Economic Issues and Concepts
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Questions and Answers

What happens to the equilibrium price and quantity when there is a decrease in supply?

  • Equilibrium price decreases, equilibrium quantity increases.
  • Equilibrium price remains constant, equilibrium quantity decreases.
  • Equilibrium price increases, equilibrium quantity decreases. (correct)
  • Equilibrium price increases, equilibrium quantity remains constant.

Which of the following best describes relative price?

  • The average price of goods in a specific market.
  • The total cost of purchasing multiple units of a good.
  • The price of a good compared to its production cost.
  • The price of one good in terms of another good. (correct)

Under what condition is demand considered elastic?

  • When quantity demanded is completely unaffected by price changes.
  • When quantity demanded changes significantly in response to a price change. (correct)
  • When total expenditure decreases with a price increase.
  • When quantity demanded changes less than the price change.

What does the elasticity measurement formula consist of?

<p>Percentage change in quantity demanded divided by percentage change in price. (A)</p> Signup and view all the answers

Which factor tends to increase the price elasticity of demand?

<p>The time interval considered is longer. (D)</p> Signup and view all the answers

What typically happens to total expenditure when demand is inelastic and price decreases?

<p>Total expenditure decreases. (C)</p> Signup and view all the answers

How does the elasticity of demand behave in the long run compared to the short run?

<p>It generally becomes more elastic. (D)</p> Signup and view all the answers

What does price elasticity of supply measure?

<p>Responsiveness of quantity supplied to a change in its own price. (C)</p> Signup and view all the answers

What typically occurs for consumers in imperfect competition?

<p>Consumers may either lose or gain consumer surplus. (C)</p> Signup and view all the answers

What distinguishes oligopoly from monopolistic competition?

<p>Oligopoly involves strategic behavior among few firms. (A)</p> Signup and view all the answers

What is a key characteristic of firms in imperfectly competitive markets?

<p>They are price setters and may alter output based on demand. (B)</p> Signup and view all the answers

What is the purpose of non-price competition in imperfect competition?

<p>To create entry barriers and protect profits. (C)</p> Signup and view all the answers

What does a negative correlation between two variables indicate?

<p>One variable increases while the other decreases. (A)</p> Signup and view all the answers

How is a market defined with respect to competition?

<p>It can be larger or smaller than national boundaries. (C)</p> Signup and view all the answers

How is the value of an index number calculated for a specific period?

<p>Absolute value in given period / absolute value in base period X 100 (D)</p> Signup and view all the answers

What term describes the total amount consumers want to purchase over a time period?

<p>Quantity demanded (B)</p> Signup and view all the answers

What distinguishes monopolistic competition from perfect competition?

<p>Firms produce differentiated products in monopolistic competition. (D)</p> Signup and view all the answers

Which statement accurately reflects the law of demand?

<p>A decrease in price results in an increase in quantity demanded. (B)</p> Signup and view all the answers

What does the concentration ratio measure?

<p>Market shares of the largest producers. (A)</p> Signup and view all the answers

What is a characteristic feature of differentiated products in monopolistic competition?

<p>They are similar but have distinct prices. (D)</p> Signup and view all the answers

What does a rightward shift in a demand curve indicate?

<p>An increase in demand. (D)</p> Signup and view all the answers

Which factor does NOT typically cause a shift in the demand curve?

<p>Change in the quantity supplied (A)</p> Signup and view all the answers

In which form can a functional relation between variables be expressed?

<p>Both verbal and numerical statements (C)</p> Signup and view all the answers

What describes a non-linear relationship between two variables?

<p>The path between the relationship changes in shape. (A)</p> Signup and view all the answers

What characterizes the demand curve faced by a monopolistically competitive firm?

<p>Downward sloping demand curve (D)</p> Signup and view all the answers

Which of the following is NOT a prediction of monopolistic competition in the long run?

<p>Firms will earn positive profits indefinitely (C)</p> Signup and view all the answers

What best describes the concept of excess capacity in monopolistic competition?

<p>Firms have underutilized resources (C)</p> Signup and view all the answers

What is a key characteristic of oligopolistic markets?

<p>Interdependence among firms (D)</p> Signup and view all the answers

Which of the following industries is most likely to represent monopolistic competition?

<p>Restaurants (A)</p> Signup and view all the answers

What dilemma do firms face in an oligopoly?

<p>Cooperating for joint profits or cheating for individual gain (A)</p> Signup and view all the answers

In game theory applied to oligopoly, what do firms consider as they decide their strategy?

<p>Expected reactions of competitors (D)</p> Signup and view all the answers

What might be considered a trade-off in monopolistic competition?

<p>Product variety versus lower cost per unit (D)</p> Signup and view all the answers

What does the term supply elasticity (Ns) represent?

<p>Percentage change in quantity supplied divided by percentage change in price (D)</p> Signup and view all the answers

Which factor does NOT directly affect the elasticity of supply?

<p>Government regulations (A)</p> Signup and view all the answers

If the income elasticity of demand (Ny) is greater than 0, what type of good is it?

<p>Normal good (B)</p> Signup and view all the answers

What happens when the market demand for an industry's product increases?

