Basic Economics Overview

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Questions and Answers

What characterizes elastic demand?

Elasticity of demand is less than one.

Elasticity of demand is equal to one.

Elasticity of demand is greater than one. (correct)

Elasticity of demand is a fixed value.

Which of the following increases according to the law of supply?

Supply remains unchanged regardless of price.

Supply decreases when prices increase.

Supply increases when prices decrease.

Supply increases when prices increase. (correct)

What is the midpoint method formula for calculating price elasticity of demand (PED)?

$P = \frac{Q2 - Q1}{(Q2 + Q1)/2} \times 100$

$PED = \frac{QD}{P}$

$QD = \frac{P2 - P1}{(P2 + P1)/2} \times 100$

$QD = \frac{Q2 - Q1}{(Q2 + Q1)/2} \times 100$ (correct)

What does inelastic supply mean?

The elasticity of supply is less than one. Signup and view all the answers

According to the law of demand, what happens to demand when there is an increase in price?

Demand decreases. Signup and view all the answers

What happens when there is a price ceiling in a market?

Prices cannot rise above the specified maximum level. Signup and view all the answers

Which factor does NOT shift the demand curve in the labor market?

Required education Signup and view all the answers

What is measured by the difference between the price a producer actually received and the minimum price they would have accepted?

Producer surplus Signup and view all the answers

How can an increase in the number of sellers affect supply in a market?

It enhances competition, potentially increasing total supply. Signup and view all the answers

What is a key characteristic of a price floor in the labor market?

It sets a legal minimum wage for workers. Signup and view all the answers

Which of the following best describes social surplus?

The combined benefit to consumers and producers from market transactions. Signup and view all the answers

What impact does expectation about future market conditions have on supply decisions?

It may encourage producers to increase supply if prices are expected to rise. Signup and view all the answers

In financial markets, who is primarily considered the supplier?

The individuals or entities that provide funds. Signup and view all the answers

What aspect does microeconomics primarily focus on?

Individual and business decisions Signup and view all the answers

Which of the following best defines scarcity in economics?

Limitation of supply in relation to demand Signup and view all the answers

What does the concept of opportunity cost signify?

The value of the next best alternative foregone Signup and view all the answers

What comprises the four factors of production?

Land, labor, capital, and entrepreneurship Signup and view all the answers

What is meant by marginal decision-making?

Assessing the benefits and costs of small changes Signup and view all the answers

What does diminishing marginal utility imply?

Satisfaction decreases as more units of a good are consumed Signup and view all the answers

Which of the following is NOT one of the four factors of production?

Management Signup and view all the answers

What does a budget constraint represent?

All possible combinations of goods that can be purchased with given income Signup and view all the answers

What best defines a sunk cost?

A financial or time investment that has already been incurred and cannot be recovered Signup and view all the answers

Which option correctly describes the law of demand?

As price decreases, quantity demanded increases Signup and view all the answers

What effect does an increase in consumer income have on the demand for a normal good?

It increases the demand Signup and view all the answers

Which of the following factors does NOT shift the supply curve?

Changes in consumer tastes Signup and view all the answers

What is a surplus in market terms?

When quantity supplied exceeds quantity demanded Signup and view all the answers

What does a demand schedule represent?

The quantity demanded at various price levels Signup and view all the answers

If a product's demand falls when income rises, it is classified as what type of good?

Inferior good Signup and view all the answers

Which statement accurately describes equilibrium in a market?

The point at which quantity demanded equals quantity supplied Signup and view all the answers

Study Notes

Basic Economics

Economics is the study of how people make choices under scarcity and how these choices impact the creation, distribution, and consumption of goods and services.
Microeconomics focuses on individual and business decisions.
Macroeconomics examines the overall economy.

Scarcity and Factors of Production

Scarcity occurs when the supply of a good or service is limited relative to the demand for it.
Unlimited wants exist alongside limited resources.
Factors of production are the resources used to create goods and services:
- Land - encompasses natural resources like minerals, forests, and water.
- Labor - refers to the efforts and skills of individuals working to create goods and services.
- Capital - encompasses the tools, machinery, and other physical assets used in production.
- Entrepreneurship - combines the other factors to create a profit.

Decision Making and Scarcity

Economizing resources involves making the most of available resources.
Budget constraint represents all possible consumption combinations a person can afford, considering prices and income.
Opportunity cost is the value of the best alternative sacrificed when making a choice.
Marginal decision-making involves assessing the incremental benefits and costs of small changes in activities, production, or resource allocation.
Marginal benefit (MB) is the additional utility gained from consuming one extra unit of a good or service.
Marginal cost (MC) is the extra cost incurred by producing one additional unit or making an incremental change.
Diminishing returns occur as additional units of a resource are used, leading to smaller increases in output.
Diminishing marginal utility states that the additional satisfaction gained from each additional unit of consumption decreases as consumption increases.
Sunk cost is an investment already made that cannot be recovered.

