Unit 1 Microeconomics Basic Economic
Concepts
Production Possibilities Curve/Frontier (PPC/PPF) - answers
Circular Flow Model - answers
Absolute Advantage - answersThe ability to produce more of a good or service than
another person or society with the same number of inputs. Alternatively, it means one
person or society can make a unit of output with fewer units of input than its counterpart.
Allocative Efficiency - answersThe amount of production that benefits society the most.
It is achieved when the marginal benefit of production equals the marginal cost. Also
known as the socially optimal level of output. A society is allocatively efficient when it is
choosing to make the mix of goods that best satisfy the wants of its population.
Capital - answersThe tools, machines, factories, and buildings used to produce goods
and services. Includes physical capital, which ranges from hammers to industrial robots
and human capital, which is "know-how" or specialized skills that get fused to labor
through education and training.
Ceteris Paribus - answers"Other things being equal." The assumption that all variables
remain constant except for those being studied by the economist. Ceteris paribus allows
economists to understand the relationship between economic variables. As in science,
economists like to try to isolate one factor that may be changing at a given time to better
understand cause and effect.
Command Economy (Communism) - answersAn economic system in which government
planners make most of the choices for the economy and answer the basic questions of
what to produce, how to produce, and for whom to produce. Often contrasted with
market economy because these are the two basic extremes; societies can choose
Concepts
Production Possibilities Curve/Frontier (PPC/PPF) - answers
Circular Flow Model - answers
Absolute Advantage - answersThe ability to produce more of a good or service than
another person or society with the same number of inputs. Alternatively, it means one
person or society can make a unit of output with fewer units of input than its counterpart.
Allocative Efficiency - answersThe amount of production that benefits society the most.
It is achieved when the marginal benefit of production equals the marginal cost. Also
known as the socially optimal level of output. A society is allocatively efficient when it is
choosing to make the mix of goods that best satisfy the wants of its population.
Capital - answersThe tools, machines, factories, and buildings used to produce goods
and services. Includes physical capital, which ranges from hammers to industrial robots
and human capital, which is "know-how" or specialized skills that get fused to labor
through education and training.
Ceteris Paribus - answers"Other things being equal." The assumption that all variables
remain constant except for those being studied by the economist. Ceteris paribus allows
economists to understand the relationship between economic variables. As in science,
economists like to try to isolate one factor that may be changing at a given time to better
understand cause and effect.
Command Economy (Communism) - answersAn economic system in which government
planners make most of the choices for the economy and answer the basic questions of
what to produce, how to produce, and for whom to produce. Often contrasted with
market economy because these are the two basic extremes; societies can choose
