Economics Opportunity Cost Quiz
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Questions and Answers

Which of the following best describes opportunity cost?

  • The profit gained from selling a product.
  • The total costs incurred in production.
  • The price of a good or service.
  • The value of the next best alternative that is forgone. (correct)

A free good incurs an opportunity cost when consumed.

False (B)

What are the three main components of factors of production?

Land, Labour, Capital

In a free market system, entrepreneurs primarily respond to _____ to determine how to produce goods and services.

<p>market demands</p> Signup and view all the answers

Match the factor of production to its description:

<p>Land = Natural resources used in production Labour = Physical and mental skills applied in production Capital = Manufactured goods used to make other goods Enterprise = Organizes and combines all other factors of production</p> Signup and view all the answers

What characterizes an economic good?

<p>It is scarce and has a positive opportunity cost. (C)</p> Signup and view all the answers

Scarcity is a fundamental economic problem faced by all societies.

<p>True (A)</p> Signup and view all the answers

Define the term 'wealth' in the context of economics.

<p>Wealth refers to the accumulation and distribution of valuable resources, goods, and services.</p> Signup and view all the answers

What characterizes a merit good?

<p>Social benefits exceed social costs (D)</p> Signup and view all the answers

Public goods are characterized by being rivalrous and excludable.

<p>False (B)</p> Signup and view all the answers

What is the main issue described by the Tragedy of the Commons?

<p>The rapid degradation of common resources by individuals focused on short-term benefits.</p> Signup and view all the answers

A good is considered ______ if one person's consumption of it does not prevent others from enjoying it.

<p>non-rivalrous</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Merit Goods = Goods for which social benefits exceed social costs Public Goods = Non-rivalrous and non-excludable goods Tragedy of the Commons = Dilemma of resource degradation due to individual consumption Subsidies = Government financial support to encourage consumption of merit goods</p> Signup and view all the answers

Which factor is associated with wages?

<p>Labour (C)</p> Signup and view all the answers

Geographic mobility refers to the ability of resources to change their job tasks.

<p>False (B)</p> Signup and view all the answers

What is a production possibility curve (PPC)?

<p>A graphical representation showing the maximum output of two products that can be produced with given resources.</p> Signup and view all the answers

Land is associated with __________.

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

Match the factor of production with its corresponding reward:

<p>Land = Rent Labour = Wages Capital = Interest Enterprise = Profits</p> Signup and view all the answers

Which characteristic enhances geographic mobility?

<p>Good transport links (C)</p> Signup and view all the answers

All forms of land are geographically mobile.

<p>False (B)</p> Signup and view all the answers

What are the three key allocation decisions in an economy?

<p>What to produce, how to produce it, whom to produce for</p> Signup and view all the answers

In a mixed economy, there is involvement from both the __________ and __________ sectors.

<p>public, private</p> Signup and view all the answers

Which of the following is NOT a characteristic of microeconomics?

<p>Overall economic growth (D)</p> Signup and view all the answers

The production possibility curve can illustrate unattainable combinations of production.

<p>True (A)</p> Signup and view all the answers

Name one reason why enterprise is considered the most mobile factor of production.

<p>Entrepreneurs can transfer skills from one industry to another.</p> Signup and view all the answers

In a planned economy, the government primarily decides the __________ of resources.

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

Match the economic system with its level of government involvement:

<p>Free Market = Less government involvement Planned Economy = More government involvement Mixed Economy = Moderate government involvement</p> Signup and view all the answers

What happens to supply when the cost of factors of production increases?

<p>Supply decreases (A)</p> Signup and view all the answers

Improvements in technology lead to a leftward shift in the supply curve.

<p>False (B)</p> Signup and view all the answers

What determines the equilibrium price (Pe) in a market?

<p>The price at which the quantity supplied equals the quantity demanded.</p> Signup and view all the answers

When the price is below market equilibrium, a ______ occurs.

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

Which of the following describes a perfectly elastic demand?

<p>Demand changes infinitely with no price change (D)</p> Signup and view all the answers

If producers expect future prices to decrease, they tend to store their current supply.

