Economics Overview and Economic Systems

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Questions and Answers

What is the main difference between scarcity and shortage?

Scarcity is temporary, while shortages are permanent.

Scarcity can be solved, while shortages always exist.

Scarcity always exists, while shortages can be solved. (correct)

Scarcity affects everyone, while shortages affect only businesses.

Which of the following is NOT one of the three key questions of economics?

For whom to produce

What to produce

Where to produce (correct)

How to produce

Which of the following statements best defines profit?

The difference between income and taxes paid.

The investment returns from capital put into the business.

The amount of money a business receives in excess of its expenses. (correct)

The total revenue earned by a business.

In economic terms, which of the following defines a product market?

The arena of exchange in which households purchase goods and services from firms. Signup and view all the answers

Which of the following is an advantage of a free market economy?

Freedom of choice for consumers and producers. Signup and view all the answers

What characteristic is unique to communism compared to socialism?

Complete control of production by the state. Signup and view all the answers

Which trait is sometimes seen in socialism but absent in communism?

A democratic political structure. Signup and view all the answers

What is a likely consequence of fixed wages under a communist system?

Workers have little incentive to be more productive. Signup and view all the answers

What is the main principle of laissez faire?

The government generally should not intervene in the marketplace. Signup and view all the answers

Which of the following describes macroeconomics?

The study of economic behavior and decision-making in an entire economy. Signup and view all the answers

What defines a public good?

A shared good or service that is impractical to charge for individually. Signup and view all the answers

What does market failure signify?

A situation where the free market does not allocate resources efficiently. Signup and view all the answers

Which effect is illustrated when Sally opts to make tea at home instead of buying coffee due to a price increase?

Substitution effect Signup and view all the answers

Jerry's decision to change dining habits following a pay raise exemplifies which economic concept?

Income effect Signup and view all the answers

What does externality mean in an economic context?

A cost or benefit that affects a party not directly involved in a transaction. Signup and view all the answers

The law of demand states that as prices go down, what happens to demand?

Demand increases. Signup and view all the answers

What is the definition of a normal good?

A good that consumers demand more of when their income increases Signup and view all the answers

Which of the following best defines inelastic demand?

Demand that is not sensitive to a change in price Signup and view all the answers

What characterizes substitute goods?

Goods that can replace each other in consumption Signup and view all the answers

Which of the following describes the law of supply?

Producers offer more of a good as its price increases Signup and view all the answers

What is an example of a fixed cost?

Rent paid for office space Signup and view all the answers

What impact do excise taxes have on supply?

They increase costs and lower supply Signup and view all the answers

Which of the following statements about rent control is true?

Rent control is a form of price ceiling Signup and view all the answers

What typically happens to supply when an import ban is enacted?

Supply decreases because of loss of foreign imports Signup and view all the answers

What type of money is backed by a physical commodity like gold or silver?

Representative money Signup and view all the answers

What is defined as money that has value due to a government's decree?

Fiat money Signup and view all the answers

Which governing body has seven members appointed by the president and confirmed by the Senate?

The Federal Reserve Board Signup and view all the answers

What significant regulation was established by the Glass-Steagall Act in 1933?

Created the FDIC for deposit insurance Signup and view all the answers

What is the main reason for the need for a $700 billion bailout of banks in 2008?

High-risk lending practices Signup and view all the answers

What type of tax entails higher earners paying higher percentages of their income?

Progressive tax Signup and view all the answers

In a general framework, which characteristic of a tax ensures it is understandable to the taxpayer?

Simplicity Signup and view all the answers

What is required under an HMO medical insurance plan before visiting a specialist?

Referral from a primary care physician Signup and view all the answers

What defines rationing in an economic context?

A means of allocating goods and services using criteria other than price Signup and view all the answers

What characterizes a monopoly in market structure?

A single seller dominating the market Signup and view all the answers

Which option best describes an oligopoly?

A few large firms dominating a market Signup and view all the answers

What event significantly contributed to the formation of labor unions?

The Industrial Revolution Signup and view all the answers

In the context of a mixed-market economy, what primarily determines prices?

Supply and demand Signup and view all the answers

What is a characteristic of pure competition?

A large number of firms produce identical products without single control over supply or prices Signup and view all the answers

What is the role of stockholders in a corporation?

To choose the board of directors Signup and view all the answers

What is defined as the exchange of goods without regard for government controls?

