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Questions and Answers
Which of the following is considered a factor of production?
Which of the following is considered a factor of production?
Opportunity cost refers to the benefit received from the next best alternative when a resource is used.
Opportunity cost refers to the benefit received from the next best alternative when a resource is used.
True
What are the four key economic problems identified in microeconomics?
What are the four key economic problems identified in microeconomics?
What is produced and how, resource allocation, consumption distribution, and idle resources.
The study of economics focuses on the use of __________ resources to satisfy unlimited human wants.
The study of economics focuses on the use of __________ resources to satisfy unlimited human wants.
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Match the following economic issues with their descriptions:
Match the following economic issues with their descriptions:
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Points inside the production possibilities boundary indicate:
Points inside the production possibilities boundary indicate:
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Scarcity implies that all goods are abundant and freely available.
Scarcity implies that all goods are abundant and freely available.
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What is the main focus of microeconomics?
What is the main focus of microeconomics?
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What economic concept explains that focusing on one activity leads to improvements?
What economic concept explains that focusing on one activity leads to improvements?
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All economies are purely traditional, command, or free-market systems.
All economies are purely traditional, command, or free-market systems.
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What role does government play in a modern mixed economy?
What role does government play in a modern mixed economy?
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Money eliminates the cumbersome system of ______ by facilitating specialization trade.
Money eliminates the cumbersome system of ______ by facilitating specialization trade.
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Match the following types of economic systems with their characteristics:
Match the following types of economic systems with their characteristics:
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Which statement is TRUE regarding positive and normative statements?
Which statement is TRUE regarding positive and normative statements?
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What is the central approach of economics that involves testing theories?
What is the central approach of economics that involves testing theories?
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A theory is considered valid as long as it has some confirming evidence.
A theory is considered valid as long as it has some confirming evidence.
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What occurs when a price floor is set above the equilibrium price?
What occurs when a price floor is set above the equilibrium price?
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Price ceilings are implemented to increase production levels in the market.
Price ceilings are implemented to increase production levels in the market.
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Who benefits from binding rent controls?
Who benefits from binding rent controls?
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A market where goods are sold at illegal prices is known as a ______.
A market where goods are sold at illegal prices is known as a ______.
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What might lead to a housing shortage as a consequence of rent controls?
What might lead to a housing shortage as a consequence of rent controls?
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Match the following concepts with their corresponding descriptions:
Match the following concepts with their corresponding descriptions:
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Binding price ceilings can satisfy normative notions of social equity.
Binding price ceilings can satisfy normative notions of social equity.
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What is the relationship between demand and supply regarding market efficiency?
What is the relationship between demand and supply regarding market efficiency?
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What does the formula for supply elasticity (Ns) represent?
What does the formula for supply elasticity (Ns) represent?
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If income elasticity (Ny) is greater than 0, the good is classified as inferior.
If income elasticity (Ny) is greater than 0, the good is classified as inferior.
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What are the two categories of goods based on income elasticity?
What are the two categories of goods based on income elasticity?
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If Nxy > 0, the goods are considered _____ related.
If Nxy > 0, the goods are considered _____ related.
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Match the terms with their correct definitions:
Match the terms with their correct definitions:
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What does a decrease in supply elasticity indicate?
What does a decrease in supply elasticity indicate?
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General equilibrium analysis is simpler than partial-equilibrium analysis.
General equilibrium analysis is simpler than partial-equilibrium analysis.
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What factor primarily determines the burden of an excise tax?
What factor primarily determines the burden of an excise tax?
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What is the effect of a price floor on total surplus?
What is the effect of a price floor on total surplus?
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Government intervention in competitive markets always increases overall economic surplus.
Government intervention in competitive markets always increases overall economic surplus.
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What happens to marginal utility as the total consumption of a product increases?
What happens to marginal utility as the total consumption of a product increases?
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A change in consumer surplus due to a price ceiling is represented as C - D. The change in producer surplus is represented as __________.
A change in consumer surplus due to a price ceiling is represented as C - D. The change in producer surplus is represented as __________.
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Match the following terms with their descriptions:
Match the following terms with their descriptions:
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How does a consumer maximize utility?
How does a consumer maximize utility?
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Output quotas can also lead to deadweight loss in a market.
Output quotas can also lead to deadweight loss in a market.
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What is the utility-maximizing condition for two products X and Y?
What is the utility-maximizing condition for two products X and Y?
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Study Notes
Economic Issues
- Productivity growth, population aging, climate change, global financing stability, rising government debt, and globalization are significant economic issues.
What is economics?
- The study of using limited resources to satisfy unlimited wants.
Resources:
- Factors of production are also known as resources.
- Resources are divided into:
- Land
- Labor
- Capital
Outputs
- Outputs are goods (tangible items) or services (intangible items).
Scarcity & Opportunity Cost
- Scarcity mandates the need for choice.
- Opportunity cost is the cost of the best alternative forgone.
Production Possibilities Boundary (PPB)
- The PPB illustrates scarcity, choice, and opportunity cost.
- Points within or on the boundary are attainable combinations.
- The line itself, called the PPB, provides a boundary between attainable and unattainable combinations.
- The negative slope of the PPB shows opportunity cost.
Four Key Economic Problems
- What goods and services will be produced?
- This is determined by the allocation of resources.
- What gets consumed and by whom?
- This addresses the distribution of output.
- Why are resources sometimes idle?
- It is more efficient than self-sufficiency due to comparative advantage and learning by doing.
Division of Labor
- Extends the idea of specialization for the production of a single good or service.
Production and Trade
- Specialization necessitates trade.
- Money facilitates specialization and trade by eliminating barter.
