Competency: Economic Thinking
Module 1 - The Economic Way of Thinking
1. What is the definition of economics? Economics is the study of how humans
make decisions in the face of scarcity. These can be individual decisions, family
decisions, business decisions, or societal decisions.
2. Explain how scarcity leads to tradeoffs. Scarcity means that human wants for
goods, services, and resources exceed what is available. Resources, such as
labor, tools, land, and raw materials are necessary to produce the goods and
services people want but they exist in limited supply. Of course, the ultimate
scarce resource is time
3. What is the definition of opportunity cost? The idea that people make choices
that maximize the value of objectives that serve their self-interest—and the focus
on the effects of small changes are ideas of great power.
4. What are the three broad economic questions that all economies must answer?
What should be produced? Using the economy’s scarce resources to produce one
thing requires giving up another. Producing better education, for example, may
require cutting back on other services, such as healthcare. A decision to preserve a
wilderness area requires giving up other uses of the land. Every society must decide
what it will produce with its scarce resources.
How should goods and services be produced? There are all sorts of choices to be
made in determining how goods and services should be produced. Should a firm
employ a few skilled workers or a lot of unskilled workers? Should it produce in its
own country or should it use foreign plants? Should manufacturing firms use new or
recycled raw materials to make their products?
For whom should goods and services be produced? If a good or service is
produced, a decision must be made about who will get it. A decision to have one
person or group receive a good or service usually means it will not be available to
someone else. For example, representatives of the poorest nations on earth often
complain that energy consumption per person in the United States is 17 times greater
than energy consumption per person in the world’s 62 poorest countries. Critics
argue that the world’s energy should be more evenly allocated. Should it? That is a
"for whom" question.
5. What is meant by making choices at the margin? The margin is the current level
of an activity. Think of it as the edge from which a choice is to be made. A choice
at the margin is a decision to do a little more or a little less of something.
,6. Given an example of the difference between microeconomics and
macroeconomics? microeconomics focuses on the actions of individual agents
within the economy, like households, workers, and
businesses; macroeconomics looks at the economy as a whole.
Macroeconomics focuses on broad issues such as growth of production, the
number of unemployed people, the inflationary increase in prices, government
deficits, and levels of exports and imports
7. What is an example of a positive statement and a normative statement? A
statement of fact or a hypothesis is a positive statement. Although people often
disagree about positive statements, such disagreements can ultimately be
resolved through investigation. A normative statement is one that makes a
value judgment. Such judgment is the opinion of the speaker; no one can "prove"
that the statement is or is not correct.
8. Identify and describe the four factors of production. Simply
put, resources are the inputs used to produce outputs (goods and/or
services). Resources are also called factors of production. What makes
something a resource? For one thing, it needs to be productive.
Natural resources (land) - Rent
Labor (human capital) - Wages
Capital (machinery, factories, equipment) - Interest
Entrepreneurship - Profit
9. Identify two differences between a traditional and a market economy. traditional
economy (oldest) Asia, Africa, and South America - organize their economic
affairs the way they have always done. Occupations stay in the family. Most
families are farmers who grow the crops they have always grown using traditional
methods. What you produce is what you get to consume. In a command
economy, economic effort is devoted to goals passed down from a ruler or ruling
class. In a command economy, the government decides what goods and services
will be produced and what prices will be charged for them. The government
decides what methods of production will be used and how much workers will be
paid. Many necessities like healthcare and education are provided for free.
Currently, Cuba and North Korea have command economies. In a market
economy, decision-making is decentralized. Market economies are based
, on private enterprise: the means of production (resources and businesses) are
owned and operated by private individuals or groups of private individuals.
Businesses supply goods and services based on demand. Most economies in
the real world are mixed; they combine elements of command and market (and
even traditional) systems. The U.S. economy is positioned toward the market-
oriented end of the spectrum. Many countries in Europe and Latin America, while
primarily market-oriented, have a greater degree of government involvement in
economic decisions than the U.S. economy.
10. Describe the flow of money in a simple circular flow diagram. The circular flow
diagram shows how households and firms interact in the goods and services
market, and in the factors market. The direction of the arrows shows that in the goods
and services market, households receive goods and services and in the factors market,
firms receive factors of production. In the opposite direction, arrows show households
receive payment for their factors of production from firms through wages, rent, interest,
and profits, and firms receive payment for providing goods and services to households.
Module 2 - Economic Problem
, 1. Illustrate the concept of a tradeoff using the PPF.
This production possibilities frontier shows a trade-off between devoting social
resources to healthcare and devoting them to education. At A all resources go to
healthcare and at B, most go to healthcare. At D most resources go to education,
and at F, all go to education.
2. How can you calculate opportunity cost using the PPF?
3. Define the term “Comparative Advantage”. The ability of a person to perform an activity
or produce a good or service at a lower opportunity cost than someone else.
4. Define the term “Absolute Advantage”. the principle of absolute
advantage refers to the ability of a party (an individual, or firm, or country) to
produce a greater quantity of a good, product, or service than competitors, using
the same amount of resources.
5. How do you determine who has comparative advantage in a given situation? You must
first calculate the opportunity cost to see who has the comparative advantage.
