Economics Class: Demand and Supply Concepts

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Questions and Answers

What is the meaning of the term 'Circular Flow model' in economics?

The Circular Flow model represents the continuous flow of goods, services, resources, and money between households and firms in an economy.

What is the definition of 'Cost' in economics?

The cost of producing something is the total amount of resources used in its production.

Define 'Price' in economics.

Price refers to the monetary value that consumers pay for a good or service.

The Law of Demand states that as price increases, quantity demanded also increases.

False (B) Signup and view all the answers

What is the difference between a change in quantity demanded and a change in demand?

A change in quantity demanded refers to a movement along the demand curve caused by a price change, while a change in demand represents a shift of the entire demand curve due to factors other than price. Signup and view all the answers

Explain how 'Tastes and preferences' can affect demand.

Changes in consumer tastes and preferences can shift the demand curve for a good or service. If preferences for a product increase, demand for it will rise, and vice versa. Signup and view all the answers

How does income affect demand for normal goods?

For normal goods, as income increases, demand increases. Signup and view all the answers

Explain the relationship between income and demand for inferior goods.

As income increases, demand for inferior goods tends to decrease. Signup and view all the answers

How does the price of substitutes affect demand for a good?

If the price of a substitute good increases, the demand for the original good will also increase. They are directly proportional. Signup and view all the answers

Describe the relationship between the price of complements and the demand for a good.

If the price of a complementary good decreases, the demand for the original good will rise. They are inversely proportional. Signup and view all the answers

What does the term 'Ceteris paribus' mean in economics?

Ceteris paribus means 'all other things being equal'. It is an assumption in economics that all other factors affecting demand or supply remain constant when analyzing the effects of a single variable. Signup and view all the answers

Who controls interest rates in the United States?

The Federal Reserve, also known as the Fed, controls interest rates in the United States. Signup and view all the answers

What are the key assumptions of the Production Possibilities Frontier (PPF) model?

The PPF model assumes two output choices, a fixed time period, fixed resources, and fixed production technology. Signup and view all the answers

Explain the Economic Law of Increasing Opportunity Costs.

The Economic Law of Increasing Opportunity Costs states that as an economy focuses more and more on producing one good, the opportunity cost of producing additional units of that good increases. Signup and view all the answers

How does a shifting of the PPF graph represent economic growth or decline?

An outward shift of the PPF represents economic growth, indicating that the economy can produce more of both goods. A shift inwards signifies economic decline, indicating a decrease in the economy's production capacity. Signup and view all the answers

What is the difference between consumer goods and capital goods?

Consumer goods are products that are consumed directly by households for their own satisfaction, while capital goods are used in the production of other goods and services. Signup and view all the answers

What is the definition of 'Economics'?

Economics is the study of how individuals and societies make choices about the allocation of scarce resources. Signup and view all the answers

Define 'Macroeconomics'.

Macroeconomics is the branch of economics that studies the overall performance and behavior of the economy as a whole. Signup and view all the answers

What is 'Microeconomics'?

Microeconomics is the branch of economics that studies the decision-making of individuals, households, and firms. Signup and view all the answers

Give examples of scarce resources in an economy.

Scarce resources in an economy include individual income and time, as well as factors of production like labor, land, capital, and entrepreneurship. Signup and view all the answers

What is the concept of 'Opportunity Costs' in economics?

Opportunity cost refers to the value of the next best alternative that is given up when making a choice. Signup and view all the answers

Define 'Efficiency' in economics.

Efficiency occurs when resources are allocated in such a way that no one can be made better off without harming another. Signup and view all the answers

What is 'Market Failure'?

Market failure occurs when the market mechanism fails to allocate resources efficiently, resulting in a suboptimal outcome for society. Signup and view all the answers

Which of the following is NOT a factor of production?

Money (D) Signup and view all the answers

What is the primary function of the Federal Reserve?

The Federal Reserve's primary function is to manage monetary policy, influencing interest rates and the availability of credit. Signup and view all the answers

A shift in the PPF to the left represents economic growth.

False (B) Signup and view all the answers

What is the relationship between the concepts of 'Cost' and 'Price'?