<p>False (B)</p> Signup and view all the answers

Name a factor that can enhance productivity.

<p>Motivated workforce, methods of production, technological improvements, or managerial expertise.</p> Signup and view all the answers

A ______ occurs when there is an excess supply in the market.

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

If a good's price rises and firms produce more of it, what is this phenomenon called?

<p>Substitution Effect (C)</p> Signup and view all the answers

What characterizes a capital-intensive production method?

<p>Low ratio of workers to capital (D)</p> Signup and view all the answers

The supply of a product will increase when its price decreases.

<p>False (B)</p> Signup and view all the answers

Define effective demand.

<p>Effective demand is the amount that consumers are willing and able to buy at each given price, supported by purchasing power.</p> Signup and view all the answers

A shift in the demand curve occurs due to changes in ______ factors.

<p>non-price</p> Signup and view all the answers

Which of the following describes the relationship stated in the Law of Demand?

<p>Price falls, demand increases (D)</p> Signup and view all the answers

An increase in consumer preferences for a product will shift the demand curve to the left.

<p>False (B)</p> Signup and view all the answers

What effect does an increase in the price of complements have on the demand for a product?

<p>It decreases the demand for the product.</p> Signup and view all the answers

Match the following concepts with their definitions:

<p>Demand Curve = Illustrates the relationship between price and quantity demanded Ceteris Paribus = All other factors being equal Law of Supply = Producers supply more at higher prices Market Equilibrium = Where supply equals demand</p> Signup and view all the answers

The quantity of a good that producers are willing to sell at a given price is known as ______.

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

Under which condition does demand increase according to the demand curve?

<p>All of the above (D)</p> Signup and view all the answers

Demand refers only to the desire to purchase a product.

<p>False (B)</p> Signup and view all the answers

What happens to market equilibrium when demand increases?

<p>Market equilibrium shifts to the right.</p> Signup and view all the answers

Which of these factors would NOT lead to a shift in the demand curve?

<p>Increase in price of the product (B)</p> Signup and view all the answers

What is the primary goal of firms in a market economy?

<p>To maximize profits.</p> Signup and view all the answers

When the price of substitutes falls, the demand for the original product will tend to ______.

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

What happens to demand when there is an increase in the number and closeness of substitutes?

<p>Demand becomes more elastic (D)</p> Signup and view all the answers

If the product is defined narrowly, the demand is more elastic.

<p>False (B)</p> Signup and view all the answers

What is the formula for Price Elasticity of Supply (PES)?

<p>PES = % change in quantity supplied / % change in price</p> Signup and view all the answers

If a product has a larger proportion of income spent on it, it is considered to have ______ elasticity.

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

Match the market situation with its description.

<p>Market failure = Inefficient allocation of resources Overproduction = Exceeding the socially efficient level of output Underproduction = Insufficient supply for optimal welfare Information failure = Poor access to accurate data</p> Signup and view all the answers

Which of the following is a determinant of Price Elasticity of Demand (PED)?

<p>Time period considered (A)</p> Signup and view all the answers

A perfectly elastic supply curve has a PES equal to 0.

<p>False (B)</p> Signup and view all the answers

What is the implication of high mobility of production factors on PES?

<p>It makes PES more elastic.</p> Signup and view all the answers

Social costs include both ______ costs and external costs.

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

Match the types of market failure with their effects.

<p>Overproduction = Negative externalities Underproduction = Loss of potential welfare Market failure when too little is provided = Insufficient provision of goods Information failure = Asymmetric information</p> Signup and view all the answers

What outcome occurs when demand for a product is inelastic and the government imposes a tax?

<p>There is no impact on unemployment (B)</p> Signup and view all the answers

Social benefits exceed private benefits during a market failure in underproduction.

<p>True (A)</p> Signup and view all the answers

What happens to quantity supplied when there is an elastic supply and demand increases?

<p>Quantity supplied rises by a greater percentage than the price change.</p> Signup and view all the answers

The ______ curve for supply depicts the true costs to society when negative externalities occur.

