General Knowledge Quiz

Introduction to Economics

• Economics is a social science that deals with the efficient allocation of scarce resources to satisfy unlimited human needs and wants.
• The concept of wealth is related to the resources of a country, with the first two resources identified by Adam Smith being Land and Labor.
• Later, additional resources such as Capital and Entrepreneurial Ability were identified by other economists.
• Resources are classified into two groups: Non-economic (free and abundant) and Economic (scarce or limited, with a price attached).

Types of Economic Resources

• Human Resources:
  • Labor: mental and physical effort exerted (salaries or wages)
  • Entrepreneurial Ability: organizer of production activity (profit, royalties)
• Non-human Resources:
  • Land: all natural resources (rent or lease)
  • Capital: man-made goods to produce other goods (interest)

Fundamental Economic Activities

• Production: creation of products
• Distribution: making goods available to consumers
• Exchange: giving money in return for products
• Consumption: utilization of products
• Public Finance: sourcing and using of funds by the government

Fundamental Economic Questions

• What to produce?
• How to produce?
• How much to produce?
• For whom to produce?

Economic Systems

• Traditional: answers to economic questions are based on customs and traditions
• Command: answers to economic questions are dictated by the government or a central-planning body
• Market: answers to economic questions are based on the price system
• Mixed: combination of market and command economies

Methodology of Economics

• 5 Steps:
  1. Observation: identify the problem and collect data
  2. Definitions and Assumptions: give operational meaning to terms and set conditions
  3. Deductions: analyze and formulate generalizations or conclusions
  4. Empirical Verification: test hypotheses
  5. Policy Formulation and Application: formulate and apply solutions to the problem

Phases of Economics

• 1. Descriptive Economics: observes what, when, where, who, and how of events
• 2. Theoretical Economics: involves definitions, assumptions, deductions, and empirical verification
• 3. Applied Economics: relates to the formulation of solutions to problems

Branches of Analysis in Economics

• 1. Positive Economics: deals with "what is" and relies on facts
• 2. Normative Economics: deals with "what should be" and uses both facts and value judgments

Approaches to the Study of Economics

• 1. Microeconomics: study of individual units of the economy (e.g., consumer or firm)
• 2. Macroeconomics: study of the aggregate economy or all units of the economy

Ten Principles of Economics

• 1. People Face Trade-Offs: people must make good decisions by understanding the options available
• 2. The Cost of Something is What You Give Up to Get It: making decisions requires comparing costs and benefits
• 3. Rational People Think at the Margin: rational people make decisions based on marginal benefits and costs
• 4. People Respond to Incentives: incentives induce people to act or change their behavior
• 5. Trade Can Make Everyone Better-Off: trade allows countries to specialize in what they do best
• 6. Markets Are Usually a Good Way to Organize Economic Activity: markets allocate resources efficiently
• 7. Governments Can Sometimes Improve Market Outcomes: governments enforce rules and maintain institutions
• 8. A Country's Standard of Living Depends on its Ability to Produce Goods and Services: standard of living is attributed to productivity
• 9. Prices Rise When the Government Prints Too Much Money: inflation is caused by government's overprinting of money
• 10. Society Faces a Short-Run Trade-Off between Inflation and Unemployment: short-run trade-off between inflation rate and unemployment rate

Evolution of Laws

• Market: a transaction of exchange between buyers and sellers of a particular product
• Labor Theory of Value: price is determined by the amount of labor spent in production
• Cost of Production Theory: price is determined by the sum of all costs plus a mark-up
• Utility Theory: price is determined by the additional satisfaction or utility derived from the good

Demand

• Demand: the entire relationship between price and quantity demanded
• Quantity Demanded: the specific number of commodities buyers are willing and capable of buying
• Law of Demand: as the price of a commodity decreases, the quantity demanded increases
• Income Effect: as the price of a commodity increases, real income falls
• Substitution Effect: as the price of a commodity increases, its relative attractiveness falls
• Abnormal Demand: Giffen Goods and Veblen Goods

Supply

• Supply: the entire relationship between price and quantity supplied
• Quantity Supplied: the specific amount of commodities sellers are willing to sell
• Law of Supply: as the price of a commodity increases, the quantity supplied increases
• Movement Along the Supply Curve: a change in price brings about a change in quantity supplied
• Shift in the Supply Curve: a change in one or more non-price factors of supply### Supply and Demand
• A shift to the right in the supply curve (SC) indicates an increase in supply, assuming a constant price.
• A shift to the left in the supply curve (SC) indicates a decrease in supply, assuming a constant price.
• Non-price factors of supply include:
  • Price of factors of input (decrease/increase)
  • Producer's motives (favorable/unfavorable)
  • Improvement in technology (advancement/stagnant)
  • Taxes (decrease/increase)
  • Budget of the firm (increase/decrease)
  • Subsidies (increase/decrease)
  • Expectations of future prices (decrease/increase)
  • Weather/climate (favorable/unfavorable)
  • Availability of resources (available/not available)
  • Number of sellers (increase/decrease)

