ECON 208 FINAL-McGill || 100% VERIFIED
ANSWERS!!!
Self-Organizing correct answers -The economy, when left alone without intervention, is
naturally self-organizing
-spontaneous economic order and self interest is behaviour that is enough to produce a
structured and organized economy
Spontaneous Economic order correct answers The billions of minor decisions and
transactions made by people every day come together to produce what people need on a
much larger scale
Self Interest correct answers -In economics we assume all people are motivated solely by
self-interest and all decisions they make are in order to maximize their personal gain
-economists call this rationality and all people are assumed to be rational
Efficiency correct answers -The order produced by all these selfish decisions is efficient
-all the good/services people want and have the means to purchase are produced with the
least possible amount of our scarce resources
Characteristics of the "Market" economy correct answers 1. Self-interest
2. Incentives: People in the economy respond to incentives
3. Market price and Quantity: determined by buyers and sellers, though not directly or
officially
4. Institutions: These activities are all governed by a set of institutions, including: private
property, freedom of contract, rule of law
Scarcity correct answers -resources are scarce (limited, not infinite)
-wants are unlimited (infinite)
-the mismatch of want and resources is the fundamental problem of economics
-economics is the study of how we use scarce resources to satisfy unlimited wants
Resources correct answers -what we use to produce the goods and services that people want
-AKA factors of production
3 kinds of resources correct answers 1. Labour: mental and physical human resources
(people)
2. Land: all natural endowments (arable land, oil, minerals, trees, fresh water, etc)
3. Capital: all manufactured aids to production (machines, computers, etc)
-all resources/FOP produce either goods or services
Two results of scarcity correct answers -choice
-opportunity cost
Choice correct answers -consumers and producers must choose to allocate scarce resources
(consumers -> money, producers -> resources) toward one thing and not another (consumers
-> buying goods and services, producers -> creating goods and services)
-because choice means giving something up for something else, what you give up is the cost
,Opportunity cost correct answers -specifically what you give up/forego in choosing to
consume (for consumers) or produce (for producers) one thing over another (what am I losing
out on by buying a shirt instead of a book for school)
-AKA the next best thing that you could be doing
Production Possibilities Curve (PPC) correct answers -we have a certain amount of resources
that can be used to produce 2 different things, lets call them product A and product B
-since the amount of resources we have is limited, how much of A and B we can produce
with them is limited too
-we can use our resources to produce only product A's, only product B's, or a combination of
product A's and B's
-There is a tradeoff whenever we choose to produce a certain amount of one product: the
more we produce of one product, the less we can produce of the other
-on the PPC one of A and B is represented on the vertical axis, the other on the horizontal
axis
-The PPC shows all the different combinations of A and B that we can produce when all of
our resources are being used
-when on the curve, we are using all our resources, showing that we are being efficient
-any point inside the curve represents a combination of A and B that we can produce without
using all of our resources (inefficient)
-any point outside the curve represents a combination of A and B that we are not capable of
producing with the amount of resources we have (unattainable, impossible)
Characteristics of PPC correct answers -negative slope (downwards)
-concave in shape (bows out from the origin): continuosly increasing
-not linear: the opportunity cost is not constant
-increasing opportunity cost
-inverse relationship between A and B
Moving along the PPC curve vs. a shift in the PPC curve correct answers -When we move
along the PPC from one point to another, we are choosing to produce a different combination
of A and B: more of one, less of the other
-At each point along the curve we are using all of our resources: no more, no less
-conversely, a shift in the PPC means that the amount of resources we have (the amount of
machines, the amount of workers) has changed, or the efficiency of those resources (the level
of technology) has changed, therefore leading to a change of how much we can now produce
Two kinds of PPC shifts correct answers 1. The entire curve shifts either inward or outward
2. only one dimension of the curve shifts inward or outward
Entire PPC curve shifts outwards correct answers -increased amount of resources allows us to
produce more of A and more of B
-producing more of each than before
-technology has improved (resources are used more efficiently), worker population has
increased (amount of resources we have - workers - has increased)
Entire PPC curve shifts inwards correct answers -decreased amount of resources forces us to
produce less of A and less of B
,One dimension of the PPC curve shifts outwards correct answers -the additional resources we