<p>social cost</p> Signup and view all the answers

What defines a perfectly inelastic supply curve?

<p>PES = 0 (D)</p> Signup and view all the answers

Flashcards

Scarcity

The limited availability of resources like land, labor, capital, and entrepreneurship, which leads to the basic economic problem.

Economic Good

A good with a cost because it is either naturally scarce or produced using scarce resources.

Opportunity Cost

The value of the next best alternative that you give up when making a choice.

Land (Factor of Production)

Any natural resource used in producing goods or services.

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Labour (Factor of Production)

The physical and mental skills employed to produce goods and services.

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Capital (Factor of Production)

Manufactured goods used in the production of other goods and services.

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Enterprise (Factor of Production)

The ability to combine the other factors of production (land, labor, and capital) and take risks in order to create goods or services.

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Money

A medium of exchange used to facilitate trade but not a productive resource by itself.

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Factors of Production

Resources used to produce goods and services. These include land, labor, capital, and enterprise.

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Land (Factor)

Natural resources used in production, including soil, minerals, and forests.

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Labor (Factor)

Human effort used in production, including physical and mental work.

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Capital (Factor)

Man-made resources used in production, including machinery, tools, and buildings.

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Enterprise (Factor)

The skill and risk-taking ability of entrepreneurs to organize production.

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Rent (Reward)

Payment for the use of land.

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Wages (Reward)

Payment for labor.

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Interest (Reward)

Payment for the use of capital.

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Profits (Reward)

Reward for enterprise, the difference between revenue and costs.

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Occupational Mobility

The ability of a factor of production to change its role or function.

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Geographic Mobility

The ability of a factor of production to move from one location to another.

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Production Possibility Curve (PPC)

A graph showing the maximum combinations of two goods that can be produced with given resources and technology.

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Microeconomics

The study of individual economic decisions and market behavior.

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Macroeconomics

The study of the economy as a whole, focusing on aggregate factors like national income and unemployment.

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Market Economic System

An economic system where prices are set by supply and demand, with minimal government intervention.

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Merit Good

A good where the social benefits exceed the social costs, leading to underproduction in a free market.

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Public Good

A good that is non-rivalrous (one person's use doesn't prevent others) and non-excludable (no one can be prevented from using it).

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Undersupply

When the market produces less of a good than is socially desirable.

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Tragedy of the Commons

A situation where individual overuse of a shared resource leads to its depletion, even though it would be better if everyone used it sustainably.

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Non-Rivalrous Good

A good where one person's consumption doesn't prevent others from enjoying it.

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Capital-intensive

A production process that uses a high amount of capital (machinery, buildings) compared to labor.

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Labor-intensive

A production process that uses a high amount of labor compared to capital.

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Price mechanism

The natural process where prices adjust based on supply and demand, influencing the allocation of resources.

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What causes a rise in price of bananas?

An increase in demand for bananas due to factors like a change in taste or income, leading to higher prices.

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How does a decrease in demand for apples affect production?

Producers will reduce the production of apples due to lower demand and prices, leading to less labor, capital, and land being used.

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What does a market economy rely on?

Market economies use the price mechanism to automatically adjust resource allocation. Prices go up and down based on supply and demand.

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What is the role of consumers in the price mechanism?

Consumers communicate their needs and desires through the prices they are willing to pay, influencing producers' actions.

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Why do producers respond to changes in market conditions?

Producers are motivated by profit, and they adjust their production based on changes in prices and demand to maximize those profits.

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What is effective demand?

The desire, ability, and willingness to buy a product at a given price.

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What is a demand curve?

A visual representation showing how much of a product consumers are willing to buy at different prices.

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What does the law of demand state?

As the price of a product increases, consumers tend to buy less of it, and vice versa.

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What is 'ceteris paribus'?

An assumption that all other factors remain constant except for the one being studied.

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What is the difference between individual and market demand?

Individual demand refers to one person's willingness to buy, while market demand aggregates the demand from all consumers in a market.