Equilibrium

• Equilibrium is the state where buyers and sellers agree on the quantity of commodities bought and sold at a particular price.
• Equilibrium is the intersection of the demand curve (DC) and supply curve (SC), which represents the equilibrium quantity and equilibrium price.
• Algebraic computation of the equilibrium price and equilibrium quantity involves equating the demand and supply functions.

Disequilibrium

• Surplus occurs when the price is higher than the equilibrium price, leading to a situation where Qd < Qs.
• Shortage occurs when the price is lower than the equilibrium price, leading to a situation where Qd > Qs.
• Price ceiling is a maximum price set by the government, which is below the equilibrium market price, to protect consumers.
• Price floor is a minimum price set by the government, which is above the equilibrium market price, to protect producers.

Elasticity

• Elasticity is the responsiveness of quantity to changes in the factors affecting it.
• Elasticity of demand is the responsiveness of Qd to changes in the factors affecting it.
• Price elasticity of demand is the responsiveness of Qd to a change in the price of the good itself.
• Income elasticity of demand is the responsiveness of Qd to a change in the income of the consumer.
• Cross-price elasticity of demand is the responsiveness of Qd to a change in the price of a related good.

Types of Elasticity

• Elastic demand (Ep > 1): a small price change leads to a large change in Qd.
• Inelastic demand (Ep < 1): a large price change leads to a small change in Qd.
• Unitary elasticity (Ep = 1): a price change leads to a proportionate change in Qd.

Interpretation of Elasticity

• Price elasticity of demand: a negative sign indicates an inverse relationship between price and Qd.
• Income elasticity of demand: a positive sign indicates a normal good, while a negative sign indicates an inferior good.
• Cross-price elasticity of demand: a positive sign indicates substitutes, while a negative sign indicates complements.

Theory of Consumer Behavior

• Utility approach: satisfaction derived from a good or service is measurable and can be ranked.
• Indifference curve approach: satisfaction derived from a good or service is not measurable, but can be ranked based on preferences.

Consumer Equilibrium

• Equi-marginal principle: a rational consumer aims to attain total satisfaction from goods consumed when spending income.
• Budget constraint line: shows all possible combinations of two goods that a consumer can purchase, given income and prices.
• Indifference curve: shows combinations of two goods that yield equal utility or satisfaction.
• Consumer equilibrium: the point where the budget constraint line is tangent to the indifference curve, also known as the Least-Cost Product Combination (LCPC).

Income-Consumption Line and Engel's Curve

• Income-consumption line: shows the effect of changing income on consumer equilibrium, while keeping prices constant.
• Engel's curve: shows the relationship between income and quantity demanded of a good, derived from the income-consumption line.
• A normal good has an upward-sloping Engel's curve, while an inferior good has a downward-sloping Engel's curve.

Price-Consumption Line and Demand Curve

• Price-consumption line: shows the effect of changing price on consumer equilibrium, while keeping income and other prices constant.
• Demand curve: shows the relationship between price and quantity demanded, derived from the price-consumption line.
• By connecting the points on the demand curve, the demand curve is derived.

Partial and General Equilibrium Analysis

• Partial Equilibrium Analysis isolates specific decision-making units and markets, abstracting from interconnections with the rest of the economy.
• General Equilibrium Analysis examines interconnections among all decision-making units and markets, showing how they are linked into an integrated system.

Elasticity

• Elasticity is the responsiveness of quantity to changes in factors affecting it, such as price, income, and prices of related goods.
• Elasticity of Demand is the responsiveness of quantity demanded (Qd) to changes in factors affecting it.
• Price Elasticity of Demand is the responsiveness of Qd when there is a change in the price of the good itself.

Interpretation of Price Elasticity of Demand Results

• The sign of the coefficient of Ep is always negative, reflecting the inverse relationship between price and quantity demanded.
• A 1% decrease in price leads to an Ep% increase in Qd, while a 1% increase in price leads to an Ep% decrease in Qd.
• Ep = 1 indicates unitary elasticity, Ep > 1 indicates relatively elastic demand, and Ep < 1 indicates relatively inelastic demand.

