Introduction to Economics Quiz

Introduction to Economics

• Economics studies how individuals and societies allocate scarce resources to satisfy unlimited wants.
• Scarcity means there are limited resources, but unlimited wants, leading to choices and trade-offs.
• Opportunity cost is the value of the most valuable alternative forgone.

The Economic Problem

• Factors of production are the inputs used to create goods and services:
  • Land: Natural resources (minerals, forests)
  • Labor: Human effort (workers in a factory)
  • Capital: Tools and machinery (computers, factories)
  • Entrepreneurship: Ability to combine resources and take risks for new products
• Production Possibility Curve (PPC) shows the maximum combinations of goods an economy can produce with its available resources.
• Economic growth, caused by technological improvements or increased resources, shifts the PPC outwards.

Demand and Supply

• Law of Demand: As the price of a good decreases, the quantity demanded increases, and vice versa.
• Demand Curve: Visual representation of the relationship between price and quantity demanded, sloping downwards.
• Law of Supply: As the price of a good increases, the quantity supplied increases, and vice versa.
• Supply Curve: Visual representation of the relationship between price and quantity supplied, sloping upwards.
• Market Equilibrium: The point where quantity demanded equals quantity supplied.
• Shifts in Demand: Affected by income, tastes, prices of related goods, expectations.
• Shifts in Supply: Affected by production costs, technology, number of suppliers, expectations.

Market Structures

• Perfect Competition: Many firms, selling identical products, with no individual control over pricing. (Example: Agriculture)
• Monopolistic Competition: Many firms, selling differentiated products, with some price control. (Example: Restaurants)
• Oligopoly: Few firms, with interdependent pricing decisions, potential for collusion. (Example: Airlines)
• Monopoly: Single firm controlling the market, significant price-setting power, barriers to entry. (Example: Local utility companies)

Government Intervention

• Governments intervene in markets to correct market failures, redistribute income, and promote economic stability.
• Types of Intervention:
  • Taxes: To reduce negative externalities (example: Cigarette taxes).
  • Subsidies: To encourage positive externalities (example: Renewable energy subsidies).
  • Regulations: To enforce standards & protect consumers (example: Environmental regulations).
  • Price Controls:
    • Minimum Price (Floor): Prevents prices from falling below a certain level (example: Minimum wage)
    • Maximum Price (Ceiling): Prevents prices from rising above a certain level (example: Rent controls)

Development Economics

• Economic Development: Aims to improve living standards, education, health.
• Economic Growth: Focuses on increasing GDP (Gross Domestic Product).
• Challenges to Development:
  • Poverty: Lack of access to resources and opportunities.
  • Inequality: Disparities in wealth and income distribution.
  • Corruption: Erosion of trust and efficiency in governance.