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Why does the demand curve typically slope downwards?

Consumers are rational and want to maximize benefits with limited income. As the price falls, they buy more because it provides more value for their money.

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What is a movement vs. a shift in the demand curve?

A movement along the curve represents a change in quantity demanded due to price changes. A shift in the curve represents a change in total demand due to non-price factors.

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Steep Demand Curve

A demand curve where a small change in price leads to a large change in quantity demanded. This means consumers are highly responsive to price changes.

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Price Elasticity of Demand (PED)

A measure of how responsive the quantity demanded of a good is to changes in its price. It's calculated as the percentage change in quantity demanded divided by the percentage change in price.

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Elastic Demand

When PED is greater than 1. This means the quantity demanded changes by a larger percentage than the price change. Consumers are highly sensitive to price changes.

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Inelastic Demand

When PED is less than 1. This means the quantity demanded changes by a smaller percentage than the price change. Consumers are less sensitive to price changes.

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Factors Affecting PED: Substitutes

The more substitutes a good has, the more elastic its demand will be. Consumers have more options to switch to if the price increases.

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Factors Affecting PED: Necessity

Goods considered essential (necessities) tend to have inelastic demand. Consumers will buy them regardless of price changes.

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Factors Affecting PED: Time Period

Demand tends to be more elastic over longer time periods. Consumers have more time to adjust their buying habits and find substitutes.

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Factors Affecting PED: Proportion of Income

Goods that make up a larger proportion of a person's income tend to have more elastic demand. Consumers are more sensitive to price changes.

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PED and Taxation

Governments can use PED to predict the impact of taxes on product prices and consumer demand. Products with elastic demand will see a greater reduction in demand due to price increases from taxes.

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Price Elasticity of Supply (PES)

A measure of how responsive the quantity supplied of a good is to changes in its price. It's calculated as the percentage change in quantity supplied divided by the percentage change in price.

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Elastic Supply

When PES is greater than 1. This means the quantity supplied changes by a larger percentage than the price change. Producers are highly responsive to price changes.

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Inelastic Supply

When PES is less than 1. This means the quantity supplied changes by a smaller percentage than the price change. Producers are less responsive to price changes.

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Factors Affecting PES: Time Period

Supply tends to be more elastic over longer time periods. Producers have more time to adjust production levels and increase supply.

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Factors Affecting PES: Unused Capacity

Firms with unused capacity can easily increase supply in response to price changes, leading to more elastic supply.

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Market Failure

A situation where the free market does not allocate resources efficiently. This can happen when there are external costs, lack of information, or public goods.

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Productivity

The amount of output produced per unit of input. It measures how efficiently resources are used in production.

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Supply Shock

A sudden event disrupting the normal supply of goods and services, often due to unexpected circumstances like natural disasters or global pandemics.

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State of Technology

The current level of technological advancement, which significantly influences production methods and efficiency.

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Market Equilibrium

A state where the quantity demanded and quantity supplied of a good are equal at a specific price. The market “clears itself” with no shortages or surpluses.

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Equilibrium Price (Pe)

The price at which the quantity supplied equals the quantity demanded in a market, representing the market-clearing price.

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Equilibrium Quantity (Qe)

The amount of a good produced and consumed at the equilibrium price, where supply and demand are balanced.

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Perfectly Elastic Demand

When even a tiny change in price leads to an unlimited change in quantity demanded. This is a theoretical extreme.

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Perfectly Inelastic Demand

When changes in price have absolutely no effect on the quantity demanded. Consumers buy the same amount regardless of price.

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Unitary Elastic Demand

When a change in price leads to an equal percentage change in quantity demanded. Total revenue remains constant.

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Study Notes

Economics Fundamentals

  • Economics studies human behavior regarding scarce resources with alternative uses.
  • "Ends" represent needs, wants, and desires; "means" are limited resources.
  • Scarcity arises from limited productive resources (land, labor, capital, entrepreneurship).
  • The basic economic problem involves scarcity and unlimited wants/needs.
  • Free goods are not scarce and have zero opportunity cost.
  • Economic goods are scarce and have an opportunity cost (greater than zero).

