Economics Concepts and Fallacies Quiz
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Questions and Answers

What common pitfall is illustrated by assuming that ice cream consumption caused polio?

  • Fallacy of Composition
  • Rational Self Interest
  • Correlation Causation Confusion (correct)
  • Unintended Consequences
  • Which scenario best exemplifies the Fallacy of Composition?

  • A person assumes that all members of a gym will go at the same peak times.
  • Someone decides to tip generously at a one-time restaurant visit.
  • A person believes they can drive faster without traffic because they leave early. (correct)
  • An individual chooses a major based solely on expected income.
  • How does the Invisible Hand concept relate to self-interest and societal benefits?

  • Self-interest should always be avoided for societal good.
  • Individuals acting in their self-interest can lead to positive societal outcomes. (correct)
  • Pursuing personal interests can unintentionally harm society.
  • Market regulation is necessary for self-interest to benefit society.
  • What is an unintended consequence in the context of incentives?

    <p>An unforeseen and often negative result of an incentive.</p> Signup and view all the answers

    Which of the following exemplifies Rational Self Interest?

    <p>Choosing a restaurant to tip well due to familiarity.</p> Signup and view all the answers

    What happens to the demand for cereal if the price of milk increases?

    <p>Demand for cereal decreases</p> Signup and view all the answers

    How does an increase in advertising influence demand?

    <p>It leads to an increase in demand</p> Signup and view all the answers

    Which factor would cause the supply curve to shift to the left?

    <p>Increase in resource costs</p> Signup and view all the answers

    What does the law of supply state?

    <p>Price and quantity supplied are positively related</p> Signup and view all the answers

    What is the effect of an expectation of higher future prices on current demand?

    <p>Current demand will increase</p> Signup and view all the answers

    If warmer weather leads to lower demand for coats, which demand shifter is at play?

    <p>Seasons</p> Signup and view all the answers

    An increase in supply occurs when:

    <p>More sellers enter the market</p> Signup and view all the answers

    What happens to quantity supplied when the price of a good decreases?

    <p>Quantity supplied decreases</p> Signup and view all the answers

    What does scarcity refer to in economics?

    <p>The phenomenon where human wants exceed available resources</p> Signup and view all the answers

    Which of the following best defines economics?

    <p>The study of choices made among wants given limited resources</p> Signup and view all the answers

    What are economic goods?

    <p>Any items that people value or desire, tangible or intangible</p> Signup and view all the answers

    What does the term 'Ceteris paribus' imply in economic models?

    <p>Only one variable is examined while others remain constant</p> Signup and view all the answers

    Which area of economics focuses on individual units such as consumers and firms?

    <p>Microeconomics</p> Signup and view all the answers

    Which of the following is an example of a macroeconomic issue?

    <p>The rate of inflation in a country</p> Signup and view all the answers

    How can making choices in economics be described?

    <p>Choices often involve giving up other opportunities</p> Signup and view all the answers

    Which statement about economic wants is true?

    <p>Wants can be both material and nonmaterial</p> Signup and view all the answers

    What represents the opportunity cost when deciding between taking a plane or a bus from Los Angeles to Las Vegas?

    <p>The total cost of the trip including time lost</p> Signup and view all the answers

    According to the rule of rational choice, when should you undertake an activity?

    <p>When the expected marginal benefit is greater than the expected marginal cost</p> Signup and view all the answers

    What does TINSTAAFL imply about economic choices?

    <p>There are hidden costs associated with every choice</p> Signup and view all the answers

    When considering whether to buy Car 2 after already purchasing Car 1, which factor is least relevant?

    <p>The emotional satisfaction from owning two cars</p> Signup and view all the answers

    If someone can earn $15 per hour, what is the opportunity cost of taking the plane for a trip costing $100?

    <p>$115 total</p> Signup and view all the answers

    What is the total benefit derived from two cars if the marginal benefits are $24k and $30k?

    <p>$54k</p> Signup and view all the answers

    If one car costs $25k, what is the total cost of purchasing two cars?

    <p>$50k</p> Signup and view all the answers

    What does the Production Possibilities Frontier (PPF) represent?

    <p>The maximum outputs a society can produce efficiently</p> Signup and view all the answers

    What happens to the demand curve when there is an increase in demand?

    <p>It shifts to the right</p> Signup and view all the answers

    Under the Law of Demand, what relationship exists between price and quantity demanded?

    <p>Inverse relationship</p> Signup and view all the answers

    What does opportunity cost represent in terms of the Production Possibilities Frontier?

    <p>The highest-valued alternative forgone</p> Signup and view all the answers

    Which of the following best exemplifies marginal benefit?

    <p>The additional satisfaction from one more unit consumed</p> Signup and view all the answers

    What is the impact of a price increase on quantity demanded?

    <p>Decrease in quantity demanded</p> Signup and view all the answers

    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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    Econ Notes before Exam 1 PDF

    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!

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