Economics Concepts: Opportunity Cost & Demand

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Questions and Answers

Which factor increases the demand for a normal good?

Increase in income (correct)

Decrease in consumer preferences

Increase in the price of a substitute

Decrease in the number of demanders

How does the law of demand describe the relationship between price and quantity demanded?

Lower price decreases quantity demanded

Higher price increases quantity demanded

Quantity demanded is unaffected by price changes

Higher price decreases quantity demanded (correct)

What effect does a rise in the price of a complement have on the demand for a good?

Has no effect on demand

Increases supply of the good

Decreases demand for the good (correct)

Increases demand for the good

In a competitive market, what does a decrease in the number of demanders do to the demand curve?

Shifts the demand curve to the left Signup and view all the answers

What is the outcome for a country that has the lowest opportunity cost for producing a good?

It has comparative advantage Signup and view all the answers

How does an expected future price increase affect current demand?

Increases current demand Signup and view all the answers

Which scenario illustrates a change in quantity demanded rather than a change in demand?

A decrease in the price of smartphones leads to more smartphones sold Signup and view all the answers

What effect does an increase in income generally have on the demand for a normal good?

Increases demand Signup and view all the answers

Which factor would lead to a rightward shift in the supply curve?

Advances in technology Signup and view all the answers

What does an increase in the expected future price of a good do to the current supply of that good?

Decreases the current supply Signup and view all the answers

How does a bad state of nature affect supply?

Decreases supply Signup and view all the answers

Which of the following is NOT a factor that shifts the demand curve?

Production costs Signup and view all the answers

What is the primary function of the law of supply?

Illustrates the relationship between price and quantity supplied Signup and view all the answers

Which factor is least likely to shift the supply curve for a given good?

A change in consumer demand Signup and view all the answers

What does consumer surplus measure?

Amount consumers are willing to pay versus what they actually pay Signup and view all the answers

What is the impact on consumers when there are exports?

Consumers are worse off, and consumer surplus decreases. Signup and view all the answers

Which statement accurately describes the impact of imports on producers?

Producers are worse off as producer surplus decreases. Signup and view all the answers

What does a balance of trade deficit indicate?

Imports exceed exports. Signup and view all the answers

What is a tariff?

A tax imposed on an imported good. Signup and view all the answers

The concept of 'gains from trade' implies that:

There are unequal benefits from trade, often favoring producers. Signup and view all the answers

What is the role of quotas in international trade?

To impose a quantitative limit on the amount of goods that can be imported. Signup and view all the answers

In the context of trade, what does 'society' overall benefit from?

Increased total surplus from trade. Signup and view all the answers

What is the main reason for protecting an infant industry?

To give it time to become competitive. Signup and view all the answers

Under what condition is protection of an industry deemed unnecessary according to the infant industry argument?

When private entrepreneurs see profit opportunities. Signup and view all the answers

For which sectors is the national security argument considered to have merit?

Only in a very limited number of industries. Signup and view all the answers

What concern exists regarding Huawei's telecom equipment in the U.S.?

It may be used for espionage through communication interception. Signup and view all the answers

What is the justification for protection as retaliation against unfair trade policies?

To enforce negotiation on trade terms from other nations. Signup and view all the answers

What effect do tariffs generally have on consumers, producers, and society?

Consumers are worse off, producers are better off, and government gains revenue. Signup and view all the answers

What is the likely effect of import quotas on society?

Total surplus in society is likely to decrease. Signup and view all the answers

What is a significant characteristic of the sugar tariff rate quota in the U.S.?

It limits sugar imports to about 20% of total U.S. needs. Signup and view all the answers

Study Notes

Opportunity Cost and Comparative Advantage

Opportunity cost is the cost of what is foregone to produce a good.
Country with the lowest opportunity cost has a comparative advantage.
Countries with comparative advantages tend to export those goods.

Demand and Supply Basics

Law of Demand: Higher prices decrease, and lower prices increase quantity demanded.
Normal goods see demand increase with rising income; inferior goods see demand increase with falling income.

Factors that Shift Demand Curve

Prices of Related Goods:
- An increase in the price of substitutes raises demand for the good.
- An increase in the price of complements decreases demand for the good.
Number of Demanders: More demanders increase demand; fewer demanders decrease it.
Preferences: Increased preference for a product raises demand.
Expected Future Price: Anticipation of higher future prices boosts current demand.

Factors that Shift Supply Curve

Cost: Reductions in production costs increase supply.
Technology: Technological advances enhance supply capabilities.
Number of Suppliers: More suppliers increase supply; fewer suppliers decrease it.
State of Nature: Favorable conditions increase supply; adverse conditions decrease it.
Expected Future Price: Anticipation of higher future prices can decrease current supply.

Equilibrium Concept

Equilibrium price is where supply and demand curves intersect, balancing quantity supplied and quantity demanded.

Surpluses

Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.
Producer Surplus: Difference between the price producers receive and the minimum price they are willing to accept.

Trade Effects

Exports: Consumers may be worse off due to a decrease in consumer surplus; producers benefit from increased producer surplus.
Imports: Consumers gain from increased consumer surplus; producers may be worse off due to decreased producer surplus.

Tariff and Quota Impacts

Tariff: Taxes on imported goods decrease consumer surplus but increase producer surplus and government revenue.
Quota: Quantitative limits on imports lead to similar effects as tariffs, decreasing total surplus in the economy.

Balance of Trade Deficits

Significant trade deficits have been recorded:
- 2016: $502 billion
- 2019: $617 billion
- 2023: $773 billion

National Security and Infant Industry Arguments

Protection of certain industries may be justified by potential national security needs or to assist nascent industries until they are competitive.

Sector-Specific Examples

Sugar tariffs protect domestic production but raise consumer prices significantly higher than world prices.
Around 20% import limitation under tariff rate quotas reduces competition in sugar markets.

Tariff Impact Metrics

Impact on surpluses shows losses in consumer surplus and gains for producers; however, net societal impact tends to show losses due to deadweight losses and inefficiencies.

Aggregate Effects of Trade Policies

Trade policy changes led to a significant increase in tariffs, harming U.S. consumers and firms that rely on imports while providing some benefits to domestic producers.

Job Effects and Costs

Protectionist measures in specific industries yield limited job protection at very high costs to consumers, resulting in a negative net effect on the economy.

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Description

Test your understanding of key economic principles such as opportunity cost, comparative advantage, and the factors affecting demand and supply. This quiz covers essential concepts that are foundational to the study of economics. Challenge yourself and enhance your knowledge of how these factors interact in real-world scenarios.