Introduction to Economics Quiz

Basic Economic Concepts

• Economics is the study of how people, firms, and societies use scarce resources to satisfy unlimited wants.
• Scarcity is a fundamental economic problem because resources are limited, while wants are unlimited.
• Macroeconomics focuses on the overall economy, considering factors like aggregate output, inflation, and unemployment.
• Microeconomics focuses on individual economic agents like consumers, firms, and industries.
• Resources, or factors of production, are scarce: land, labor, capital, and entrepreneurship.

Scarcity

• All factors of production (land, labor, capital, and entrepreneurship) are scarce; therefore, the production of goods and services is also scarce.
• The economic problem is that human wants are unlimited, while the resources to produce those goods and services are limited.

Macroeconomics vs. Microeconomics

• Macroeconomics analyzes the economy as a whole, examining aggregate indicators like national income, unemployment, and inflation rates.
• Microeconomics examines the behavior of individual economic agents like households and firms, and their impact on specific markets.

Resources or Factors of Production

• Labor: Human effort and talent (physical and mental), augmented by education and training.
• Land: Natural resources like minerals, oil, water, and arable land.
• Physical capital: Human-made equipment, buildings, roads, vehicles, and computers.
• Entrepreneurship: The ability to combine other resources to create a productive venture.

Organizations of Society

• Tradition: Tied to subsistence and tribal life. Economic planning and distribution of resources are determined by customs and societal norms.
• Command: Centralized economic planning typically found in communist or socialist systems, where a governing institution dictates production and distribution of goods.
• Market: An economy where buyers and sellers interact to establish prices and exchange goods/services. Decentralized and typically governed by the laws of supply and demand.
• Mixed Economy: Most modern economies are this, combining market mechanisms with some degree of government intervention, regulation, and ownership.

Opportunity Costs & Trade-offs

• Opportunity cost is the value of the next best alternative forgone when a decision is made
• Choices involve trade-offs, wherein one benefit is offset by a loss of another

Production Possibilities Curve (PPC)

• A PPC is a simplified graphical model of production possibilities that considers the trade-offs when an economy produces two goods or services.
• PPC curves are usually concave-shaped, meaning that the opportunity cost of one good increases as more of it is produced, implying that factors of production are not perfectly interchangeable.

Constant vs. Increasing Opportunity Cost

• Constant opportunity cost: Products can be made effectively using the same amount of resources
• Increasing opportunity cost: There is an increased opportunity cost when choosing one good over the other, making PPC concave, wherein specialization limits resources.

Efficiency

• Productive efficiency occurs at all points along a PPC, wherein the economy is producing maximum feasible output for a given level of technology and resources.
• Allocative efficiency occurs at the point on the PPC that the consumers want. It ensures resources move towards meeting maximum consumer satisfaction.

Economic Growth

• Economic growth is the ability of a country to produce a greater total output of goods or services over time.
• Factors that accelerate economic growth are increases in resources, quality of resources, and technological advancements.

Comparative Advantage & Trade

• Absolute advantage: The advantage a country or entity has over another in producing a good or service using fewer inputs.

• Comparative advantage: The ability of a country or production entity to produce a good or service at a lower opportunity cost relative to another country or entity.

Law of Demand

• The law of demand states that consumers will demand more of a product at a lower price and less at a higher price (inverse relationship)

Law of Supply

• The law of supply states that producers will supply more of a good or service at a higher price and less at a lower price (positive relationship)

Market Equilibrium

• Market equilibrium is the point at which the quantity demanded and supplied are equal.

Determinants of Demand

• Income
• Number of Buyers
• Substitutes
• Expectations of Future Price
• Complements
• Tastes and Preferences

Determinants of Supply

• Resources
• Other good prices
• Taxes
• Technology
• Expectations of the supplier
• Number of competitors

Market Equilibrium

• Market equilibrium is found where supply and demand intersect

Market Disequilibrium

• A market is in disequilibrium when supply and demand do not intersect
• A shortage occurs when quantity demanded is greater than quantity supplied
• A surplus occurs when quantity supplied is greater than quantity demanded

Circular Flow Model

• Illustrates the flow of resources, goods, and income between households and firms in a simplified economy

Gross Domestic Product (GDP)

• GDP: A measure of the market value of all final goods and services produced within a country in a given period.
• GDP incorporates consumption spending, investment spending, government spending, and net exports.

National Income Concepts

• Aggregate income (AI) is the sum of all income earned by resource suppliers (wages, rents, interests, and profits)

Limitations of GDP

• Population differences
• Inequality
• Environment
• Shadow economy

Measuring Unemployment

• Employed: At least one hour of paid work in the previous week
• Unemployed: Actively seeking work in the previous four weeks and available to work.
• Unemployment rate: percentage of labor force that is unemployed.

Types of Unemployment

• Frictional unemployment: Transition between jobs when a worker leaves one job and finds another.
• Seasonal unemployment: Changes in employment related to the seasons.
• Structural unemployment: Fundamental changes in the economy that shift the demand for certain skills.
• Cyclical unemployment: Changes in employment related to the business cycle.

Price Indices and Inflation

• CPI (consumer price index): Measures the average change in prices for consumers in a given period
• GDP deflator: Measures the average change in prices for all final goods and services

Real vs. Nominal GDP

• Nominal GDP values output at current prices.
• Real GDP values output at base-year prices.

Business Cycles

• Expansions
• Peaks
• Contractions
• Troughs

Aggregate Demand (AD)

• AD is the total spending on domestically produced goods and services at a given price level
• Inverse relationship between price level and real GDP

Aggregate Supply (AS)

• AS is the total real output supplied at various price levels
• Positive relationship between price level and real GDP

Short-Run vs Long-Run Aggregate Supply

• Short run depicts output of goods and services which can easily adapt to changing prices.
• Long run depicts all resources having sufficient time to fully adjust their prices and quantities.

Fiscal Policy

• Fiscal policy refers to policy changes implemented by the government through changes in government spending (G) or net taxes (T).

Monetary Policy

• Monetary Policy is a set of actions of a central bank to control the supply of money and credit to maintain price stability, full employment, and stable currency.
• Tools used are open market operations, discount rates, and reserve requirements.

Loanable Funds Market

• Loanable funds market shows the interaction between borrowers and lenders in an economy at different real interest rates.

Open Economy

• An economy interacting with other economies, influencing each other's growth and stability. This is an economy that participates in international trade.

Foreign Exchange Market

• The exchange rate in the currency market to measure the exchange rates available.

Tariffs and Quotas

• Tariffs: Taxes on imported goods
• Quotas: Limits on the quantity of imported goods.

Test your knowledge of fundamental economics concepts through this quiz. Explore topics such as scarcity, factors of production, and the effects of economic cycles like inflation and recession. Perfect for students looking to solidify their understanding of introductory economics.