Economic Principles and Systems Quiz

Study Notes

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).

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.

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.

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.

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.

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.

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.