C718 - Microeconomics - CM created Study Guide Quest
C718 - CM created Study Guide Questons
This set of study questons will help guide and reinforce your understanding of a number of important
concepts after reading the Acrobatq e-text. These study questons are designed to supplement, not
replace, your e-text reading. Therefore, you must read each module in the e-text as indicated in the
course of study before you engage in these study questons. The answers to all the questons can be
found in the e-text. It will be most effectve if, after reading each module, you assess your understanding
by engaging in the study questons one module at a tme. You are strongly encouraged to revisit the e-
text if you find yourself unable to answer a given queston. The ttles of the modules corresponding to
each set of questons are indicated throughout the document below.
Competency 3002.1.1: The Economic Way of Thinking
The graduate evaluates individual and firm behavior by applying fundamental economic principles,
including scarcity, opportunity cost, marginal analysis, supply and demand analysis, and elastcity.
Module 1 - The Economic Way of Thinking
What is the definition of economics?
Economics is the study of how people, individually and through insttutons, make decisions about
producing and consuming goods and services, and how they face the problem of scarcity.
Explain how scarcity leads to tradeoffs.
Human wants and desires are vast, relatve to the resources available to satsfy them. Thus, in every
economic system there has to be some method for making tradeoffs among alternatve actons. The
desires of individuals generally exceed what is possible to produce or consume in the economy
,Illustrate the concept of a tradeoff using the PPF.
Shifting output from guns to butter, or vice versa-more of one means less of another.
Negatve slop of the fronter means that if we want to produce more guns, we’ll have to take labor and
machinery away from butter producton, thus reducing amount of butter produce
What is the definition of opportunity cost?
Every decision to produce or consume something means sacrificing the production or
consumption of something else. Economists use the term opportunity cost to denote the
full value of the best alternative that is given up, or forgone. For example, the cost of going
to a football game includes the value of what is given up in order to attend. Part of the cost
of attending the game is the price of the ticket; this price represents the other goods and
services you could have purchased with that money instead. However, there is another
important part of the cost. This second part is the most valuable alternative use of those 3
hours that you spent at the game. The opportunity cost of attending the game consists of
both the price of the ticket and the difference in your test grade that 3 more hours of
studying would have produced. Even if the ticket were free, going to the game would still
have an opportunity cost.
,How can you calculate opportunity cost using the PPF?
If the economy is at Point A in Figure 1.3, we can get another ten levees by shifting
resources from soybean production to levee production. In moving from Point A to Point C,
we must give up only a small amount of soybeans: 5 tons. But to move from Point B to
Point D, producing another ten levees requires a larger sacrifice of soybeans, 23 tons
instead of 5 tons. This curved production possibilities curve illustrates the very important
principle of increasing opportunity cost. That is, the more levees that are already being
produced, the larger the sacrifice of soybeans that is required to build additional levees.
Table 1.2 shows that between Points A and C, ten more levees cost 5 tons of soybeans.
Between Points B and D, however, ten more levees cost 23 tons of soybeans.
What factors cause economic growth?
Added resources (usually labor or capital) are sources of economic growth. New technology
can also shift a production possibilities curve outward and account for economic growth.
Invention, innovation, discovery of resources, and improvements in productivity all
contribute to economic growth and allow us to produce and consume beyond Point A.
macroeconomic issue that can be illustrated by the production possibilities model is
economic growth. If technology can improve or the quantity of resources can increase,
output can grow beyond the limits of the production possibilities curve. Better technology
or more resources means a change in the fourth assumption stated earlier—that both
resources and technology are fixed. As labor becomes more skilled and productive, and as
, producers acquire new machines and plants embodying the latest technology, the
production possibilities curve shifts outward.
How is growth illustrated using the PPF?
An outward shift of a production possibilities curve is shown in Figure 1.4. If the economy is
at Point A on PR, production consists of D1 tons of soybeans and C1 units of levees. With the
shift of the curve to P1R1P1R1 , it is possible to reach some point, such as Point B, which
includes more of both soybeans (D2 tons) and levees (C2 units). Other possible combinations
on the new production possibilities curve include the same amount of one good and more
of the other (such as Point E or F) and less of one good and more of the other (such as
Point H or J). No matter which combination is produced, the important thing about an
outward shift of a production possibilities curve is that it increases the economy’s capacity
to respond to human wants.
An outward shift of the production possibilities curve from PRPR to P1R1P1R1 means
that the economy can produce more of both soybeans and levees (economic growth).
How can the production possibility frontier be used to identify market combinations that are
inefficient, and those that are efficient?
