Fundamental Economic Concepts and Systems
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Questions and Answers

What does the Law of Demand state?

  • Quantity supplied remains constant with price changes.
  • As price increases, quantity demanded increases.
  • As income rises, demand for luxury goods decreases.
  • As price decreases, quantity demanded increases. (correct)

    • Which of the following shifts the demand curve to the right?

  • An increase in the price of a substitute good.
  • A decrease in population.
  • A decrease in consumer income for normal goods.
  • A rise in expected future prices. (correct)

    • What results from a price ceiling set below the market equilibrium?

  • Increase in supplier profits.
  • A surplus of goods in the market.
  • A shortage of goods in the market. (correct)
  • Increased consumer surplus.

    • What is a complementary good?

    <p>A product that enhances the consumption of another. (C)</p> Signup and view all the answers

    Which factor does NOT typically shift the supply curve?

    <p>Consumer preferences. (B)</p> Signup and view all the answers

    What is consumer surplus?

    <p>The price consumers are willing to pay minus the market price. (D)</p> Signup and view all the answers

    How does a subsidy generally affect supply?

    <p>It increases supply by lowering production costs. (D)</p> Signup and view all the answers

    In the context of market equilibrium, what does a surplus indicate?

    <p>Quantity supplied exceeds quantity demanded. (B)</p> Signup and view all the answers

    What is meant by the term 'Ceteris Paribus'?

    <p>All other variables remain constant. (B)</p> Signup and view all the answers

    What is a primary consequence of imposing tariffs on imports?

    <p>Increased supply of domestic products. (C)</p> Signup and view all the answers

    If the marginal cost of producing an additional unit of a product is $10 and the marginal benefit is $8, what should a firm do?

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

    Which of the following is an example of an implicit cost?

    <p>The value of a business owner's time spent working in the business (C)</p> Signup and view all the answers

    What does the law of diminishing marginal utility imply?

    <p>As consumption of a good increases, the marginal utility derived from each additional unit decreases. (C)</p> Signup and view all the answers

    Which economic system relies primarily on customs and traditions to guide economic decisions?

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

    What is the primary factor limiting production in a production possibilities frontier?

    <p>Scarcity of resources (B)</p> Signup and view all the answers

    Which of the following statements best describes the concept of comparative advantage?

    <p>The ability to produce a good at a lower opportunity cost than another country or individual. (D)</p> Signup and view all the answers

    What is a major benefit of specialization and trade?

    <p>Increased overall output (D)</p> Signup and view all the answers

    Which type of cost should be ignored when making future economic decisions?

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

    Flashcards

    Scarcity

    The basic economic problem where unlimited wants exceed limited resources.

    Opportunity Cost

    The value of the next best alternative forgone when making a choice.

    Marginal Costs

    The additional cost of producing or consuming one more unit of a good.

    Economic Decision Rule

    If marginal benefit exceeds marginal cost, take the action; otherwise, refrain.

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    Market Economy

    An economy where individual choices and supply/demand determine decisions.

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    Production Possibilities Frontier (PPF)

    A graph showing the maximum combinations of goods/services that can be produced with given resources.

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    Comparative Advantage

    The ability to produce a good at a lower opportunity cost than another.

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    Law of Diminishing Marginal Utility

    Each additional unit of a good provides less additional satisfaction than the previous one.

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    Trade Ratios

    The rate at which goods are exchanged between countries.

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    Law of Demand

    As price decreases, quantity demanded increases; an inverse relationship.

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    Ceteris Paribus

    Latin for 'all else equal'; assumption in economics to isolate variables.

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    Substitution Effect

    Consumers switch to cheaper substitutes when a product’s price rises.

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    Determinants of Demand

    Factors that can shift demand, such as income and preferences.

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    Law of Supply

    As price increases, quantity supplied also increases; a direct relationship.

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    Market Equilibrium

    The point where quantity demanded equals quantity supplied.

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    Consumer Surplus

    The difference between what consumers are willing to pay and what they actually pay.

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    Price Ceiling

    A maximum price set below equilibrium, causing shortages.

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    Tariffs

    Taxes on imports to protect domestic industries.

