Unit I Study Guide* – Introduction to Economics

Unit Summary: The concepts that are essential to understanding Economics include scarcity and choice, trade-offs and opportunity cost, productivity, money and exchange, interdependence, and markets. These concepts have special relevance within the U.S. free-market system, whose main features and goals answer the 3 basic economic questions that individuals, business, and societies must address when deciding how best to allocate scarce resources: what to produce, how to produce, and for whom to produce. While government plays a minimal role in our free-market economy, it provides essential functions for all citizens, promoting growth and stability, supplying public goods, and providing an economic safety net.

Big Ideas:

  • Economic scarcity, a basic fact of economic life, requires choices and trade-offs, and all choices have costs.
  • The American free-enterprise economic system is based on and takes advantage of the freedom to make choices based on incentives and self-interest; because it has limited government involvement and regulation, our economy leans toward the pure market model.
  • Producers and consumers distribute goods and services most efficiently through a voluntary system of exchange; value in an exchange depends on utility and scarcity.
  • The goals of the American free-enterprise system—economic freedom, efficiency, and growth—are the result of the basic economic principles of profit motive, voluntaryexchange, private property rights and competition.
  • When necessary, the government intervenes in the economy to promote growth and stability, provide public goods and maintain a healthy standard of living.

Essential Questions:

  • What is the relationship among scarcity, trade-offs, opportunity costs and production possibilities?
  • How does the market economy establish and preserve political and personal liberty—include a discussion of enlightened self interest, incentives, economic competition, individual freedom and choice, limited government involvement and the role of private property?
  • Define productivity and explain why improving productivity is good for consumers and producers.
  • How are scarce resources allocated efficiently and effectively within the American free-enterprise system?
  • Describe the basic principles of the American free-enterprise system.
  • How does the U.S. government support free enterprise and promote and protect the public interest?

Topics/Terms:

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  • Need
  • Want
  • Economics
  • Goods
  • Services
  • Scarcity
  • Shortage
  • Factors of production
  • Land
  • Labor
  • Capital
  • Physical capital
  • Human capital
  • Entrepreneur
  • Trade-off
  • Guns or butter
  • Opportunity cost
  • Thinking at the margin
  • Production possibilities curve
  • Production possibilities frontier
  • Efficiency
  • Underutilization
  • Cost
  • Law of increasing costs
  • Economic system
  • Factor payments
  • Patriotism
  • Safety net
  • Standard of living
  • Traditional economy
  • Market economy
  • Centrally planned economy
  • Command economy
  • Mixed economy
  • Market
  • Specialization
  • Household
  • Firm
  • Factor market
  • Profit
  • Product market
  • Self-interest
  • Incentive
  • Invisible hand
  • Consumer sovereignty
  • Socialism
  • Communism
  • Authoritarian
  • Collective
  • Heavy industry
  • Laissez faire
  • Private property
  • Free enterprise
  • Continuum
  • Transition
  • Privatize
  • Profit motive
  • Open opportunity
  • Private property rights
  • Free contract
  • Voluntary exchange
  • Competition
  • Interest group
  • Public disclosure laws
  • Public interest
  • Macroeconomics
  • Microeconomics
  • Gross domestic product (GDP)
  • Business cycle
  • Work ethic
  • Technology
  • Public good
  • Public sector
  • Private sector
  • Free rider
  • Market failure
  • Externality
  • Poverty threshold
  • Welfare
  • Crash transfers
  • In-kind benefits

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Short-Answer Questions—some or all may be included on the exam:

  • How does scarcity affect economic choices—e.g., trade-offs, opportunity costs, production possibilities, etc?
  • Use the concept of “opportunity cost” to explain the following economic truism: “Nothing in life is free.”
  • What are the roles of self-interest and incentives in a market economy?
  • Why do our national economic goals sometimes require trade-offs?
  • Explain the three questions all economic systems must address in order to allocate resources effectively.
  • Describe production possibilities curves. Include the assumptions on which they are based and the factors that cause them to change.
  • What determines value in an exchange?
  • Explain how an economy can work efficiently in terms of its production possibilities but not be producing goods that are useful to it.
  • Explain what has happened to most of the large centrally planned economies, and discuss why this has happened.
  • Speculate why a completely free market economy might not be a practical one for any major country.
  • Provide an example of a positive and a negative externality?

*Applicable California Standards–

  • 12.1.1, 12.1.2, 12.1.3, 12.1.5: Students understand common economic terms and concepts and economic reasoning.
  • 12.2.3, 12.2.8: Students analyze the elements of America’s market economy in a global setting.
  • 12.3.1, 12.3.2, 12.3.3: Students analyze the influence of the federal government on the American economy.

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