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Questions and Answers
What is the role of households in an economy?
How are prices determined in a free market economy?
What is a characteristic of a central planned economy?
What is emphasized more in planned economies compared to market economies?
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What is a potential consequence of a heavy bureaucracy in planned economies?
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What occurs when there is a fall in the price of tax return software?
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What is indicated by an increase in the demand for tax return software?
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What does an upward shift in the demand curve for tax return software imply?
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How does a fall in the cost of producing tax return software affect the supply curve?
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What happens to quantity demanded when the equilibrium price of tax return software decreases?
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What is the result of professional tax return preparers raising their service prices?
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What characterizes the equilibrium price in a market?
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If the price of tax return software is set above the equilibrium price, what likely occurs?
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What characterizes a monopoly market structure?
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Which market structure is characterized by a large number of firms producing a homogeneous product?
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What typically leads to market failure?
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How is Gross Domestic Product (GDP) per head calculated?
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What primarily influences variations in an economy's standard of living?
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Which market structure features few firms and the potential for collusion?
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What is a barrier to entry in market structures?
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What does productivity measure in an economy?
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What term describes buyers and sellers who accept the market price as given?
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According to the law of demand, what happens to the quantity demanded if the price of a good rises?
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What does a demand schedule illustrate?
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What does the market demand curve represent?
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If the price of milk rises from €0.30 to €0.50, how does the quantity demanded change based on Rachel's demand schedule?
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Which of the following statements about individual demand curves is correct?
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What effect does an increase in the price of milk from €0.20 to €0.40 have on quantity demanded?
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Which of the following best describes the term 'ceteris paribus' in the context of the law of demand?
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What best defines opportunity cost?
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How do rational people typically make decisions?
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What motivates people to respond according to the principle of incentives?
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Which of the following statements best describes how markets organize economic activity?
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What is an example of a marginal change?
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Which of the following scenarios best illustrates the concept of opportunity cost?
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Which principle states that individuals act when the marginal benefits exceed the marginal costs?
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What do rational individuals evaluate to decide effectively?
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Study Notes
Buyers and Sellers in Markets
- Buyers and sellers are considered "price takers" because they must accept the market price.
Demand
- Quantity demanded is the amount of a good buyers are willing and able to purchase.
- The Law of Demand states that, ceteris paribus, the quantity demanded of a good decreases when the price rises.
The Demand Curve
- A demand schedule is a table showing the relationship between the price of a good and the quantity demanded.
- A demand curve is a graph of this relationship, showing the quantity demanded at different prices.
Market Demand vs Individual Demand
- Market demand is the sum of all individual demands for a particular good or service.
- Market demand curves are created by horizontally summing individual demand curves.
Factors Affecting Demand
- A decrease in the price of tax return software causes a movement down along the existing demand curve, resulting in a lower price and lower quantity.
- A fall in the cost of producing the software shifts the supply curve to the right, increasing the quantity demanded at each price.
- Professional tax return preparers raising their prices shifts the demand curve for tax preparation software, not the supply curve.
Supply and Demand Together
- Equilibrium price is the price that balances quantity supplied and quantity demanded, where the supply and demand curves intersect.
- Equilibrium quantity is the quantity supplied and demanded at the equilibrium price, also found at the intersection of the supply and demand curves.
Opportunity Cost
- The opportunity cost of an item is what you give up to obtain that item.
Thinking at the Margin
- Marginal changes are small, incremental adjustments to an existing plan.
- People make decisions by comparing marginal costs and benefits.
Incentives
- People respond to incentives, meaning that marginal changes in costs or benefits motivate behavior.
- Public policies can create incentives or disincentives that alter behavior.
Markets and Economic Activity
- Markets are a process that reconciles households' consumption decisions, firms' production decisions, and workers' labor decisions through price adjustments.
- Economic agents include households/individuals, firms, the government, and the rest of the world.
Resource Allocation
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Resource allocation is the process of distributing resources to different uses, handled differently in different types of economies:
- Central planned economies: Government decides allocation and prices.
- Mixed economies: A combination of government and market forces determine allocation.
- Free market economies: Economic agents determine allocation and prices through supply and demand.
Efficiency vs Equity
- Efficiency is a primary focus in free market economies, while equity is prioritized in planned economies.
- Lack of competition in planned economies can decrease productivity and quality.
Market Structures
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Market characteristics determine the economic environment:
- Number and size of firms: Large or small number of firms.
- Product differentiation: Homogeneous or differentiated products.
- Barriers to entry: Easy or difficult for new firms to enter the market.
Market Structures
- Perfect competition: Many small firms, homogeneous product, no barriers to entry.
- Monopoly: Single firm, unique product with no close substitutes, protected by barriers to entry.
- Monopolistic competition: Many small firms, differentiated products, no barriers to entry.
- Oligopoly: Few firms dominate the market, homogeneous or heterogeneous products, actions by one firm affect others.
Market Failure
- Market failure occurs when markets fail to allocate resources efficiently.
- Government intervention can help overcome market failures.
- Causes of market failure include:
- Externalities: Actions affecting bystanders.
- Market power: One person or firm unduly influencing prices.
Standard of Living
- Standard of living measures welfare based on the amount of goods and services income can buy.
- Most variations in living standards are due to differences in productivity, which is the amount of goods and services produced per worker hour.
- Economic growth is the increase in goods and services produced over time.
- Gross domestic product per head (GDP per capita) is the market value of goods and services produced in a country divided by the population.
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Description
Explore the fundamental concepts of demand and market dynamics in this quiz. Understand the Law of Demand, the demand curve, and the differences between market demand and individual demand. Test your knowledge on factors affecting demand and how they influence buyer behavior.