Supply and Demand

Demand represents the quantity of a good or service consumers are willing and able to buy at each price.
Price is the monetary value paid for a unit of a good or service.
Quantity demanded is the total number of units consumers would purchase at a specific price.
Law of demand states that as price increases, quantity demanded decreases and vice versa.
Demand schedule is a table showing the quantity demanded at various prices.
Demand curve graphs the relationship between price and quantity demanded, with quantity on the horizontal axis and price on the vertical axis.
Supply is the quantity of a good or service producers are willing to offer at each price.
Law of supply describes the direct relationship between price and quantity supplied.
Supply schedule shows the quantity supplied at a range of prices.
Supply curve graphs the relationship between price and quantity supplied, with quantity on the horizontal axis and price on the vertical axis.
Equilibrium occurs when the quantity demanded equals the quantity supplied.
Shortage exists when demand exceeds supply.
Surplus occurs when supply exceeds demand.
Ceteris paribus implies that all other factors remain constant.

Factors Affecting Demand and Supply

Normal good is a product whose demand increases as income rises.
Inferior good is a product whose demand falls as income rises.
Factors shifting demand curves include:*
Buyers - changes in the number of consumers.
Income - changes in consumers' income.
Taste/trends - changes in preferences or popularity.
Expectations - changes in future expectations.
Related goods - complements and substitutes.
Factors shifting supply curves include:*
Subsidies/taxes - government subsidies or taxes impact production costs.
Technology - technological advancements affect production efficiency and costs.
Other goods - prices of alternative outputs influence production decisions.
Number of sellers - the total number of producers impacts supply.
Expectations - expectations about future market conditions influence current supply decisions.
Resource costs - changes in the costs of raw materials and labor.

Price Controls

Price ceiling is a legal maximum price, preventing prices from exceeding a set level.
Price floor is a legal minimum price, preventing prices from falling below a set level.

Surplus and Welfare

Consumer surplus is the additional benefit consumers receive from buying a good or service, measured as the difference between what they're willing to pay and what they actually paid.
Producer surplus is the additional benefit producers receive from selling a good or service, measured as the difference between the price received and the minimum price they would have accepted.
Social surplus is the sum of consumer surplus and producer surplus, representing the overall benefit to society.

Labor Markets

Labor market is the market for employees or jobs.
Demand in the labor market is driven by firms and employers.
Supply in the labor market is driven by individuals or workers.
Price floor in the labor market is a government-imposed minimum wage, the lowest legal wage employers can pay.
Factors shifting demand in the labor market include:*
Demand for output
Education and training
Technology
Number of companies
Government regulations
Price and availability of other inputs
Factors shifting supply in the labor market include:*
Number of workers
Required education
Government policies
Minimum wage* is a compulsory minimum pay employers must provide to their employees.
Living wage* is the total amount needed to cover an individual's or family's basic living expenses.

Financial Markets

Financial market is a market for savings or borrowing.
Demand is driven by individuals and firms (lenders).
Supply is driven by individuals, firms, or governments (loaners).
Price ceiling in the financial market is a regulatory limit on the interest rate a lender can charge.
Usury law imposes an upper limit on interest rates lenders can charge.

Summary Table of Key Concepts

	Goods/Services Market	Labor Market	Financial Market
Law of Demand	Price increase, demand decrease	Wage increase, demand decrease	Interest increase, demand decrease
Law of Supply	Price increase, supply increase	Wage increase, supply increase	Interest increase, supply increase

Elasticity

Elasticity measures responsiveness to change.
Elastic demand occurs when a change in price leads to a proportionally larger change in quantity demanded (PED > 1).
Inelastic demand occurs when a change in price leads to a proportionally smaller change in quantity demanded (PED < 1).
Elastic supply occurs when a change in price leads to a proportionally larger change in quantity supplied (PES > 1).
Inelastic supply occurs when a change in price leads to a proportionally smaller change in quantity supplied (PES < 1).
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to price changes.
Price elasticity of supply (PES) measures the responsiveness of quantity supplied to price changes.

Midpoint Method

The midpoint method is a more accurate way to calculate elasticity than the basic percentage change method.
It considers the average of the initial and final values of price and quantity.
The midpoint method formula for price elasticity of demand (PED) is:
```
PED = (change in quantity demanded / ((Q2 + Q1) / 2) ) / (change in price / ((P2 + P1) / 2))
```
Where:
- Q1 = Initial quantity demanded
- Q2 = Final quantity demanded
- P1 = Initial price
- P2 = Final price

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Description

This quiz covers the fundamental concepts of economics, including scarcity and the factors of production. Explore microeconomics and macroeconomics, along with the importance of decision-making in resource allocation. Test your understanding of how choices impact the economy.