Factors Governing the Size of the Coefficient of Price Elasticity of Demand

• Number and closeness of substitutes for the commodity
• Number of uses of the commodity
• Expenditures on the commodity
• Adjustment time
• Level of price

Income Elasticity of Demand

• Income Elasticity of Demand is the responsiveness of Qd to changes in the income of the consumer.
• The sign of the coefficient of Ey can be positive or negative.

Interpretation of Income Elasticity of Demand Results

• If the sign of the coefficient is positive and greater than 1, the good is superior.
• If the sign of the coefficient is positive and equal or less than 1, the good is normal.
• If the sign of the coefficient is negative, the good is inferior or cheap.
• A 1% increase in income leads to an Ey% increase in Qd, while a 1% decrease in income leads to an Ey% decrease in Qd.

Engel's Curve

• Engel's Curve is a graphical illustration showing the relationship between the demand for a good and the income of the buyer or consumer.

Cross-Price Elasticity Demand

• Cross-Price Elasticity Demand is the responsiveness of Good Y when there is a change in the price of Good X.

Interpretation of Cross-Price Elasticity of Demand Results

• The sign of the coefficient of Exy can be positive or negative.
• If the sign of the coefficient is positive, the goods are substitutes.
• If the sign of the coefficient is negative, the goods are complements.

Elasticity of Supply

• Elasticity of Supply is the responsiveness of quantity supplied (Qs) to changes in factors affecting it, namely the price of the good itself.

Interpretation of Price Elasticity of Supply Results

• The sign of the coefficient of Ep is always positive, reflecting the direct relationship between price and quantity supplied.
• A 1% increase in price leads to an Ep% increase in Qs, while a 1% decrease in price leads to an Ep% decrease in Qs.

Theory of Consumer Behavior

Utility Approach

• Utility Approach: satisfaction derived from a good or service is measurable and is rated.
• Total Utility (TU): the total satisfaction derived by the consumer for consuming specific units of goods.
• Marginal Utility (MU): the additional or incremental satisfaction derived from consuming an additional unit of the good.
• Law of Diminishing Marginal Utility: the values of MU decrease as an additional unit of the good is consumed.

Consumer Equilibrium

• Consumer Equilibrium is achieved when the marginal utilities per peso spent on all goods are equal, and the purchases are equal to the budget or income to be spent by the consumer.

Indifference Curve Approach

• Indifference Curve Approach: satisfaction derived from a good or service is not measurable, but can be ranked based on the satisfaction derived from them.
• Indifference Curve: shows the various combinations of Good A and Good B that yield equal utility or satisfaction to the consumer.
• Characteristics of Indifference Curves:
  • Negatively Sloped
  • Convex to the Point of Origin
  • Non-Intersecting
• Transitivity of Preferences: a fundamental principle shared by most major contemporary rational, prescriptive, and descriptive models of decision making.

Budget Constraint Line and Consumer Equilibrium

• Budget Constraint Line: shows all the different combinations of the two goods that a consumer can purchase, given the money income and the prices of the two goods.
• Consumer Equilibrium: the consumer is in equilibrium at the point where the budget constraint line is tangent to the indifference curve, also known as the Least-Cost Product Combination (LCPC).

Income-Consumption Line and Engel's Curve

• Income-Consumption Line: by changing the consumer's money income while keeping constant the tastes and the prices of the goods, the budget constraint line shifts parallel to the original.
• Engel Curve: derived from the Income-consumption line, showing the relationship between the demand for a good and the income of the buyer or consumer.

Price-Consumption Line and Demand Curve

• Price-Consumption Line: by changing the price of one of the goods while keeping the price of the other good constant and the budget or money income, a new budget line is created and therefore a new tangency point or LCPC.
• Demand Curve: derived from the LCPC in relation to the good whose price has changed, showing the relationship between the price and quantity demanded of the good.### Market Forces
• A market is a transaction of exchange between a group of buyers and sellers of a particular product.
• The price of a good or service is determined by the market forces of demand and supply.

Evolution of Laws

• Labor Theory of Value: the price of a good is determined by the amount of labor spent in its production (formulated by David Ricardo and Karl Marx).
• Cost of Production Theory: the price of a good is determined by the sum of all costs spent in its production plus a mark-up (formulated by Alfred Marshall and Leon Walras).
• Utility Theory: the price of a good is determined by the additional satisfaction or utility derived from the good.

