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Questions and Answers
What common pitfall is illustrated by assuming that ice cream consumption caused polio?
Which scenario best exemplifies the Fallacy of Composition?
How does the Invisible Hand concept relate to self-interest and societal benefits?
What is an unintended consequence in the context of incentives?
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Which of the following exemplifies Rational Self Interest?
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What happens to the demand for cereal if the price of milk increases?
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How does an increase in advertising influence demand?
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Which factor would cause the supply curve to shift to the left?
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What does the law of supply state?
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What is the effect of an expectation of higher future prices on current demand?
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If warmer weather leads to lower demand for coats, which demand shifter is at play?
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An increase in supply occurs when:
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What happens to quantity supplied when the price of a good decreases?
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What does scarcity refer to in economics?
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Which of the following best defines economics?
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What are economic goods?
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What does the term 'Ceteris paribus' imply in economic models?
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Which area of economics focuses on individual units such as consumers and firms?
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Which of the following is an example of a macroeconomic issue?
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How can making choices in economics be described?
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Which statement about economic wants is true?
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What represents the opportunity cost when deciding between taking a plane or a bus from Los Angeles to Las Vegas?
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According to the rule of rational choice, when should you undertake an activity?
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What does TINSTAAFL imply about economic choices?
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When considering whether to buy Car 2 after already purchasing Car 1, which factor is least relevant?
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If someone can earn $15 per hour, what is the opportunity cost of taking the plane for a trip costing $100?
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What is the total benefit derived from two cars if the marginal benefits are $24k and $30k?
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If one car costs $25k, what is the total cost of purchasing two cars?
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What does the Production Possibilities Frontier (PPF) represent?
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What happens to the demand curve when there is an increase in demand?
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Under the Law of Demand, what relationship exists between price and quantity demanded?
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What does opportunity cost represent in terms of the Production Possibilities Frontier?
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Which of the following best exemplifies marginal benefit?
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What is the impact of a price increase on quantity demanded?
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Study Notes
Complements in Consumption
- An increase in milk prices results in a movement along the demand curve for milk.
- Cereal experiences a shift in demand due to changes in milk prices.
Demand Shifters
- Advertising: Increased advertising raises demand, exemplified by Lebron James endorsing Sprite.
- Tastes & Preferences: Changes in popularity lead to fluctuations in demand.
- Expectations: Anticipation of higher future prices boosts current demand.
- Seasons: Demand for products like coats rises in winter and falls in summer.
Supply
- Defined as the quantity of a good or service producers are willing to sell at a specific price.
- Law of Supply: As price increases, the quantity supplied also increases, ceteris paribus.
- Supply Curve: Illustrates the relationship between price and quantity of output suppliers are willing to sell.
- Seller's Reservation Price: Minimum price needed to supply a particular quantity of output.
Changes in Supply
- Quantity Supplied Increases: Triggered by a price increase.
- Quantity Supplied Decreases: Triggered by a price decrease.
- Increase in Supply: Entire supply curve shifts right, indicating a greater willingness to sell at any price.
Non-Price Factors Affecting Supply
- Resource costs, prices of other goods, technology, taxes, subsidies, government regulation, and producer expectations can all shift the supply curve.
Resource Cost as a Supply Shifter
- Changes in input prices directly shift the supply curve.
Other Goods’ Price as a Supply Shifter
- Substitutes: An inverse relationship exists between the price of one good and the supply of another that can be produced with the same resources.
Scarcity
- Resources are inputs necessary for producing goods and services.
- Scarcity arises when human wants surpass available resources.
- Economics is the study of choices made given limited resources.
Wants vs. Needs
- Economic Good: Items valued or desired, can be tangible or intangible.
- Economic Bad: Items that are undesirable, prompting desire to eliminate them.
The Economic Problem
- Making choices involves opportunity costs, as choosing one option means sacrificing another.
- Scarcity requires prioritization of wants.
Decision-Making in Economics
- Microeconomics focuses on individual units; includes personal shopping decisions and firm operations.
- Macroeconomics studies the overall economy; includes inflation, unemployment, and economic growth.
Economic Models and Ceteris Paribus
- Ceteris paribus allows analysis of one variable while holding others constant, isolating effects.
Pitfalls in Economic Thinking
- Correlation vs. Causation: Misinterpreting relationships between events.
- Fallacy of Composition: Assuming what is true for one is true for all.
Rational Self-Interest
- Individuals make choices that maximize personal happiness, which might include charitable actions.
The Invisible Hand
- Adam Smith’s concept: individual self-interest can lead to societal benefits through market self-regulation.
Incentives
- Positive and negative incentives motivate actions and decisions regarding resource allocation.
Unintended Consequences
- Actions taken can result in unexpected negative outcomes.
Opportunity Cost
- The highest-valued alternative given up when making a choice; often considered in economic decisions.
Marginal Thinking
- Decisions involve weighing marginal benefits against marginal costs.
- The Rule of Rational Choice advocates action when expected marginal benefits exceed marginal costs.
Factors of Production
- C-E-L-L: Capital, Entrepreneurship, Land, Labor (mental & physical effort) are necessary for production processes.
Production Possibilities Frontier (PPF)
- PPF displays maximum output combinations of two goods given fixed resources and technology.
- Opportunity cost in this model is represented by the slope of the PPF.
Demand
- Quantity demanded reflects how much consumers are willing to buy at various price points.
- Law of Demand: An inverse relationship exists between price and quantity demanded, ceteris paribus.
Demand Changes
- Increase in Quantity Demanded: Results from price decreases.
- Decrease in Quantity Demanded: Results from price increases.
- Increase in Demand: Entire demand curve shifts right, willingness to purchase rises across all prices.
- Decrease in Demand: Entire demand curve shifts left, willingness to purchase falls across all prices.
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Description
Test your understanding of key economic concepts such as the Fallacy of Composition, the Invisible Hand, and rational self-interest. This quiz challenges you to identify common pitfalls in reasoning and unintended consequences within economic incentives. Perfect for students of economics!
