Economics Fundamentals Quiz

Study Notes

Economics is a social science that studies how individuals, organizations, and governments allocate scarce resources to meet unlimited wants. It divides into two broad disciplines: microeconomics and macroeconomics.

Microeconomics

Microeconomics focuses on the behavior of individual economic agents such as consumers and firms. This branch explores how these agents make decisions on the allocation of their limited resources among alternative uses to satisfy their utility and maximize profits or revenues. Key concepts include utility maximization, market equilibrium, consumer theory, producer theory, game theory, and general equilibrium theory.

Macroeconomics

Macroeconomics addresses broader issues related to national income and output, unemployment, interest rates, exchange rates, and inflation, which are subjected to government intervention by fiscal policy and monetary policy. Some major topics within this field include aggregate supply and demand, Gross Domestic Product (GDP), balance of payments accounts, international trade, economic growth, inflation, and fiscal policy. A macroeconomic perspective is used to analyze the overall performance of an economy and its variables to understand the consequences of policy actions and changes in economic conditions.

Demand and Supply

Demand and supply are two sides of the market. The law of demand states that when prices rise, consumers tend to buy less, assuming all other factors remain constant. On the contrary, as prices fall, they tend to buy more. This relationship between price and quantity demanded is called the demand curve. Meanwhile, the law of supply suggests that when producers face higher prices for their product, they will produce more. When faced with lower prices, they will reduce production, which means an inverse relationship exists between price and quantity supplied. The equilibrium point occurs where both the supply and demand curves intersect; this intersection indicates the highest possible price and quantity, representing the social welfare maximization under perfect competition.

Elasticity of Demand

Elasticity of demand is a measure of how responsive the demand for a good or service is to changes in its price. It tells us whether the percentage change in demand is larger or smaller than the percentage change in price. Goods with high elasticity of demand have inelastic supplies, while goods with low elasticity of demand have inelastic supplies. Understanding elasticity helps businesses identify pricing strategies, anticipate revenue effects, and determine demand reactions to price changes.

Production and Cost

Understanding production is crucial for any business environment. It involves determining how many units can be produced using given resources, such as labor and materials. There are different types of costs involved in production, including fixed costs, variable costs, total costs, average cost, and marginal cost. Analyzing these costs allows firms to make decisions on how to minimize costs while maintaining profitability.