economics final exam review – printable worksheet
directions: answer the following questions using complete sentences when appropriate.
1. what is scarcity and why is it the fundamental economic problem?
2. define opportunity cost.
3. what does a production possibilities curve (ppc) show?
4. what does an outward shift of the ppc represent?
5. what are the two markets shown in the circular flow model?
6. list and describe the four factors of production.
7. who makes economic decisions in a traditional economy?
8. how does a command economy differ from a market economy?
9. what is equilibrium in a supply and demand graph?
10. name three non - price determinants of demand.
11. what is a sole proprietorship?
12. what is limited liability and why is it important?
13. which market structure has only one seller?
14. what does gdp measure?
15. what is inflation?
16. what is a recession?

Question

Accepted Answer

### Question 1
# Brief Explanations:
Scarcity is the situation where unlimited wants exceed limited resources. It's fundamental because all economic choices stem from having to allocate scarce resources among competing uses.
# Answer:
Scarcity is the condition where human wants (for goods, services, resources) are unlimited, but the resources (like land, labor, capital, entrepreneurship) available to satisfy those wants are limited. It is the fundamental economic problem because every economic system must address how to allocate these scarce resources to meet unlimited needs and wants, as choices must be made about what to produce, how to produce, and for whom to produce due to resource limitations.

### Question 2
# Brief Explanations:
Opportunity cost is the value of the next - best alternative forgone when a choice is made. For example, if you choose to spend an hour studying instead of watching TV, the opportunity cost is the enjoyment and information you would have gained from watching TV.
# Answer:
Opportunity cost is the value of the best - forgone alternative when a decision is made. In other words, it is what you give up to obtain or do something else. For instance, if a student decides to spend their time working at a part - time job instead of studying, the opportunity cost is the knowledge they could have gained from studying and the potential improvement in their grades.

### Question 3
# Brief Explanations:
The Production Possibilities Curve (PPC) is a graphical representation. It shows the maximum combination of two goods or services that an economy can produce when all resources are fully and efficiently utilized. Points on the curve represent efficient production, inside the curve represent underutilization, and outside the curve represent production that is currently unattainable with existing resources and technology.
# Answer:
A Production Possibilities Curve (PPC) shows the different combinations of two goods or services that an economy can produce efficiently when all of its available resources are fully and effectively employed, and the level of technology is held constant. It also illustrates the concept of trade - offs (to produce more of one good, an economy must produce less of the other) and the limits of production due to resource scarcity.

### Question 4
# Brief Explanations:
An outward shift of the PPC means that the economy's capacity to produce goods and services has increased. This can be due to an increase in resources (like a discovery of new oil reserves, an increase in the labor force), an improvement in technology (such as new manufacturing processes), or an improvement in the quality of resources (like a more educated workforce).
# Answer:
An outward shift of the Production Possibilities Curve (PPC) represents economic growth or an increase in an economy's productive capacity. This can occur because of an increase in the quantity or quality of resources (e.g., a larger labor force, better - trained workers, discovery of new natural resources), technological advancements (new inventions or improvements in production methods), or an improvement in the efficiency of resource allocation. As a result, the economy is now able to produce more of both (or more of one) of the goods or services represented on the axes of the PPC.

### Question 5
# Brief Explanations:
The circular flow model has two main markets. The product market is where businesses sell goods and services to households, and households buy goods and services. The factor market is where households sell their resources (like labor, capital, land, entrepreneurship) to businesses, and businesses buy these resources to produce goods and services.
# Answer:
The two markets shown in the circular flow model are the product market and the factor (or resource) market. In the product market, households purchase goods and services from firms, and firms sell goods and services to households. In the factor market, households supply resources (such as labor, land, capital, and entrepreneurial ability) to firms, and firms purchase these resources from households to use in the production of goods and services.

### Question 6
# Brief Explanations:
The four factors of production are land, labor, capital, and entrepreneurship. Land includes all natural resources. Labor is the human effort (physical and mental) used in production. Capital is the man - made resources used to produce other goods. Entrepreneurship is the ability to organize the other factors and take risks.
# Answer:
1. **Land**: Land refers to all natural resources used in production. This includes not only the surface of the earth (for agriculture, building sites) but also natural resources like minerals, water, forests, and air. These resources are used as inputs in the production of goods and services.
2. **Labor**: Labor is the physical and mental effort exerted by people in the production process. It includes the work of factory workers, teachers, doctors, and all other individuals who contribute their time and skills to produce goods or provide services.
3. **Capital**: Capital consists of man - made resources used to produce other goods and services. It can be divided into physical capital (such as machinery, equipment, buildings) and human capital (the knowledge and skills that workers possess, which is improved through education and training).
4. **Entrepreneurship**: Entrepreneurship is the ability to combine the other three factors of production (land, labor, and capital) in a new or innovative way to start a business or create a new product or service. Entrepreneurs take on the risk of business failure in the hope of earning a profit, and they also make decisions about what to produce, how to produce, and for whom to produce.

### Question 7
# Brief Explanations:
In a traditional economy, economic decisions are based on custom, tradition, and the habits of the past. Usually, the elders or the community as a whole, following long - established traditions, make economic decisions. For example, in a traditional farming community, the methods of farming, what to grow, and how to distribute the produce are often determined by what has been done for generations.
# Answer:
In a traditional economy, economic decisions are made by the community, often based on custom, tradition, and the habits of previous generations. Typically, elders or those with traditional authority in the community make decisions about what to produce, how to produce it, and for whom to produce it, following the patterns and practices that have been passed down over time (such as traditional farming methods, barter systems, and resource allocation based on long - standing cultural norms).

