Economic Principles and Systems Quiz

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Questions and Answers

What is the fundamental problem that the study of economics addresses?

Equal distribution of wealth

Government intervention

Overproduction and under consumption

Unlimited wants and limited resources (correct)

According to the principle of opportunity cost, what is the cost of an economic decision?

The time and effort involved

The value of the next best alternative foregone (correct)

The total expenses incurred

The monetary cost

Which principle suggests that people make decisions by comparing marginal benefits and marginal costs?

Ceteris paribus

Scarcity principle

Marginal analysis (correct)

Production possibilities frontier

What is the primary characteristic of a market economy?

Consumer choice and private ownership Signup and view all the answers

Which economic system relies on the forces of supply and demand to determine prices and allocate resources?

Market economy Signup and view all the answers

In a command economy, who typically makes decisions about what and how much to produce?

Government authorities Signup and view all the answers

What does 'invisible hand' refer to in economic theory?

Market forces guiding self-interest Signup and view all the answers

What is the main difference between economic profit and accounting profit?

Economic profit includes explicit and implicit costs, while accounting profit only includes explicit costs. Signup and view all the answers

What does diminishing marginal product of labor indicate?

Output decreases as more labor is added. Signup and view all the answers

Which of the following is a characteristic of perfectly competitive markets?

Many buyers and sellers Signup and view all the answers

In a perfectly competitive market, each firm is a:

Price taker Signup and view all the answers

What is the main goal of a firm in a perfectly competitive market?

Maximize profit Signup and view all the answers

The demand curve facing a perfectly competitive firm is:

Perfectly elastic Signup and view all the answers

Which of the following is a characteristic of a monopolistic competition market structure?

Many sellers, differentiated products Signup and view all the answers

What is a natural monopoly?

Single company can produce at a lower cost than other competitors can Signup and view all the answers

Which of the following best describes the term 'externality' in economics?

A cost or benefit incurred by a third party who did not choose to be affected by it Signup and view all the answers

Study Notes

Economic Principles

Fundamental problem: Unlimited wants and limited resources create scarcity, the foundation of economic study.
Opportunity cost: The cost of an economic decision is the value of the next best alternative foregone (not just monetary cost).
Marginal analysis: Decisions are made by comparing marginal benefits and costs (additional benefits and costs from one more unit).

Economic Systems

Market economy: Driven by consumer choice and private ownership. Resources are allocated through supply and demand.
Command economy: Government authorities make decisions on production and resource allocation.
Mixed economy: Combines elements of both market and command economies.
Invisible hand: Market forces guiding self-interest, leading to unintended social benefits.

Demand Elasticity

Inelastic demand: A good with inelastic demand has a relatively small change in quantity demanded when price changes. Loaf of bread is an example.
Elastic demand: A good with elastic demand has a relatively large change in quantity demanded when price changes. Luxury cars are an example.

Profit and Production Cost

Economic profit: Includes both explicit (out-of-pocket) and implicit costs (opportunity costs), which accounts for all the cost of inputs used in production.
Accounting profit: Only includes explicit costs, it doesn't consider implicit costs such as forgone income earning opportunities.
Marginal product of labor: The additional output produced by adding one more unit of labor.
Diminishing marginal product of labor: Indicates that the addition of extra labor leads to smaller increases in output, as resources become more abundant.

Market Structures

Perfect competition: Characterized by many buyers and sellers, identical products, and easy entry and exit. Firms are price takers.
Monopolistic competition: Characterized by many sellers, differentiated products, and relatively easy entry and exit.
Oligopoly: Characterized by few firms, differentiated products, and high barriers to entry.
Monopoly: A single firm controls the entire market.
Natural monopoly: One firm produces at a lower cost than multiple firms could.

Externalities

Externality: A cost or benefit not incurred by the person making the decision, but by a third party who isn't involved in the transaction.
Positive externality: A benefit to a third party unrelated to the transaction. Education is an example.
Negative externality: A cost to a third party unrelated to the transaction. Pollution is an example.

Production Possibilities Frontier (PPF)

PPF: A curve representing the different combinations of goods and services a country can produce with its resources.
A point inside the PPF: Indicates that an economy is not using its resources efficiently.
A point on the PPF: Indicates that an economy is producing efficiently, but there is no room to produce more without sacrificing something else.

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Description

Test your knowledge on fundamental economic concepts like scarcity, opportunity cost, and the elasticity of demand. Explore different economic systems including market, command, and mixed economies. This quiz will challenge your understanding of how these factors influence decision-making in economics.