Demand

• Demand: the entire relationship between price and quantity demanded as shown in a table or graph.
• Demand shows various quantities of commodities buyers are willing and capable of buying given specific prices, in a specific market for a specific period of time.
• 2 kinds of demand:
  • Potential demand: willingness to buy or desire to buy only.
  • Effective demand: willingness to buy or desire to buy plus capability to buy due to the presence of purchasing power.
• Quantity demanded: the specific number of commodities buyers are willing and capable of buying given specific prices, in a specific market for a specific period of time.
• Law of Demand: as the price of a commodity decreases, the quantity demanded increases, and vice versa, assuming ceteris paribus.
• Law of Demand: price and quantity demanded have an inverse or negative relationship.
• Why people buy less when prices increase:
  • Income Effect: as the price of a commodity increases, nominal income remains the same, but real income falls.
  • Substitution Effect: as the price of a commodity increases, its relative attractiveness falls, causing consumers to purchase lower-priced alternatives.
• Abnormal demand:
  • Giffen Goods: low-priced products, the demand for which rises along with the price (e.g., potatoes, bread, wheat, and rice).
  • Veblen Goods: high-quality premium goods, the demand for which increases along with its price (e.g., sports cars, expensive accessories, luxury clothing, and bags).

Demand Function and Inverse Demand Function

• Demand function: Qd = a - bP
• Inverse demand function: P = a - bQd

Movement Along the Demand Curve and Shift in the Demand Curve

• Movement along the demand curve: a change in price brings about a change in quantity demanded, moving along the same demand curve.
• Shift in the demand curve: a change in one or more non-price factors of demand brings about a change in demand, shifting the demand curve.

Non-Price Factors of Demand

• Wealth: increase in wealth leads to an increase in demand.
• Income: increase in income leads to an increase in demand.
• Population: increase in population leads to an increase in demand.
• Price of substitutes: increase in price of substitutes leads to an increase in demand.
• Price of complements: decrease in price of complements leads to an increase in demand.
• Consumer tastes and preferences: favorable change leads to an increase in demand.
• Quality of the good: improvement leads to an increase in demand.
• Advertising and promotions: favorable change leads to an increase in demand.
• Expectations of future prices: increase in expected prices leads to an increase in demand.

Supply

• Supply: the entire relationship between price and quantity supplied as shown in a table or graph.
• Supply shows various quantities of commodities sellers are willing to sell given specific prices, in a specific market for a specific period of time.
• Quantity supplied: the specific amount or quantity of commodities sellers are willing to sell given a specific price, in a specific market for a definite period of time.
• Law of Supply: as the price of a commodity increases, the quantity supplied increases, and vice versa, assuming ceteris paribus.
• Law of Supply: price and quantity supplied have a direct or positive relationship.

Supply Function and Inverse Supply Function

• Supply function: Qs = a + bP
• Inverse supply function: P = a + bQs

Movement Along the Supply Curve and Shift in the Supply Curve

• Movement along the supply curve: a change in price brings about a change in quantity supplied, moving along the same supply curve.
• Shift in the supply curve: a change in one or more non-price factors of supply brings about a change in supply, shifting the supply curve.

Non-Price Factors of Supply

• Price of factors inputs: decrease in price leads to an increase in supply.
• Producer's motives: favorable change leads to an increase in supply.
• Improvement in technology: advancement leads to an increase in supply.
• Taxes: decrease in taxes leads to an increase in supply.
• Budget of the firm: increase in budget leads to an increase in supply.
• Subsidies: increase in subsidies leads to an increase in supply.
• Expectations of future prices: decrease in expected prices leads to an increase in supply.
• Weather/climate: favorable change leads to an increase in supply.
• Availability of resources: increase in availability leads to an increase in supply.
• Number of sellers: increase in number of sellers leads to an increase in supply.

Equilibrium

• Equilibrium: the point where buyers and sellers agree on the quantity of commodities bought and sold at a particular price.
• Equilibrium: intersection of the demand curve and supply curve = equilibrium quantity and equilibrium price.
• Algebraic computation of the equilibrium price and equilibrium quantity:
  • Qd = Qs
  • Equilibrium price: P = 2.5
  • Equilibrium quantity: Q = 50

Disequilibrium

• Surplus: if the price goes higher than the equilibrium price, Qd < Qs.
• Shortage: if the price goes lower than the equilibrium price, Qd > Qs.
• Price ceiling: maximum price a commodity may be sold in the market, aiming to protect consumers against unscrupulous businessmen.
• Price floor: minimum price a commodity may be sold in the market, aiming to protect producers or sellers from abusive buyers.

Comparative Statistics and Comparative Dynamics

• Comparative statistics: interested only in the equilibrium values of the variables involved in the analysis.

