative effects on producers and consumers.

43. Essential Question How does an individual, a company, or a nation increase productivity and increase growth? Words to Know Productivity

44. What is Growth? Profit acts as an incentive for producers. They increase their profits by increasing Productivity. Productivity can be broken down into inputs (the factors of production) and outputs (products/services). Growth is achieved when Outputs increase and Inputs decrease.

45. Investments The most common way to increase productivity is to invest resources in Capital Investments. This is investing money into either capital goods (products) or human capital (workers).

46. Capital Goods Investing in new machines, equipment, or technologies can help increase Output while decreasing Input.

47. Human Capital Investing in quality of life or skills of employees can help increase productivity. Educated employees often enjoy a better standard of living than uneducated employees.

48. Increases in Capital Investments can shift the PPC.