### Question 8
# Brief Explanations:
In a command economy, the government (central planning authority) makes most economic decisions. It decides what to produce, how to produce, and for whom to produce. In a market economy, economic decisions are driven by the interactions of buyers and sellers in the market (the forces of supply and demand). Private individuals and businesses make decisions based on profit motives and consumer preferences.
# Answer:
In a command economy, the government (or a central planning authority) makes most economic decisions. It determines what goods and services will be produced, how they will be produced (including the allocation of resources like labor and capital), and for whom they will be produced (through centralized distribution plans). In contrast, in a market economy, economic decisions are primarily made by private individuals and businesses. What to produce is determined by consumer demand (signaled through prices), how to produce is determined by firms seeking to maximize profits (by choosing the most efficient production methods), and for whom to produce is determined by the ability of consumers to pay (those with more money can purchase more goods and services). Prices in a market economy act as signals to guide these decisions, while in a command economy, central planners set production targets and resource allocations.

### Question 9
# Brief Explanations:
In a supply - demand graph, equilibrium is the point where the quantity of a good or service that buyers are willing and able to buy (quantity demanded) is equal to the quantity that sellers are willing and able to sell (quantity supplied). At this point, there is no surplus or shortage in the market, and the price is stable (unless there is a change in supply or demand factors).
# Answer:
In a supply and demand graph, equilibrium is the point where the quantity demanded of a good or service is equal to the quantity supplied. Graphically, it is the intersection point of the demand curve and the supply curve. At the equilibrium price (the price at this intersection), the quantity that consumers are willing to buy matches the quantity that producers are willing to sell, so there is no tendency for the price or the quantity to change (assuming ceteris paribus, or all other things being equal) unless there is a shift in the demand or supply curve.

### Question 10
# Brief Explanations:
Non - price determinants of demand are factors other than the price of the good itself that affect the quantity demanded. Some common ones are consumer income (for normal and inferior goods), consumer tastes and preferences, the price of related goods (substitutes and complements), the number of consumers in the market, and consumer expectations (about future prices or income).
# Answer:
Three non - price determinants of demand are:
1. **Consumer Income**: For normal goods, an increase in income leads to an increase in demand (e.g., demand for luxury cars may rise as income increases). For inferior goods, an increase in income leads to a decrease in demand (e.g., demand for generic brand food may fall as income rises).
2. **Consumer Tastes and Preferences**: If a product becomes more popular (e.g., a new fashion trend for a certain style of clothing), the demand for that product will increase, even if the price remains the same.
3. **Price of Related Goods**:
    - **Substitutes**: If the price of a substitute good (e.g., tea is a substitute for coffee) increases, the demand for the original good (coffee) will increase.
    - **Complements**: If the price of a complementary good (e.g., milk is a complement for cereal) increases, the demand for the original good (cereal) will decrease.

### Question 11
# Brief Explanations:
A sole proprietorship is a type of business ownership. It is owned and run by a single individual. The owner has complete control over the business, but also has unlimited liability (meaning they are personally responsible for all the business's debts and obligations).
# Answer:
A sole proprietorship is a business owned and operated by a single individual. The owner has complete control over the business, receives all the profits, and is also personally liable for all the business's debts and legal obligations. It is the simplest form of business ownership, and the owner is often directly involved in the day - to - day operations of the business.

### Question 12
# Brief Explanations:
Limited liability means that the owners of a business (like in a corporation or a limited liability company) are not personally responsible for the business's debts beyond the amount they have invested in the business. It is important because it encourages investment. People are more willing to invest in a business if they know that their personal assets (like their home, savings) are not at risk if the business fails.
# Answer:
Limited liability is a legal concept where the owners (shareholders in a corporation, members in an LLC) of a business are not personally responsible for the business's debts and obligations beyond the amount of money they have invested in the business. It is important because it encourages entrepreneurship and investment. Investors are more likely to put money into a business if they know that their personal assets (such as their house, personal savings) are protected from the business's liabilities. This allows businesses to raise more capital to expand, innovate, and create jobs, as the risk to investors is limited to their investment in the business.

### Question 13
# Brief Explanations:
A monopoly is a market structure with only one seller. This seller has significant control over the price of the product or service because there are no close substitutes and barriers to entry (like patents, high start - up costs, exclusive access to resources) prevent other firms from entering the market.
# Answer:
The market structure that has only one seller is a monopoly. In a monopoly, there is a single firm that produces and sells a unique product or service for which there are no close substitutes. The monopolist has significant market power and can often influence the price of the product (by controlling the quantity supplied) because there are barriers to entry (such as legal restrictions, control of essential resources, or economies of scale that make it difficult for new firms to enter the market) that prevent other firms from competing.

### Question 14
# Brief Explanations:
Gross Domestic Product (GDP) measures the total value of all final goods and services produced within a country's borders in a specific time period (usually a year or a quarter). It can be calculated using the expenditure approach (sum of consumption, investment, government spending, and net exports) or the income approach (sum of all incomes earned in the production process).
# Answer:
Gross Domestic Product (GDP) measures the total market value of all final goods and services produced within a country's geographic boundaries during a specific period of time (typically a year or a quarter). It is a key indicator of the size and health of a country's economy. GDP can be calculated in three ways: the expenditure approach (summing consumption (C), investment (I),…

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