Introduction to Economics Quiz

Introduction to Microeconomics

• Microeconomics studies individual choices of consumers, businesses, and governments, and how these choices interact.
• Macroeconomics studies the aggregate effects of these choices on the overall economy.

Scarcity

• Scarcity arises when human wants exceed available resources.
• Scarcity necessitates choices.
• Choices depend on the incentives that individuals face.

Economic Questions

• How do choices determine what, how, and for whom goods and services are produced? • What goods and services get produced, and in what quantities? • How are goods and services produced? • For whom are the various goods and services produced?
• When do choices made in self-interest also promote the social interest? • Is globalization in the social interest? • Does the pursuit of self-interest also serve the social interest related to the information revolution?

The Economic Way of Thinking

• Choice is a tradeoff.
• Cost is what you must give up to get something.
• Benefit is what you gain from something.
• People make rational choices by comparing benefits and costs.
• Most choices are "how much" choices made at the margin.
• Choices respond to incentives.

Economics as a Social Science

• Economists use the scientific method to understand and predict economic forces.
• Economists use models to describe economic phenomena.
• Economists use natural experiments, statistical investigations, and/or economic experiments to test models against facts.

Economics as a Policy Tool

• Economics provides a way to approach problems in personal, business, and government contexts.
• Understanding scarcity, incentives, and choices is key to making sound economic decisions.
• Disagreements among economists can be based on different assumptions and beliefs about policy choices.

Graphs in Microeconomics

• Graphs show relationships between variables.
• The x-axis is the horizontal axis.
• The y-axis is the vertical axis.
• The origin is the point where both axes intersect (0,0).

Interpreting Data Graphs

• A scatter diagram shows the value of one variable against another.
• A time-series graph plots a variable over time.
• A trend shows how a variable is changing.
• A cross-section graph shows the values of an economic variable across different groups at a point in time.

The Production Possibilities Frontier (PPF)

• The PPF demonstrates the various combinations of goods and services an economy can produce given its resources and technology.
• Points on the PPF are attainable and efficient.
• Points inside the PPF are attainable but inefficient.
• Points outside the PPF are unattainable.
• The shape of the PPF reflects increasing opportunity costs for producing more of one good.
• The PPF shifts outward when an economy grows.

Opportunity Cost

• Opportunity cost is the highest-valued alternative forgone.
• Opportunity cost increases as production of one good increases.
• The slope of the PPF reflects opportunity cost.

Economic Growth

• An economy grows when the quantity of resources increases, or when there are improvements to technology, quality of labor, or quantity of capital.
• Economic growth causes the PPF to shift outward.

Specialization and Trade

• Specialization in goods with comparative advantage makes individuals and nations more productive and allows for greater gains from trade.

Price Elasticity of Demand

• Measures the sensitivity of quantity demanded to price changes.
• A high elasticity indicates that consumers respond significantly to price changes.
• Factors that influence price elasticity include: availability of substitutes, the proportion of income spent on a good, and the time elapsed since the price change.

Price Elasticity of Supply

• Measures the sensitivity of quantity supplied to price changes.
• A high elasticity indicates that producers respond significantly to price changes.
• Factors that influence price elasticity of supply include: production possibilities and storage possibilities.

Market Equilibrium

• Equilibrium occurs when quantity demanded equals quantity supplied.
• Market forces (i.e. price changes) bring markets to equilibrium.
• A surplus occurs when quantity supplied exceeds quantity demanded, and prices fall to achieve equilibrium.
• A shortage occurs when quantity demanded exceeds quantity supplied, and prices rise to achieve equilibrium.
• Market equilibrium maximizes total economic surplus.

Government Actions in Markets

• Price ceilings place an upper limit on prices (e.g. rent controls). • Price floors set a lower limit on prices (e.g. minimum wage). • Production quotas place an upper limit on production, or supply.

Taxes

• Taxes influence prices and quantities, creating deadweight losses.
• The incidence of a tax depends on the price elasticities of demand and supply.

This quiz covers fundamental concepts in economics, including the basic principles of economic thinking and the typical approaches economists take in their work. Test your understanding of key assumptions and questions that economists address.