<p>Prices and profits both rise, leading to new entries in the market. (C)</p> Signup and view all the answers

What effect does technological development have on newly built plants in an industry?

<p>It reduces production costs, allowing them to earn economic profits. (B)</p> Signup and view all the answers

When the cross elasticity of demand (Nxy) is less than 0, the goods are classified as:

<p>Compliments (C)</p> Signup and view all the answers

What impact does an excise tax have on the price received by producers?

<p>It lowers the price received by producers (D)</p> Signup and view all the answers

In a declining industry experiencing continuous decrease in demand, what is the efficient response for firms?

<p>Continue operating as long as variable costs are covered. (C)</p> Signup and view all the answers

How does a monopolist determine the profit-maximizing level of output?

<p>Where marginal cost equals marginal revenue. (D)</p> Signup and view all the answers

How does the distinction between luxuries and necessities relate to income elasticity?

<p>Necessities tend to have lower income elasticity compared to luxuries (D)</p> Signup and view all the answers

Which of the following statements about a monopolist's pricing strategy is true?

<p>A monopolist can set a price above marginal cost. (A)</p> Signup and view all the answers

In partial-equilibrium analysis, what is primarily ignored?

<p>All market interactions in the economy (D)</p> Signup and view all the answers

General-equilibrium analysis is considered more complicated because it involves:

<p>Analyzing all markets simultaneously (B)</p> Signup and view all the answers

What is the relationship between price and marginal cost in a perfectly competitive industry?

<p>Price is equal to marginal cost. (D)</p> Signup and view all the answers

Which of the following are barriers to entry for a monopolist?

<p>Natural barriers such as economies of scale. (D)</p> Signup and view all the answers

What happens to old plants when new plants enter the market due to technological advancements?

<p>They may incur losses and eventually exit the market. (A)</p> Signup and view all the answers

Flashcards

Positive Correlation

A relationship where two variables move in the same direction. If one variable increases, the other also increases, and vice versa.

Negative Correlation

A relationship where two variables move in opposite directions. If one variable increases, the other decreases, and vice versa.

Index Number

A number that measures the change in a variable over time relative to a base period. It allows us to compare changes in different periods.

Cross-Sectional Data

Data collected at a single point in time for different individuals, firms, or regions.

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Time-Series Data

Data collected over time for the same individual, firm, or region.

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Scatter Diagram

A graph that shows the relationship between two variables. Each point on the graph represents a specific value for both variables.

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Quantity Demanded

The total amount of a product that consumers are willing to purchase during a specific time period.

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Law of Demand

The relationship between the price of a product and the quantity demanded, where a decrease in price leads to an increase in the quantity demanded.

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Price Elasticity of Demand

The sensitivity of quantity demanded to changes in the price of a good.

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Elasticity Calculation

The percentage change in quantity demanded divided by the percentage change in price.

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Factors Affecting Elasticity: Substitutes

Many close substitutes available.

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Long-Run Elasticity

Demand is more elastic, as people have more time to adjust to price changes.

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Elasticity and Necessities

Demand tends to be more inelastic for essential items.

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Price Elasticity of Supply

The responsiveness of quantity supplied to changes in the good's price.

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Marginal Revenue (MR)

The additional revenue generated by selling one more unit of a product. It is calculated as the change in total revenue divided by the change in quantity.

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Marginal Cost (MC)

The cost of producing one more unit of a product. It is calculated as the change in total cost divided by the change in quantity.

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Profit Maximization

The point where marginal cost (MC) equals marginal revenue (MR). This is where a firm maximizes its profit.

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Economic Profit

The difference between a firm's total revenue and total cost. It represents the overall profit or loss.

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Natural Entry Barrier

A barrier to entry that exists due to factors like economies of scale, where firms can produce more efficiently at larger sizes.

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Created Entry Barrier

Barriers to entry created by factors like advertising campaigns, government regulations, or patents.

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Monopoly

A situation where a single firm controls the entire supply of a product or service.

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Cartel

A group of firms that collude to act like a monopoly, setting prices and output levels together.

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Supply Elasticity

The percentage change in quantity supplied divided by the percentage change in price. It measures the responsiveness of quantity supplied to changes in price.

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Determinants of Supply Elasticity

The ease with which firms can adjust their production in response to price changes. It depends on factors like availability of resources, production technology, and time.

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Income Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in income. Measures how much demand changes in response to changes in income.

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Normal good

Goods for which demand increases as income rises. The income elasticity of demand is positive (greater than 0).

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Inferior good

Goods for which demand decreases as income rises. The income elasticity of demand is negative (less than 0).

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Cross Elasticity of Demand

The percentage change in quantity demanded of good X divided by the percentage change in the price of good Y. Measures how the demand for one good is affected by price changes in another good.

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Complements

Goods that are used together. When the price of one good increases, the demand for the other decreases. The cross elasticity of demand is negative (less than 0).

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Substitutes

Goods that can be used in place of each other. When the price of one good increases, the demand for the other increases. The cross elasticity of demand is positive (greater than 0).

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Monopolistic Competition

A market structure where many firms sell similar but slightly different products. Each firm has some control over its price, but faces competition from close substitutes.