Types of Economic Systems
- Traditional
- Command
- Free-Market
Government in the Modern Mixed Economy
- Key government-provided institutions in market economies are private property and freedom of contract.
- Government intervenes by:
- Correcting market failures
- Providing public goods
- Offsetting externalities
Normative Statements
- Statements based on value judgments and opinions.
Positive Statements
- Statements about what is, was, or will be, regardless of value judgments.
Theories
- A set of definitions about variables, assumptions, and predictions.
Testing Theories
- Theories are tested by comparing predictions with evidence.
- Theories undergo the scientific approach in economics.
Rejection vs. Confirmation
- A hypothesis can be rejected by data, which brings the value of the theory into question.
- Searching for confirming evidence alone isn't a reliable way to test a theory.
Statistical Analysis
- A method to test a hypothesis.
- It is used for data that can be observed and recorded continuously.
Correlation Vs. Causation
- Correlation does not automatically implies causation.
Demand Elasticity
- The measure of responsiveness of quantity demanded to changes in price.
Price Elasticity of Demand
- Elasticity measures how much quantity demanded changes in response to price changes.
- Ed = percentage change in quantity demanded/ percentage change in price
- Elastic demand (Ed > 1): Sensitive to price changes
- Inelastic demand (Ed < 1): Insensitive to price changes
- Unitary elasticity (Ed = 1): Quantity demanded changes proportionally to price.
Determinants of Demand Elasticity
- Availability of Substitutes: More substitutes mean higher elasticity
- Time Span: Longer time periods allow for more adjustments and lead to higher elasticity.
- Percentage of Income Spent: A larger percentage of budget spent signifies higher elasticity.
- Nature of the Good: Luxury goods have higher elasticity compared to necessities.
Total Revenue Test
- Helps determine if demand is elastic or inelastic.
- Elastic Demand: Price and total revenue move in opposite directions.
- Inelastic Demand: Price and total revenue move in the same direction.
Supply Elasticity
- Measures how much quantity supplied changes in response to price changes.
- Ns = Percentage change in quantity supplied / percentage change in price
Determinants of Supply Elasticity
- The ease of increasing production in response to price changes.
- This depends on:
- Technical ease of substitution in production
- The time span
- Nature of production costs.
Excise Tax and Elasticity
- The burden of an excise tax depends on the relative elasticities of demand and supply.
Income Elasticity of Demand
- Measures how much quantity demanded changes in response to income changes.
- Ny = percentage change in quantity demanded / percentage change in income
- Normal Good: Ny > 0; Demand increases with income.
- Inferior Good: Ny < 0; Demand decreases with income.
Luxuries vs. Necessities
- Necessities have lower income elasticity.
- Income elasticities also vary based on your income level.
- The distinction between luxury and necessity influences income elasticities between countries.
Cross Elasticity of Demand
- Measures how much quantity demanded of one good changes in response to the price change of another good.
- Nxy = percentage change in quantity demanded of good X / percentage change in price of good Y.
- Substitutes: Nxy > 0; Quantity demanded for good X increases when the price of Y increases.
- Complements: Nxy < 0; Quantity demanded for good X decreases when the price of Y increases.
The Interaction Among Markets
- Partial-equilibrium analysis focuses on a single market in isolation, ignoring feedback from other markets.
- General-equilibrium analysis examines all markets simultaneously, taking into account feedback effects.
Government-Controlled Prices
- Prices set by government intervention, not market forces.
Disequilibrium Prices
- Prices that lead to excess supply or excess demand.
Price Floor
- A minimum price set by the government, which is above the equilibrium price.
- Examples include:
- Minimum wage
- Alcohol pricing.
Price Ceiling
- A maximum price set by the government, which is below the equilibrium price.
Black Market
- A market where goods are sold at illegal prices.
The Prediction Effects of Rent Controls
- Rent controls are a form of price ceiling.
- Effects include:
- Housing shortage
- Black markets
- Illegal schemes
Economic Surplus and Market Efficiency
- Market efficiency is measured by overall societal well-being.
- Demand represents value, and supply represents cost.
- The price reflects the highest price consumers are willing to pay and the lowest price producers are willing to accept.
Economic Surplus
- The difference between the total value consumers place on a good (based on demand) and the total cost producers incur to produce it (based on supply).
Market Efficiency and Price Controls
- Price Floor: Creates deadweight loss (D+E)
- Price Ceiling: Creates deadweight loss (D+E)
- Output Quota: Creates deadweight loss (D+E)
Output Quotas
- Limits on the quantity of a good that can be produced.
Cautionary Word Regarding Government Intervention
- Government intervention redistributes surplus between buyers and sellers.
- However, it often leads to overall losses.
- Government policies often benefit a specific group, but economists need to analyze their actual impact.
Diminishing Marginal Utility
- Utility derived from successive units of a product decreases as total consumption increases.
Utility Schedules and Graphs
- Depict the relationship between utility and quantity consumed.
Maximizing Utility
- Consumers allocate spending to maximize total utility.
- The utility obtained from the last dollar spent on each product should be equal.
The Consumer Demand Curve
- The consumer demand curve shows how much of a good a consumer will purchase at various prices.
Income and Substitution Effects
- Income Effect: The change in quantity demanded due to changes in purchasing power caused by price changes.
- Substitution Effect: The change in quantity demanded due to price changes making other goods relatively more or less attractive.
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Description
This quiz explores fundamental concepts in economics, including productivity growth, scarcity, and opportunity cost. It covers key topics such as resources, outputs, and the Production Possibilities Boundary (PPB). Test your understanding of these essential economic principles.
