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Questions and Answers

What is the fundamental problem that the study of economics addresses?

Equal distribution of wealth

Government intervention

Unlimited wants and limited resources (correct)

Overproduction and under consumption

According to the principle of opportunity cost, what is the cost of an economic decision?

The value of the next best alternative foregone (correct)

The monetary cost

The time and effort involved

The total expenses incurred

Which principle suggests that people make decisions by comparing marginal benefits and marginal costs?

Scarcity principle

Ceteris paribus

Marginal analysis (correct)

Production possibilities frontier

What is the primary characteristic of a market economy?

Consumer choice and private ownership (B) Signup and view all the answers

Which economic system relies on the forces of supply and demand to determine prices and allocate resources?

Market economy (B) Signup and view all the answers

In a command economy, who typically makes decisions about what and how much to produce?

Government authorities (B) Signup and view all the answers

Which economic system combines elements of both market and command economies?

Mixed economy (D) Signup and view all the answers

What does 'invisible hand' refer to in economic theory?

Market forces guiding self-interest (C) Signup and view all the answers

Which of the following goods is likely to have a more inelastic demand?

Loaf (A) Signup and view all the answers

What is the main difference between economic profit and accounting profit?

Economic profit includes explicit and implicit costs, while accounting profit only includes explicit costs. (C) Signup and view all the answers

If a firm's marginal product of labor is 10, what does this mean?

The firm is adding 10 units of output for each additional unit of labor. (D) Signup and view all the answers

What does diminishing marginal product of labor indicate?

Output decreases as more labor is added. (D) Signup and view all the answers

Which of the following is a characteristic of perfectly competitive markets?

Many buyers and sellers (C) Signup and view all the answers

In a perfectly competitive market, each firm is a:

Price taker (C) Signup and view all the answers

What is the main goal of a firm in a perfectly competitive market?

Maximize profit (D) Signup and view all the answers

The demand curve facing a perfectly competitive firm is:

Perfectly elastic (B) Signup and view all the answers

Which of the following is a characteristic of a monopolistic competition market structure?

Many sellers, differentiated products (B) Signup and view all the answers

What is a key feature of an oligopoly?

Few firms, differentiated products (D) Signup and view all the answers

What is a natural monopoly?

Single company can produce at a lower cost than other competitors can (D) Signup and view all the answers

A firm in a monopolistic market faces a:

Downward-sloping demand curve (C) Signup and view all the answers

Which of the following best describes the term 'externality' in economics?

A cost or benefit incurred by a third party who did not choose to be affected by it (D) Signup and view all the answers

Which of the following is an example of a positive externality?

Education (B) Signup and view all the answers

Study Notes

Economics Fundamentals

Scarcity: Economics addresses the fundamental problem of unlimited wants and limited resources.
Opportunity Cost: The cost of an economic decision is the value of the next best alternative foregone.
Marginal Analysis: Decision-making involves comparing marginal benefits and marginal costs.

Market Systems

Market Economy: Characterized by consumer choice and private ownership of resources, using supply and demand to determine prices and allocation.
Command Economy: Centralized planning by government authorities determines production and resource allocation.
Mixed Economy: Blends elements of both market and command economies.
"Invisible Hand": Market forces guide individual self-interest to lead to a collective benefit.
Demand Elasticity: Goods with inelastic demand are less affected by price changes, like gasoline.

Firm Behavior and Perfect Competition

Economic Profit: Includes both explicit and implicit costs.
Accounting Profit: Includes only explicit costs.
Marginal Product of Labor: Measures the additional output produced from employing one more unit of labor; if the marginal product is 10, adding one more worker increases output by 10 units.
Diminishing Marginal Product of Labor: As more labor is added, the output increases less with each additional worker, eventually decreasing.
Perfectly Competitive Markets: Characterized by numerous buyers and sellers, homogenous products, free entry and exit, and no market power for individual firms.
Price Taker: A perfectly competitive firm accepts the market price, unable to influence it.
Profit Maximization: The goal for firms in perfect competition is to maximize profit.
Perfectly Elastic Demand Curve: A perfectly competitive firm faces a horizontal demand curve, indicating that it can sell any quantity at the going market price.

Market Structures: Beyond Perfect Competition

Monopolistic Competition: Many sellers offer similar but differentiated products, allowing some market power for individual firms.
Oligopoly: A market dominated by a few large firms, often with high barriers to entry, leading to interdependence and strategic interaction between them.
Natural Monopoly: A single firm can produce the entire output at a lower cost than multiple firms, leading to economies of scale.
Monopoly: Single firm, unique product, and significant market power, allowing for price setting.

Externalities

Externality: A cost or benefit that affects someone who is not directly involved in the transaction.
Positive Externality: Beneficial impact on a third party, like education.
Negative Externality: Harmful impact on a third party, like pollution.