have acquired are only useful in producing one of our two goods or we improved our
technology for producing A
-ex: our new resources are only capable of producing A
--> 10 A's and 0 B's to 12 A's and 0 B's
One dimension of the PPC curve shifts inwards correct answers -the resources we lost were
only useful in producing one of our two goods
-Ex: our lost resources were only capable of producing B
--> 10 A's and 10 B's to 10 A's and 8 B's
Circular flow of income and expenditure correct answers -goods and services go from firms
to individuals (consumers)
-payments for these goods and services go from individuals (consumers) to firms
-these changes occur in the goods markets
-factor services (ex: labour) go from individuals to firms
-payments for these factor services go from firms to individuals
-these changes occur in the factor market
specialization of labour correct answers -the allocation of different jobs to different people
-beneficial because different people are good at different things
-this results in greater efficiency and productivity
division of labour correct answers -specialization within the production process of a
particular product
-ex: one worker specializes in the assembly of a chair and another specializes in cutting of the
material for the chair
-production process is broken down into several different tasks, each undertaken by a
different worker/group of workers
Barter correct answers -instead of using money to purchase a good, goods are traded for one
another
-this requires a double coincidence of wants: you need to have what i want, and i need to
have what you want
-Money eliminates this requirement, thus facilitating exchange between individuals
irrespective of whether they posses a good that the other wants
Traditional economy correct answers -behaviour and decisions are based mainly on tradition,
customs, and habits
Command Economy correct answers -Decisions are made by a central planning authority
-main feature is centralization of decision making
-command economy and centrally planned economy are synonyms
Free-Market economy correct answers -Most decisions are made by private households and
firms (individuals)
-main feature is decentralization of decision making
-Free-market economy, market economy, and price-system economy, are all synonyms
, Mixed economy correct answers -a combination of traditional, command, and free-market
economies
-some decisions are made by firms and households; others are made by government
-in practice, all economies are mixed economies
Positive Statement correct answers -stating something as FACT
-Whether the statement is true, false, or unverifiable does not change whether or not it is a
positive statement
-A positive statement is a statement saying "something is this way" or "this thing happens" or
"when this happens, that happens", etc
-ex: rain usually leads to more car accidents, an increase in GDP causes interest rates to fall
Normative statements correct answers -stating something as an OPINION
-whether the opinion is intelligent, stupid, makes a lot of sense, or makes no sense at all, does
not change whether or not it is a normative statement
-a normative statement is a statement saying "something should be this way" or "ought to be
this way" or "it would be better to do this than that"
-ex: because rain leads to more car accidents, people ought to avoid driving on rainy days, the
government should try to increase GDP so that interest rates can fall
-when economists disagree about something, it is usually regarding "normative" issues, not
"positive" ones
-this is because different economists have different values and beliefs, either about the way
things should be or what we should do in order to attain a certain goal
Economic theories correct answers -a theory is used to either explain a theory that has been
observed or what will happen in the future (eg- predict whether a high unemployment rate in
the future will lead to a decrease in national income)
-there are three components to a theory: 1. variables, 2. assumptions, 3. predictions
variable correct answers -this is an item being studied that can take on different possible
values
-the core of any theory is its variables, as its variables are what is being studied, what is being
tried to explain, and what it is trying to predict
-ex: we are studying the relationship between the price of a good (apples) and the quantity
demanded of that good-price of apples and quantity demanded of apples are both variables
-the point of the theory is to predict these variables and explain changes in these variables
Endogenous variables correct answers -Y-axis
-The variables whose values we are trying to explain and predict
-the variables occurring "within" the theory or model; its value is determined within the
theory
-price of apples and quantity demanded of apples are endogenous variables in our theory
-we study the relationship between our theory's endogenous variables (how they affect each
other), and how an exogenous variable affects/influences our endogenous variables, but NOT
how our endogenous variables affect the exogenous variable
exogenous variables correct answers -X axis
-a variable which influences the theory's endogenous variables, but does not itself occur
within the theory
-its value is determined outside the theory
