Chapter 1 Assessment

Chapter Summary

A summary of major ideas in Chapter 1 appears below. See also the Guide to the Essentials of Economics, which provides additional review and test practice of key concepts in Chapter 1.

• Section 1 Scarcity and the Factors of Production (pp. 3–6)

  Economics is the study of how people seek to satisfy their needs and wants by making choices. People, businesses, and governments must make choices because all resources are scarce. Scarcity means limited quantities of resources to meet unlimited needs or desires. Economists call the resources that are used to make all goods and services the factors of production. The three factors of production are land, labor, and capital. Entrepreneurs are leaders who combine the three factors of production to create new goods and services.

• Section 2 Opportunity Cost (pp. 8–11)

  Every decision involves trade-offs. Trade-offs are all the alternatives that we give up when we choose one course of action over another. The most desirable alternative given up as the result of a decision is called the opportunity cost. If a decision involves choosing one more or one fewer unit of an input, economists say we are thinking at the margin. Employers think at the margin to decide how many workers to hire.

• Section 3 Production Possibilities Curves (pp. 13–18)

  Economists draw curves or graphs in order to help them analyze the choices and trade-offs people make. A production possibilities curve shows the alternative ways in which an economy's resources can be used. The production possibilities frontier is the line or curve on the graph that represents the maximum amount that an economy can produce. Points inside the frontier reflect an underutilization of resources. If the amount of available land, labor, or capital increases, the entire curve can shift to the right. The law of increasing costs states that as production shifts from one item to a second item, more and more resources are necessary to increase production of the second item.

Key Terms

Complete each sentence by choosing the correct answer from the list of terms below. You will not use all of the terms.

• capital
• entrepreneur
• goods
• “guns or butter”
• land
• opportunity cost
• scarcity
• trade-offs
• underutilization
• economics

1. Economists define _____ as “limited quantities to meet unlimited wants.”
2. All decisions involve _____ because we must give up some alternatives when we choose a certain course of action.
3. The term _____ refers to all natural resources that are used to produce goods and services.
4. Economists use the phrase _____ to describe the trade-offs a country is forced to make when choosing between military and consumer production.
5. A(n) _____ is the most important sacrifice that results from making a decision.
6. A person who starts a new business or develops an original idea is known as a(n) _____.
7. _____ of resources occurs when an economy uses fewer resources than it is capable of expending.

Using Graphic Organizers

8. On a separate sheet of paper, copy the tree map below to help you organize information about the factors of production. Complete the tree map by writing descriptions and examples for each of the headings shown.

   

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