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Differentiated Product

A product is considered differentiated if it is similar enough to other products to be considered part of the same market, but also different enough to command a different price.

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Non-Price Competition

Firms in monopolistic competition often engage in activities like advertising and product differentiation to attract customers and create a sense of brand loyalty.

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Price Setters

Firms in monopolistic competition can set prices for their products because they offer unique features, but they must still consider the prices of close substitutes.

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Concentration Ratio

The concentration ratio measures the market share of the largest firms in an industry. It is often used to indicate whether competition is high or low.

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Monopolistic Competition Theory

The theory of monopolistic competition describes industries with many small firms selling differentiated products.

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Globalization and Market Scope

The market for a product can sometimes extend beyond national borders due to globalization, making local firms compete with foreign firms.

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Consumer Surplus in Imperfect Competition

The effect of imperfect competition on consumer surplus is complex and can vary depending on factors such as product differentiation and pricing strategies.

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Excess Capacity

The situation where a firm in monopolistic competition produces at an output level less than the efficient scale. This means they could produce more at a lower average total cost.

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Oligopoly

A market structure characterized by a few dominant firms that are interdependent and strategically interact in their pricing and output decisions.

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Collusion

The situation where oligopolistic firms cooperate to maximize joint profits. This may involve setting a common price or output.

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Cheating

The act of one firm in an oligopoly breaking away from a collusive agreement to increase its individual profits by lowering prices or increasing output.

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Game Theory

A framework that analyzes strategic decision-making in situations where there is interdependence between players. It helps understand choices made in oligopolies.

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Duopoly: Cooperate or Compete

A duopoly where two firms can choose to cooperate or compete. Cooperating results in higher profits for both, while competing leads to lower profits but a possible individual advantage.

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Price Determination

A situation where the price of a product is determined by several factors including the costs of production, the level of competition, and the demand for the product.

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Study Notes

Economic Issues and Concepts

  • Productivity growth is a pressing economic concern
  • Population aging is a significant economic issue
  • Climate change is a major global economic concern
  • Global financing stability poses a threat
  • Rising government debt is a serious economic concern
  • Globalization is a complex global economic factor

What is Economics?

  • Economics studies the use of scarce resources to satisfy unlimited wants
  • Resources are typically divided into land, labor, and capital
  • Outputs are tangible goods or intangible services

Opportunity Cost

  • Choices have an associated cost, which is called opportunity cost
  • Opportunity cost is the benefit given up by not using resources in the best alternative way

Production Possibilities Boundary

  • The PPB shows attainable and unattainable combinations of goods
  • The slope of the PPB represents opportunity cost
  • The boundary between attainable and unattainable combinations
  • The choice to receive more of one good carries an opportunity cost

Four Key Economic Problems

  • What is produced and how? Resource allocation
  • What is consumed and by whom? Resource distribution
  • Why are resources sometimes idle? Inefficiency in the economy
  • Should governments worry about idle resources? Intervention possibilities

Economics and Government Policy

  • Government policy alters resource allocation
  • Government policy influences consumption distribution
  • Government policy can affect overall output and income
  • Policy is relevant in discussing the issues of resource scarcity and idle resources

The Nature of Market Economies

  • Self-interest of people creates spontaneous social order (economy is self-organizing)
  • Efficiency is organizing resources for most-wanted goods
  • Self-interest guides decisions in market systems
  • Individuals respond to prices and quantities
  • Property right enforcement is key for market functions

The Circular Flow of Income Expenditure

  • Individuals own factors of production, sell services in factor markers, and receive income
  • Firms transform factors into goods/services, sell in good markets, and earn revenue.
  • Factor markets and good markets connect these economic actors.

Production and Trade

  • Specialization and trade improve efficiency
  • Money replaces barter, simplifying trade
  • Globalization reduces transport / communication costs, enabling international trade

Types of Economic Systems

  • Traditional, Command, and Free Market systems are combined in mixed economies
  • Key government functions in mixed economies (e.g., property rights, freedom of contract).

Economic Theories, Data, and Graphs

  • Normative statements involve value judgments (opinions)
  • Positive statements describe facts
  • Theories consist of definitions, assumptions, and predictions
  • Theories are tested by comparing predictions to evidence

Rejection Vs. Confirmation of theories

  • Hypotheses can be tested and rejected by data
  • Confirming evidence can be found for any theory

Statistical Analysis

  • Data collection and analysis in economics frequently use statistical methods
  • Correlation does not imply causation

Correlation Vs. Causation

  • Correlation is when two variables move together
  • Causation exists when one variable directly influences another

Index Numbers

  • Index numbers compare data to a base period

Graphing Economic Data, Theories, and Functional Relations

  • Cross-sectional data measures different units at one point in time
  • Time-series data tracks a variable over time
  • Scatter diagrams show relationships between variables
  • Relationships can be linear or nonlinear

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Description

This quiz explores key economic issues such as productivity growth, population aging, and climate change. It also covers fundamental concepts in economics, including opportunity cost and the production possibilities boundary. Test your understanding of how these elements interact within the economy.

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