Wealth Allocation

  • Wealth involves allocation, consumption, production, distribution, and utilization of resources.

Factors of Production

  • Land: Natural resources (nature-derived).
  • Labor: Physical and mental skills used in production.
  • Capital: Manufactured goods used in production (tools, equipment).
  • Enterprise/Entrepreneurship: Organizes other factors to create goods/services; assumes market risk.
  • Money: Facilitates exchange, not a productive resource.

Factor Rewards

  • Land: Rent
  • Labor: Wages
  • Capital: Interest
  • Enterprise: Profit

Factors of Production Mobility

  • Occupational Mobility: Ability to change tasks.
  • Geographic Mobility: Ability to move locations.
  • Land is immobile geographically.
  • Enterprise is highly mobile.

Factor Quantity and Quality

  • Land: Quality varies by natural resources; quantity is affected by erosion/reclamation.
  • Capital: Quantity increases with investment; quality improves with technology/robotics.
  • Labor: Quantity affected by population, immigration, retirement age; quality depends on experience, education.
  • Enterprise: Quality influenced by education, risk tolerance/ motivation and access to capital.

Production Possibility Curve (PPC)

  • A PPC shows maximum output combinations for two goods.
  • Points on the curve are attainable; points outside are unattainable.
  • PPCs are used to represent output possibilities with available resources and technology.

Microeconomics and Macroeconomics

  • Microeconomics: Studies individual households and firms, and individual markets.
  • Macroeconomics: Studies the economy as a whole (aggregate levels).

Resource Allocation

  • What to produce?
  • How to produce it?
  • For whom to produce it?
  • Types of economies: Planned, mixed, free market.

Market Economic System

  • Consumer preferences guide production.
  • The price mechanism allocates resources.
  • Market equilibrium (supply = demand) ensures no shortages/surpluses.

Demand

  • Effective demand is backed by ability and willingness to pay.
  • Demand curves show inverse relationship between price and quantity demanded.
  • Individual and market demand are summed to determine overall market demand.

Demand Curve Shifts and Movements

  • Price changes cause movements along the curve.
  • Other factors (taste/preferences, prices of related goods, income) shift the curve.

Supply

  • Supply is quantity offered for sale at various prices.
  • The law of supply states that higher prices incentivize greater supply.
  • Non-price factors (costs of production, technology, prices of other goods, expectations) shift the curve.

Price Determination

  • Market equilibrium occurs where supply equals demand.
  • Equilibrium price and quantity are where supply and demand intersect.
  • Market disequilibrium leads to shortages or surpluses, which drive prices towards equilibrium.

Price Elasticity of Demand (PED)

  • PED measures responsiveness of quantity demanded to price changes.
  • PED can be elastic, inelastic, unitary, perfectly elastic, or perfectly inelastic.
  • Determinants of PED include availability of substitutes, necessity of the good, and time frame.

Price Elasticity of Supply (PES)

  • PES measures responsiveness of quantity supplied to price changes.
  • PES can be elastic, inelastic, unitary, perfectly elastic, or perfectly inelastic.
  • Determinants of PES include factors like production costs, unused capacity, and time frame.

Market Failure

  • Market failure occurs when free markets fail to allocate resources efficiently.
  • Causes include information failure, lack of merit goods, and public goods.
  • Social benefits and costs may differ from private benefits & costs when there is market failure.

Overproduction and Underproduction

  • Overproduction results in social costs exceeding social benefits.
  • Underproduction results in social benefits exceeding social costs.

Information Failure

  • Incomplete or inaccurate information affecting market efficiency.

Lack of Merit and Public Goods

  • Merit goods have social benefits exceeding costs.
  • Public goods are non-rivalrous and non-excludable.

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Test your knowledge of key economic concepts, including opportunity cost, factors of production, and the characteristics of goods. This quiz covers fundamental ideas in economics that are crucial for understanding market dynamics. Challenge yourself and see how well you understand these important topics!

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