Module 1 - The Economic Way of Thinking
1. What is the definition of economics? Economics is the study of how humans
make decisions in the face of scarcity. These can be individual decisions, family
decisions, business decisions, or societal decisions.
2. Explain how scarcity leads to tradeoffs. Scarcity means that human wants for
goods, services, and resources exceed what is available. Resources, such as
labor, tools, land, and raw materials are necessary to produce the goods and
services people want but they exist in limited supply. Of course, the ultimate
scarce resource is time
3. What is the definition of opportunity cost? The idea that people make choices
that maximize the value of objectives that serve their self-interest—and the focus
on the effects of small changes are ideas of great power.
4. What are the three broad economic questions that all economies must answer?
What should be produced? Using the economy’s scarce resources to produce one
thing requires giving up another. Producing better education, for example, may
require cutting back on other services, such as healthcare. A decision to preserve a
wilderness area requires giving up other uses of the land. Every society must decide
what it will produce with its scarce resources.
How should goods and services be produced? There are all sorts of choices to be
made in determining how goods and services should be produced. Should a firm
employ a few skilled workers or a lot of unskilled workers? Should it produce in its
own country or should it use foreign plants? Should manufacturing firms use new or
recycled raw materials to make their products?
For whom should goods and services be produced? If a good or service is
produced, a decision must be made about who will get it. A decision to have one
person or group receive a good or service usually means it will not be available to
someone else. For example, representatives of the poorest nations on earth often
complain that energy consumption per person in the United States is 17 times greater
than energy consumption per person in the world’s 62 poorest countries. Critics
argue that the world’s energy should be more evenly allocated. Should it? That is a
"for whom" question.
5. What is meant by making choices at the margin? The margin is the current level
of an activity. Think of it as the edge from which a choice is to be made. A choice
at the margin is a decision to do a little more or a little less of something.
,6. Given an example of the difference between microeconomics and
macroeconomics? microeconomics focuses on the actions of individual agents
within the economy, like households, workers, and
businesses; macroeconomics looks at the economy as a whole.
Macroeconomics focuses on broad issues such as growth of production, the
number of unemployed people, the inflationary increase in prices, government
deficits, and levels of exports and imports
7. What is an example of a positive statement and a normative statement? A
statement of fact or a hypothesis is a positive statement. Although people often
disagree about positive statements, such disagreements can ultimately be
resolved through investigation. A normative statement is one that makes a
value judgment. Such judgment is the opinion of the speaker; no one can "prove"
that the statement is or is not correct.
8. Identify and describe the four factors of production. Simply
put, resources are the inputs used to produce outputs (goods and/or
services). Resources are also called factors of production. What makes
something a resource? For one thing, it needs to be productive.
Natural resources (land) - Rent
Labor (human capital) - Wages
Capital (machinery, factories, equipment) - Interest
Entrepreneurship - Profit
9. Identify two differences between a traditional and a market economy. traditional
economy (oldest) Asia, Africa, and South America - organize their economic
affairs the way they have always done. Occupations stay in the family. Most
families are farmers who grow the crops they have always grown using traditional
methods. What you produce is what you get to consume. In a command
economy, economic effort is devoted to goals passed down from a ruler or ruling
class. In a command economy, the government decides what goods and services
will be produced and what prices will be charged for them. The government
decides what methods of production will be used and how much workers will be
paid. Many necessities like healthcare and education are provided for free.
Currently, Cuba and North Korea have command economies. In a market
economy, decision-making is decentralized. Market economies are based
, on private enterprise: the means of production (resources and businesses) are
owned and operated by private individuals or groups of private individuals.
Businesses supply goods and services based on demand. Most economies in
the real world are mixed; they combine elements of command and market (and
even traditional) systems. The U.S. economy is positioned toward the market-
oriented end of the spectrum. Many countries in Europe and Latin America, while
primarily market-oriented, have a greater degree of government involvement in
economic decisions than the U.S. economy.
10. Describe the flow of money in a simple circular flow diagram. The circular flow
diagram shows how households and firms interact in the goods and services
market, and in the factors market. The direction of the arrows shows that in the goods
and services market, households receive goods and services and in the factors market,
firms receive factors of production. In the opposite direction, arrows show households
receive payment for their factors of production from firms through wages, rent, interest,
and profits, and firms receive payment for providing goods and services to households.
Module 2 - Economic Problem
, 1. Illustrate the concept of a tradeoff using the PPF.
This production possibilities frontier shows a trade-off between devoting social
resources to healthcare and devoting them to education. At A all resources go to
healthcare and at B, most go to healthcare. At D most resources go to education,
and at F, all go to education.
2. How can you calculate opportunity cost using the PPF?
3. Define the term “Comparative Advantage”. The ability of a person to perform an activity
or produce a good or service at a lower opportunity cost than someone else.
4. Define the term “Absolute Advantage”. the principle of absolute
advantage refers to the ability of a party (an individual, or firm, or country) to
produce a greater quantity of a good, product, or service than competitors, using
the same amount of resources.
5. How do you determine who has comparative advantage in a given situation? You must
first calculate the opportunity cost to see who has the comparative advantage.