Black market Signup and view all the answers

Study Notes

Economics

Economics is the study of how people make decisions to satisfy their wants and needs.
Scarcity always exists, while shortages can be solved.
The factors of production are land, labor, and capital.
Capital can be defined as a pool of money available for investment or any resource made by people that is used in production.

Economic Systems

Countries can be ranked based on their economic systems, with Iran, Mexico, the United States, and Canada being more free market, and North Korea being more centrally planned.
The three key questions of economics are what to produce, how to produce, and for whom to produce.
Profit is the amount of money a business receives in excess of its expenses.
The product market is where households purchase goods and services from firms, while the factor market is where firms purchase factors of production from households.
Advantages of a free market economy:
- Freedom of choice for consumers and producers
- Variety of goods and services
- Efficient response to changing market conditions
Disadvantages of a free market economy:
- The invisible hand: The self-regulating nature of the marketplace can lead to inefficiencies.
Socialism: Allows some private property ownership, a range of economic systems, and can be part of a democracy.
Communism: Brought about by revolutionary change, has an authoritarian government, and all production is controlled and owned by the state.
Outcomes of fixed wages under communism: Workers have little incentive to be more productive.
Outcomes of the goal of equity under communism: Government officials receive more pay and have access to better goods, leading to chronic shortages and low-quality goods for the masses.

Supply and Demand

Law of demand: As prices go down, demand increases.
The substitution effect occurs when consumers switch to a cheaper alternative good when the price of a good goes up.
The income effect describes how changes in income affect demand for goods and services.
Normal good: Consumers demand more when their income increases.
Inferior good: Consumers demand less when their income increases.
Complementary goods: Goods that are bought and used together (e.g., cars and gasoline).
Substitute Goods: Goods that are used in place of one another (e.g., coffee and tea).
Elastic demand: Demand is sensitive to a change in price.
Inelastic demand: Demand is not sensitive to a change in price.
Law of supply: Producers offer more of a good or service as its price increases and less as its price falls.
Fixed costs: Costs that do not change, regardless of production quantity (e.g., rent).
Variable costs: Costs that rise or fall depending on the quantity produced (e.g., hourly wages).
Excise taxes, regulations, and subsidies: Excise taxes and regulations increase costs and lower supply, while subsidies lower costs and increase supply.
Supply shock: A sudden shortage of a good, such as gasoline.

Competition and Market Structures

Monopoly: A single seller dominates a market.
Monopolistic competition: Many companies sell similar but not identical products.
Pure competition/perfect competition: A large number of firms all produce the same product, and no single seller controls supply or prices.
Oligopoly: A few large firms dominate a market.

Business and Labor

Sole proprietorships: Advantages include full control but disadvantages include limited access to resources.
In a corporation, the stockholders choose the board of directors.
Labor unions: Began during the Industrial Revolution to advocate for workers' rights.
Right-to-work laws: Laws that ban mandatory union membership.
Collective bargaining: The process in which union and company management meet to negotiate a new labor contract.

Money, Banking, and Financial Markets

Representative money: Money that is backed by gold or silver.
Fiat money: Money that has value because a government has decreed that it is an acceptable means to pay debts.
Federal Reserve Board: Has seven members appointed by the President and confirmed by the Senate. It supervises the regional Federal Reserve banks.
Glass Steagall Act (1933): Established the FDIC, which insured the deposits of bank customers.
Federal Open Market Committee: Meets eight times per year to discuss and decide monetary policy. It includes six of the twelve district bank leaders and their actions impact consumer interest rates.

Taxes and Spending

Progressive tax: High earners pay a greater percentage of their income than low earners.
Regressive tax: Everyone pays the same percentage, but this can disproportionately affect lower-income earners.
Tax characteristics: Simplicity, efficiency, certainty, and equity.

Financial Literacy

Co-pay: A fixed amount the insured pays for healthcare services.
Deductible: The amount a policyholder must pay before insurance coverage kicks in.
Comprehensive Coverage: Covers damage to your vehicle not caused by an accident.
HMO medical insurance plan: Requires a referral from a primary care physician before seeing a specialist.
Car insurance: Consider customer service in addition to premiums when evaluating car insurance.

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Description

This quiz covers the fundamental concepts of economics, including decision-making, factors of production, and the differences between economic systems. It also explores the characteristics of free market economies and the interactions between households and firms in the product and factor markets.