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    Study Notes

    Fundamental Economic Concepts

    • Scarcity: Unlimited wants clash with limited resources, a fundamental economic problem.
    • Opportunity Cost: The value of the next best alternative forfeited when choosing one option.
    • Implicit Costs: Costs not requiring direct payment (like forgone wages).
    • Marginal Costs: The additional cost of producing/consuming one more unit.
    • Marginal Benefits: The added benefit from producing/consuming one more unit.
    • Economic Decision Rule: If marginal benefit exceeds marginal cost, undertake the action; otherwise, don't.
    • Sunk Costs: Costs already incurred and unrecoverable; irrelevant to future decisions.

    Economic Systems

    • Market Economy: Decisions based on supply and demand (e.g., U.S.).
    • Command Economy: A central authority (government) controls all economic decisions (e.g., North Korea).
    • Traditional Economy: Decisions adhere to customs and traditions (e.g., some indigenous communities).

    Choice in a World of Scarcity

    • Budget Constraints: Limited income sets spending limits.
    • Opportunity Costs: Trade-offs from choosing one option over another.
    • Marginal Analysis: Analyzing small, incremental changes for economic decisions.
    • Utility: Satisfaction derived from consuming goods/services.
    • Law of Diminishing Marginal Utility: Each extra unit consumed yields less additional satisfaction.
    • PPF (Production Possibilities Frontier): A graph showing maximum output combinations.
    • Law of Diminishing Returns: Adding more of one input, while holding others constant, yields smaller output increases.
    • Productive Efficiency: Producing goods at lowest possible cost.
    • Allocative Efficiency: Producing goods most desired by society.
    • Absolute Advantage: Producing more of a good with the same resources compared to others.
    • Comparative Advantage: Producing a good at a lower opportunity cost than others.
    • Specialization: Concentrating resources on goods with comparative advantage.
    • Gains from Trade: Increased total output from specialization and trade.
    • Mutually Beneficial Trade: Trade benefits both parties.
    • Trade Ratios (Terms of Trade): Exchange rate of goods between countries (e.g., 1 car for 2 tons of steel).

    Supply and Demand

    • Demand Schedule (Demand Curve): Table/graph showing quantity demanded at various prices.
    • Price vs. Quantity Demanded: Price changes along the demand curve, other factors shift it.
    • Ceteris Paribus: "All other things being equal" assumption in economics.
    • Law of Demand: Inverse relationship—price decreases, quantity demanded increases.
    • Law of Diminishing Marginal Utility: Successive units of a good hold less additional satisfaction.
    • Substitution Effect: Consumers switch to cheaper alternatives when prices rise.
    • Income Effect: Lower prices raise purchasing power, allowing more consumption.
    • Determinants of Demand: Factors that shift the demand curve.
    • Income: Normal goods (demand rises with income), inferior goods (demand falls with income).
    • Price of Related Goods: Complements (used together) and substitutes (alternatives).
    • Preferences: Changes in consumer taste and preferences.
    • Expected Future Prices: Anticipated price increases boost current demand.
    • Population: More consumers mean higher demand.
    • Supply Schedule (Supply Curve): Table/graph showing quantity supplied at various prices.
    • Price vs. Quantity Supplied: Price changes along the supply curve, other factors shift it.
    • Law of Supply: Direct relationship—price increases, quantity supplied increases.
    • Determinants of Supply: Factors that shift the supply curve.
    • Factors of Production: Input costs affect supply.
    • Number of Suppliers: More suppliers mean higher supply.
    • Expected Future Prices: Anticipated price increases reduce current supply.
    • Price of Related Goods: Complements and substitutes in production.
    • Market Equilibrium: Intersection of supply and demand curves, where quantity demanded = quantity supplied.
    • Surplus: Quantity supplied exceeds quantity demanded; leads to price decreases.
    • Shortage: Quantity demanded exceeds quantity supplied; leads to price increases.
    • Inefficiency from Government Intervention: Price ceilings (below equilibrium) create shortages, price floors (above equilibrium) create surpluses.
    • Surplus Measures & Trade: Consumer surplus, producer surplus, gains from trade (social surplus), deadweight loss.
    • Government Surplus: Revenue from taxes/subsidies.
    • Taxes & Subsidies: Taxes reduce supply and demand, subsidies increase them.
    • World Trade: Exchange of goods/services across international markets.
    • World Trade with Tariffs/Quotas: Tariffs (taxes on imports) and quotas (limits on imports) protect domestic industries.

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    Description

    Test your knowledge on key economic concepts such as scarcity, opportunity cost, and economic systems. This quiz covers fundamental terms and classifications that shape our understanding of economics. Enhance your grasp of market, command, and traditional economies while evaluating economic decision-making principles.

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