AP Microeconomics Basic Economic Concepts 1 — Questions and Answers
Question 1: Which of the following best describes the concept of scarcity?
- Unlimited resources to meet unlimited wants
- Limited resources to meet unlimited wants (Correct answer)
- Limited wants and unlimited resources
- Limited resources to meet limited wants
Correct answer: Limited resources to meet unlimited wants
Scarcity is the fundamental economic problem that arises because human wants for goods, services, and resources exceed what is available. This means that society's productive resources are finite, while human desires are infinite. This imbalance forces individuals and societies to make choices about how to allocate their limited resources.
Question 2: What is the opportunity cost of choosing to produce more of one good?
- The cost of raw materials used in production
- The money spent on producing that good
- The value of the next best alternative foregone (Correct answer)
- The total value of all alternatives foregone
Correct answer: The value of the next best alternative foregone
Opportunity cost is the value of the best alternative that must be given up when a choice is made. When deciding to produce more of one good, the resources used for that good cannot be used for something else. Therefore, the opportunity cost is the benefit that would have been derived from the next best alternative production choice.
Question 3: A production possibilities curve (PPC) is bowed outwards. This indicates:
- Constant opportunity costs
- Increasing opportunity costs (Correct answer)
- Decreasing opportunity costs
- No opportunity costs
Correct answer: Increasing opportunity costs
A production possibilities curve (PPC) that is bowed outwards (concave to the origin) indicates increasing opportunity costs. This means that as more of one good is produced, increasingly larger amounts of the other good must be sacrificed. This typically occurs because resources are not perfectly adaptable to the production of both goods, leading to diminishing returns as production shifts.
Question 4: If one country has an absolute advantage in producing all goods, can it still benefit from trade?
- Yes, because of comparative advantage (Correct answer)
- Yes, because of absolute advantage
- No, because it produces all goods more efficiently
- No, because it does not need trade
Correct answer: Yes, because of comparative advantage
Even if one country has an absolute advantage in producing all goods, meaning it can produce everything more efficiently, it can still benefit from trade. This is because trade is based on comparative advantage, which means specializing in goods where a country has a lower opportunity cost. By focusing on what they do relatively best and trading, both countries can achieve a higher overall consumption level than if they produced everything themselves.
Question 5: Which economic system relies on government planning to allocate resources?
- Market economy
- Mixed economy
- Command economy (Correct answer)
- Traditional economy
Correct answer: Command economy
A command economy is an economic system characterized by central government planning and control over resource allocation. In this system, the government makes all major decisions regarding what goods and services are produced, how they are produced, and for whom. This contrasts sharply with market economies, where individual choices and supply and demand primarily drive resource allocation.
AP Microeconomics Basic Economic Concepts 1
Which of the following best describes the concept of scarcity?