Questions and Answers
The owner of capital earns an income known as profit.
False
Marginal analysis is utilized to compare the additional input required and the resultant decrease in costs.
False
The production possibility frontier illustrates the combination of three goods that can be produced using finite resources.
False
Entrepreneurship solely relies on labor and does not use capital.
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The circular flow model depicts the movement of resources from firms to households and goods from households to firms.
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Absolute scarcity occurs when resources are insufficient to meet the needs of consumers and producers.
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Intrinsic incentives are motivated by external rewards received from consumption decisions.
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Relative scarcity refers to a situation where a good is abundant compared to its demand.
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The law of demand states that as price increases, the quantity demanded also increases.
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Opportunity cost represents the value of the best alternative that is forgone when a decision is made.
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Ceteris paribus means to consider all factors in a given economic situation.
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Labor refers exclusively to the efforts of manual workers in production.
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The law of supply states that a decrease in price will typically result in an increase in supply.
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Study Notes
Scarcity
- Scarcity occurs when resources are insufficient to meet the needs and wants of a population.
- Relative scarcity describes the situation when a good is scarce compared to its demand; for instance, coconuts are abundant in the Philippines, but may become scarce if supply doesn't meet demand.
- Absolute scarcity refers to a complete lack of supply; an example is the absence of oil wells in a country, resulting in no local petroleum production.
Choice and Decision-Making
- Scarcity necessitates making decisions to optimize the use of limited resources to fulfill as many wants as possible.
- Opportunity cost is the value of the best alternative that is forgone when making a decision.
Incentives
- Incentives are factors influencing consumer decisions, categorized into intrinsic and extrinsic incentives.
- Intrinsic incentives arise from within the consumer, while extrinsic incentives are driven by external rewards; for example, a price decrease acts as an extrinsic incentive to purchase.
Demand and Supply
- Supply represents the quantity of goods and services available to consumers.
- The law of supply indicates that supply increases as prices rise, and decreases when prices drop.
- Demand indicates how much of a good or service consumers are willing to purchase; according to the law of demand, demand decreases as prices increase, and vice versa.
- Ceteris paribus is a principle that means "all else being equal," used to analyze changes in economic variables.
Factors of Production / Economic Resources
- Land: Natural, non-man-made resources like soil. Owners receive rent.
- Labor: Physical and human efforts in production, encompassing both manual and professional workers. Wages are the income received.
- Capital: Man-made resources, including machinery and equipment used in production. Owners earn interest on capital.
- Entrepreneurship: Combines land, labor, and capital to create goods or services for consumers.
Production Possibility Frontier
- The production possibility frontier (PPF) illustrates the maximum combinations of two goods that can be produced with limited resources.
Marginal Analysis
- Marginal analysis evaluates additional costs against the additional benefits from an activity, often used by companies when considering expansion.
Circular Flow
- The circular flow model demonstrates the movement of money within an economy, linking households and firms through factors of production and the flow of goods and services.
- Resources flow from households to firms, while goods and services flow from firms back to households.
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Description
Explore the fundamental concept of scarcity in economics, including its definition and implications for both consumers and producers. This quiz delves into the differences between absolute and relative scarcity with real-world examples. Test your understanding of how limited resources affect market dynamics.