C718 - CM created Study Guide Questons
This set of study questons will help guide and reinforce your understanding of a number of important
concepts after reading the Acrobatq e-text. These study questons are designed to supplement, not
replace, your e-text reading. Therefore, you must read each module in the e-text as indicated in the
course of study before you engage in these study questons. The answers to all the questons can be
found in the e-text. It will be most effectve if, after reading each module, you assess your understanding
by engaging in the study questons one module at a tme. You are strongly encouraged to revisit the e-
text if you find yourself unable to answer a given queston. The ttles of the modules corresponding to
each set of questons are indicated throughout the document below.
Competency 3002.1.1: The Economic Way of Thinking
The graduate evaluates individual and firm behavior by applying fundamental economic principles,
including scarcity, opportunity cost, marginal analysis, supply and demand analysis, and elastcity.
Module 1 - The Economic Way of Thinking
What is the definition of economics?
Economics is the study of how people, individually and through insttutons, make decisions about
producing and consuming goods and services, and how they face the problem of scarcity.
Explain how scarcity leads to tradeoffs.
Human wants and desires are vast, relatve to the resources available to satsfy them. Thus, in every
economic system there has to be some method for making tradeoffs among alternatve actons. The
desires of individuals generally exceed what is possible to produce or consume in the economy
,Illustrate the concept of a tradeoff using the PPF.
Shifting output from guns to butter, or vice versa-more of one means less of another.
Negatve slop of the fronter means that if we want to produce more guns, we’ll have to take labor and
machinery away from butter producton, thus reducing amount of butter produce
What is the definition of opportunity cost?
Every decision to produce or consume something means sacrificing the production or
consumption of something else. Economists use the term opportunity cost to denote the
full value of the best alternative that is given up, or forgone. For example, the cost of going
to a football game includes the value of what is given up in order to attend. Part of the cost
of attending the game is the price of the ticket; this price represents the other goods and
services you could have purchased with that money instead. However, there is another
important part of the cost. This second part is the most valuable alternative use of those 3
hours that you spent at the game. The opportunity cost of attending the game consists of
both the price of the ticket and the difference in your test grade that 3 more hours of
studying would have produced. Even if the ticket were free, going to the game would still
have an opportunity cost.
,How can you calculate opportunity cost using the PPF?
If the economy is at Point A in Figure 1.3, we can get another ten levees by shifting
resources from soybean production to levee production. In moving from Point A to Point C,
we must give up only a small amount of soybeans: 5 tons. But to move from Point B to
Point D, producing another ten levees requires a larger sacrifice of soybeans, 23 tons
instead of 5 tons. This curved production possibilities curve illustrates the very important
principle of increasing opportunity cost. That is, the more levees that are already being
produced, the larger the sacrifice of soybeans that is required to build additional levees.
Table 1.2 shows that between Points A and C, ten more levees cost 5 tons of soybeans.
Between Points B and D, however, ten more levees cost 23 tons of soybeans.
What factors cause economic growth?
Added resources (usually labor or capital) are sources of economic growth. New technology
can also shift a production possibilities curve outward and account for economic growth.
Invention, innovation, discovery of resources, and improvements in productivity all
contribute to economic growth and allow us to produce and consume beyond Point A.
macroeconomic issue that can be illustrated by the production possibilities model is
economic growth. If technology can improve or the quantity of resources can increase,
output can grow beyond the limits of the production possibilities curve. Better technology
or more resources means a change in the fourth assumption stated earlier—that both
resources and technology are fixed. As labor becomes more skilled and productive, and as
, producers acquire new machines and plants embodying the latest technology, the
production possibilities curve shifts outward.
How is growth illustrated using the PPF?
An outward shift of a production possibilities curve is shown in Figure 1.4. If the economy is
at Point A on PR, production consists of D1 tons of soybeans and C1 units of levees. With the
shift of the curve to P1R1P1R1 , it is possible to reach some point, such as Point B, which
includes more of both soybeans (D2 tons) and levees (C2 units). Other possible combinations
on the new production possibilities curve include the same amount of one good and more
of the other (such as Point E or F) and less of one good and more of the other (such as
Point H or J). No matter which combination is produced, the important thing about an
outward shift of a production possibilities curve is that it increases the economy’s capacity
to respond to human wants.
An outward shift of the production possibilities curve from PRPR to P1R1P1R1 means
that the economy can produce more of both soybeans and levees (economic growth).
How can the production possibility frontier be used to identify market combinations that are
inefficient, and those that are efficient?
