Economic Principles Quiz

The Economic Problem

• The economic problem arises from the scarcity of resources to meet unlimited wants.
• Economic goods have an opportunity cost, meaning there is a cost associated with choosing one over another.
• Free goods do not have an opportunity cost, such as sunlight.

Factors of Production

• Land: Natural resources used in production.
• Labor: Human resources used in production.
• Capital: Man-made resources used to produce goods and services.
• Enterprise: Skills and willingness of individuals to take risks in production.

Rewards for Factors of Production

• Land: Rent
• Labor: Wages
• Capital: Interest
• Enterprise: Profits

Mobility of Factors of Production

• Geographical Mobility: Willingness to relocate for employment, influenced by factors such as family ties, commitments, and cost of living.
• Occupational Mobility: Willingness to change jobs, influenced by factors like cost of training, education, and profession.

Opportunity Cost

• The cost of the next best alternative when making a choice.
• Can be represented using a production possibility curve (PPC).
• Points on the PPC represent different combinations of goods and services a country can produce with its available resources.
• A point inside the PPC is inefficient, while a point outside the PPC is unattainable.
• Outward shifts in the PPC indicate economic growth due to factors like increased resources, technology advancements, or a larger labor force.
• Inward shifts in the PPC indicate economic decline due to factors like natural disasters, low investments, or depletion of resources.

Branches of Economics

• Microeconomics: Focuses on individual markets and their interactions.
• Macroeconomics: Focuses on the economy as a whole, including factors like employment, inflation, and economic growth.

Market System

• Economic decisions are driven by prices of goods and services, determined by supply and demand.

Key Questions of Economics

• What to produce?
• How to produce?
• For whom to produce?

Price Mechanism

• The interaction of supply and demand determining equilibrium prices.
• Equilibrium point is where the supply and demand curves intersect.

Demand

• The willingness and ability of consumers to buy goods and services at a given price.
• Higher price generally leads to lower demand.
• Factors affecting demand: Price, advertising, government policies, consumer testing, consumer income, price of substitutes, interest rates.
• Individual demand: The demand of one individual or firm.
• Market demand: The aggregate demand of all individuals and firms.
• Movements along the demand curve are caused by changes in price.
• Shifts in the demand curve (rightward or leftward) are caused by changes in factors other than price.

Supply

• The willingness and ability of suppliers to provide goods and services at a given price.
• Higher price generally leads to higher supply.
• Factors affecting supply: Cost of factors of production, prices of other goods, global factors, technological advancements, business optimism.
• Individual supply: The supply of an individual producer.
• Market supply: The aggregate supply of all firms.
• Market Equilibrium: Occurs when supply and demand are equal.

Price Elasticity of Demand

• The responsiveness of demand to changes in price.
• Inelastic demand: Demand is relatively unresponsive to price changes.
• Elastic demand: Demand is highly responsive to changes in price.
• Factors affecting price elasticity of demand: Number of substitutes, time period, proportion of income spent on the good, necessity of the product.

Price Elasticity of Supply

• The responsiveness of quantity supplied to changes in price.
• Inelastic supply: Supply is relatively unresponsive to price changes.
• Elastic supply: Supply is highly responsive to price changes.
• Factors affecting price elasticity of supply: Time available, availability of resources, supply already available to meet demand, spare production capacity, factor substitution available.

Market Failure

• Occurs when the price mechanism fails to allocate scarce resources efficiently.

Mixed Economic Systems

• A combination of market and government intervention in the economy.

Functions of Money

• Medium of Exchange: Facilitates transactions without bartering.
• Unit of Account: Provides a common measure of value for goods and services.
• Store of Value: Holds value over time, allowing people to save and invest.
• Standard for Deferred Payment: Enables borrowing and lending.

Characteristics of Money

• Acceptability: Willingness of people to use it as payment.
• Durability: Able to withstand repeated use.
• Portability: Easy to carry and transport.
• Divisibility: Can be easily divided into smaller units.
• Scarcity: Limited supply to maintain value.

Types of Banks

• Commercial Banks: Offer financial services to individuals and businesses.
• Central Banks: Control a country's money supply and interest rates.

Households

• Spending: Consumers contribute to the demand for goods and services.
• Saving: Provides funds for investment and economic growth.
• Borrowing: Allows households to finance purchases or invest.