Chapter 2.

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The fundamental question(s) every society asks/answers are

how to produce?, what to produce?, for whom to produce?

Which fundamental economic question requires society to choose the combination (mix) of resources (factors of productions) in order to produce goods & services?

the How to Produce question.

The opportunity cost of making a decision (by an individual or a society) is:

the best alternative that was sacrificed.

The opportunity cost of an action taken by an individual/society is:

the value of the best opportunity that must be sacrificed in order to take the current action.

From an economic standpoint, government intervention is justified:

When the market mechanism fails to achieve the optimal mix of output.

If an economy is operating at a point inside the production possibilities curve,

its resources are not being used efficiently.

Economic growth may be represented by a(n):

outward shift of a production possibilities curve.

A point outside the production possibilities curve represents a combination of goods that is:


Compare two economies A and B that start out with identical production possibilities curves. Economy A chooses an efficient point with 10 consumption/consumer goods (more consumer goods as compared to economy B) and 5 capital/producer/industrial goods, while economy B also chooses an efficient point, but with 6 consumption/consumer goods and 9 capital/producer/industrial goods. In the future we can predict:

economy B will grow faster than economy A.

Which of the following will be most likely to cause the production possibilities curve for a country to shift inward?

a decrease in the stock of physical capital

If an economy keeps increasing its capital stock/number of workers/technology/natural resources, then over time its production possibilities curve will:

shift to the right.

Any point on the production possibilities curve illustrates:

maximum production combinations.

A production possibilities curve (PPC) or production possibilities frontier (PPF) shows the various:

combinations of goods the economy has the capacity to produce.

Using the above Figure, suppose point "C" represents the optimal mix of output for a society. If market forces cause society to produce at point "D", then, the society may allow the government to intervene in the economy; and such a government intervention;

Could move the production to the optimal level "C". Could move the production to point "B" in the diagram. Could move the production to point "A" in the diagram. The Government do whatever it wants

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