Cost is the total amount of resources used to produce a good or service, while price is the monetary value that consumers pay for it. In a competitive market, price is typically influenced by the cost of production. Signup and view all the answers

The Law of Demand implies that if the price of a good decreases, the quantity demanded will also decrease.

False (B) Signup and view all the answers

Explain the concept of 'ceteris paribus' and how it applies to the Law of Demand.

Ceteris paribus means 'all other things being equal'. When applying the Law of Demand, we assume that factors other than price, such as income, tastes and preferences, and the price of substitutes and complements, are held constant. This allows us to isolate the effect of price changes on the quantity demanded. Signup and view all the answers

Describe the difference between a 'change in quantity demanded' and a 'change in demand'.

A 'change in quantity demanded' refers to a movement along the demand curve, caused solely by a change in the price. A 'change in demand', however, involves a shift of the entire demand curve, caused by factors other than price, such as changes in income, tastes and preferences, or the price of substitutes and complements. Signup and view all the answers

How do changes in 'Tastes and preferences' affect the demand for a good?

Changes in consumer tastes and preferences directly impact the demand for a good. For instance, if consumer tastes shift towards a specific type of product, the demand for that good will increase. Conversely, if consumer preferences shift away from a particular good, the demand will decline. Signup and view all the answers

What is the relationship between income and demand for 'normal goods'?

Normal goods are those whose demand increases as income rises. As income rises, consumers have more disposable income to allocate towards purchases, often leading to an increase in the demand for higher-quality or more expensive versions of these goods. Signup and view all the answers

How does the price of 'substitutes' affect the demand for a good?

If the price of a substitute good rises, the demand for the original good will increase. This occurs because consumers switch to the original good as a less expensive alternative, leading to a higher demand for it. Signup and view all the answers

Explain the concept of 'ceteris paribus' in relation to the PPF model.

In the PPF model, ceteris paribus assumes that factors other than those explicitly considered, such as technology, resource availability, and production methods, are held constant. This allows us to isolate the relationship between the production of two goods while assuming other factors are unchanging. Signup and view all the answers

Explain how economic growth is represented by a shift in the PPF.

Economic growth is represented by an outward or rightward shift of the PPF. This shift indicates that the economy has expanded its productive capacity, allowing it to produce more of both goods. Signup and view all the answers

Describe the concept of 'opportunity cost' in relation to the PPF.

The PPF graphically illustrates the concept of opportunity cost. The slope of the PPF at any point represents the opportunity cost of producing one more unit of a good in terms of the other good. This means that to produce more of one good, the economy must sacrifice some production of the other good, highlighting the trade-off inherent in resource allocation. Signup and view all the answers

What are the key factors that can shift the Production Possibilities Frontier (PPF)?

Factors that can shift the PPF include changes in resource availability, technological advancements, and improvements in productivity. Signup and view all the answers

Explain the difference between 'consumer goods' and 'capital goods'.

Consumer goods are goods that are consumed directly by households for their own satisfaction, providing immediate benefits. Capital goods, on the other hand, are used in the production of other goods and services, providing future benefits. Signup and view all the answers

What is the main difference between macroeconomics and microeconomics?

Macroeconomics focuses on the overall performance and behavior of the economy as a whole, while microeconomics studies the decision-making of individuals, households, and firms. Signup and view all the answers

Explain the concept of 'scarce resources' in economics.

Scarce resources are those that are limited in availability relative to their demand. This scarcity forces individuals and societies to make choices about how to allocate these resources. Signup and view all the answers

What is the relationship between 'opportunity cost' and 'efficiency' in economics?

Efficiency in resource allocation occurs when resources are used to produce the maximum output possible, given the constraints of scarce resources. Opportunity cost plays a critical role in achieving efficiency because it highlights the trade-offs involved in resource allocation. By understanding opportunity costs, we can make choices that lead to the most efficient allocation of resources, maximizing output while minimizing waste. Signup and view all the answers

Flashcards

Circular Flow model

The flow of the economy where households want goods and services in exchange for money, and firms want money in exchange for their products/services.

Cost

How much it cost to make something.