• Comparative dynamics: interested in the movement over time of the variables involved in the analysis, as one equilibrium position evolves into another.### Introduction to Economics

• Economics is the social science that deals with the efficient allocation of scarce resources to satisfy man's unlimited needs and wants.

• The term "economics" comes from the Greek word "oeikonomia," meaning "art of household management" or "budgeting."

• Adam Smith's treatise "The Wealth of Nations" (1776) is considered a foundational work in economics.

Resources and Their Classification

• Resources are classified into two groups: economic and non-economic.
• Economic resources are scarce, have a price attached, and need to be allocated efficiently.
• Non-economic resources are free, abundant, and do not require efficient allocation.
• Economic resources or factors of production are divided into two types: human resources (labor, entrepreneurial ability) and non-human resources (land, capital).
• Human resources include labor, which is mental and physical effort, and entrepreneurial ability, which is the organizer of production activity and a risk-taker.
• Non-human resources include land, which is all natural resources, and capital, which is man-made goods used to produce other goods.

Scarcity, Needs, and Wants

• Scarcity is the basic problem of economics.
• Man's needs and wants are unlimited, insatiable, and constantly changing and dynamic.
• Needs and wants can be classified into three categories: basic, secondary, and luxury.
• Basic needs are essential for survival, secondary needs are desirable, and luxury needs are non-essential.

Technology and Products

• Technology is used to create products that satisfy needs and wants.
• There are two types of technology: labor-intensive and capital-intensive.
• Products can be either goods or services.
• Goods are tangible and material, while services are intangible and immaterial.
• Goods can be classified into three categories: consumer goods, capital goods, and raw materials.

Fundamental Economic Activities

• There are four fundamental economic activities: production, distribution, exchange, and consumption.
• Production involves the creation of products.
• Distribution involves making goods available to consumers through different channels.
• Exchange involves giving money in return for products.
• Consumption involves the utilization of products.

Economic Systems

• There are four types of economic systems: traditional, command, market, and mixed.
• Traditional economic systems rely on customs and traditions to answer fundamental economic questions.
• Command economic systems rely on the government or a central-planning body to answer fundamental economic questions.
• Market economic systems rely on the price system to answer fundamental economic questions.
• Mixed economic systems combine elements of market and command systems.

Methodology of Economics

• The methodology of economics involves five steps: observation, definitions and assumptions, deductions, empirical verification, and policy formulation and application.
• Observation involves identifying a specific problem and collecting relevant data.
• Definitions and assumptions involve giving operational meaning to terms and setting conditions.
• Deductions involve analyzing and formulating generalizations or conclusions.
• Empirical verification involves testing hypotheses using statistical tools.
• Policy formulation and application involves formulating solutions and implementing policies.

Phases of Economics

• There are three phases of economics: descriptive, theoretical, and applied.
• Descriptive economics involves observing and describing economic events.
• Theoretical economics involves analyzing and explaining economic events.
• Applied economics involves formulating policies to address economic problems.

Branches of Analysis

• There are two branches of analysis in economics: positive and normative.
• Positive economics deals with "what is" and relies on facts only.
• Normative economics deals with "what should be" and uses both facts and value judgments.
• Value judgments involve considering belief systems, customs, and traditions, as well as environmental considerations.

Approaches in the Study of Economics

• There are two approaches in the study of economics: microeconomics and macroeconomics.
• Microeconomics involves the study of individual units or specific sectors of the economy.
• Macroeconomics involves the study of the economy as a whole.

Ten Principles of Economics

• The ten principles of economics are divided into three categories: how individuals make decisions, how people interact, and how the economy as a whole works.

How Individuals Make Decisions

• Principle 1: People face trade-offs, and there is no such thing as a "free lunch."
• Principle 2: The cost of something is what you give up to get it, including opportunity costs.
• Principle 3: Rational people think at the margin, making decisions based on marginal benefits and costs.
• Principle 4: People respond to incentives, which can be positive or negative.

How People Interact

• Principle 5: Trade can make everyone better off, allowing countries to specialize and buy goods at a lower cost.
• Principle 6: Markets are usually a good way to organize economic activity, using the price system to allocate resources.
• Principle 7: Governments can sometimes improve market outcomes, enforcing property rights and correcting market failures.

How the Economy as a Whole Works

• Principle 8: A country's standard of living depends on its ability to produce goods and services, attributed to productivity.
• Principle 9: Prices rise when the government prints too much money, leading to inflation.
• Principle 10: Society faces a short-run trade-off between inflation and unemployment, as observed in the Phillips' Curve.

Test your knowledge of various topics including geography, history, and science. Answer questions about the capital city of France, the location of the Great Wall of China, and the boiling point of water.