Introduction to Economics
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Questions and Answers

What is the primary focus of macroeconomics?

  • Scarcity of resources
  • Economic goals of countries (correct)
  • Choices individuals make
  • Individual economic behavior

What defines an economic good?

  • An abundant resource
  • A resource with no production cost
  • A scarce resource (correct)
  • A resource with unlimited supply

Which of the following best describes scarcity?

  • Abundance of resources
  • A state where all needs are met
  • A situation with no trade-offs
  • Unlimited wants and limited resources (correct)

What is opportunity cost?

<p>The next best alternative given up (B)</p> Signup and view all the answers

What does 'Ceteris Paribus' assume?

<p>One variable changes while others remain constant (C)</p> Signup and view all the answers

What is included under the term 'capital' in factors of production?

<p>Human-made resources used to create goods (B)</p> Signup and view all the answers

What best describes a 'free good'?

<p>A good with no scarcity (C)</p> Signup and view all the answers

Which of the following roles does entrepreneurship play in the economy?

<p>Brings together all factors of production (B)</p> Signup and view all the answers

What does Price Elasticity of Demand (PED) measure?

<p>The responsiveness of quantity demanded to price changes. (D)</p> Signup and view all the answers

Which of the following goods is most likely to have elastic demand?

<p>Luxury items (D)</p> Signup and view all the answers

If a product has a PED of less than 1, it is considered to have what type of demand?

<p>Inelastic demand (A)</p> Signup and view all the answers

What happens to total revenue when the price of an inelastic good increases?

<p>Total revenue increases. (D)</p> Signup and view all the answers

Which statement is true regarding goods with elastic demand?

<p>Price changes greatly affect the quantity demanded. (C)</p> Signup and view all the answers

Which factor would likely make demand for a product more elastic?

<p>The product has many close substitutes. (B)</p> Signup and view all the answers

In terms of elasticity, what category do tobacco products generally fall into?

<p>Inelastic (B)</p> Signup and view all the answers

What is indicated by a price elasticity greater than 1?

<p>Demand is elastic. (A)</p> Signup and view all the answers

What does marginal utility refer to?

<p>The additional satisfaction from consuming one more unit (A)</p> Signup and view all the answers

Which of the following best defines stagflation?

<p>High inflation with stagnant economic growth and high unemployment (C)</p> Signup and view all the answers

What is the main focus of monetarists in economics?

<p>The amount of money in the economy (B)</p> Signup and view all the answers

How does the law of demand describe the relationship between price and quantity demanded?

<p>An increase in price generally leads to a decrease in quantity demanded (D)</p> Signup and view all the answers

What is a Veblen good?

<p>A luxury good for which demand increases with higher prices (B)</p> Signup and view all the answers

Which concept explains why quantity demanded decreases when prices go up?

<p>Income effect (C)</p> Signup and view all the answers

Which of the following is NOT a non-price determinant of demand?

<p>The current price of the good (C)</p> Signup and view all the answers

What does individual demand represent?

<p>Demand from a specific consumer for a product (B)</p> Signup and view all the answers

What best defines 'land' in economic terms?

<p>Any natural resource used to produce goods and services. (A)</p> Signup and view all the answers

Which economic system allows individuals to make decisions with minimal government intervention?

<p>Free market economy (C)</p> Signup and view all the answers

What does 'thinking on the margin' refer to in economic decision-making?

<p>Evaluating choices based on incremental changes. (A)</p> Signup and view all the answers

Which statement accurately describes a mixed economy?

<p>It combines elements of both market and command economies. (C)</p> Signup and view all the answers

What is represented by the Production Possibilities Curve (PPC)?

<p>The maximum combinations of goods a firm or country can produce with available resources. (B)</p> Signup and view all the answers

In which economic system are roles typically passed down through generations?

<p>Traditional economy (D)</p> Signup and view all the answers

What does efficiency imply in the context of resource use?

<p>Resources are used in the best possible way with no waste. (C)</p> Signup and view all the answers

Which of the following best describes a command/centrally planned economy?

<p>The government controls production, distribution, and pricing. (B)</p> Signup and view all the answers

If the income elasticity of demand (YED) for a good is negative, what type of good is it considered?

<p>Inferior good (C)</p> Signup and view all the answers

In which scenario would you expect total revenue to decrease?

<p>Price of an elastic good increases (B)</p> Signup and view all the answers

What does the Engel Curve illustrate?

<p>The relationship between income and quantity demanded (C)</p> Signup and view all the answers

When the price of a unit elastic good changes, what happens to total revenue?

<p>Total revenue remains unchanged (B)</p> Signup and view all the answers

What does opportunity cost represent when making a choice?

<p>The value of the best alternative forgone. (D)</p> Signup and view all the answers

What causes the production possibility curve (PPC) to be 'bowed out'?

<p>Different resources are suited for different goods. (A)</p> Signup and view all the answers

What is the definition of scarcity?

<p>When demand exceeds the availability of a good or service. (D)</p> Signup and view all the answers

What is meant by actual growth in an economy?

<p>Growth achieved through improved resource utilization. (D)</p> Signup and view all the answers

What is an example of a leakage in an economy?

<p>Taxes collected from citizens. (B)</p> Signup and view all the answers

What happens to Gross National Income (GNI) during a recession?

<p>It falls because leakages grow larger than injections. (D)</p> Signup and view all the answers

Which of the following describes a closed circular flow?

<p>A model without any money flowing out of the economy. (B)</p> Signup and view all the answers

What principle does classical economics advocate for?

<p>Private ownership supported by individual empowerment. (D)</p> Signup and view all the answers

Flashcards

Microeconomics

The study of individual economic behavior.

Macroeconomics

The study of the economy as a whole, and countries' goals.

Economic good

A scarce good; limited in supply.

Free good

A good with unlimited supply; no scarcity.

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Opportunity cost

The value of the next best alternative given up.

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Scarcity

Limited resources with unlimited wants.

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Trade-off

Alternatives given up when a choice is made.

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factors of production

Resources used to produce goods and services.

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Land (Resource)

Any natural resource used to produce goods and services. Anything that comes naturally from the earth.

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Labor (Resource)

A person who devotes effort to a task and is usually paid for their work.

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Thinking at the Margin

Making decisions based on increments, considering only the additional costs and benefits of a choice.

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Traditional Economy

An economic system where roles and jobs are passed down through generations, often involving hunting, gathering, or bartering.

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Command Economy

An economic system where the government controls all aspects of the economy, from production to distribution.

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Market Economy

An economic system where individuals and businesses decide what to produce and consume based on supply and demand.

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PPC (Production Possibilities Curve)

A model representing the different combinations of goods and services a country or firm can produce with its maximum resources.

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Economic Efficiency

Using resources in the best possible way to produce goods and services with minimal waste and maximum output.

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Increasing opportunity cost

As you produce more of one good, the opportunity cost of producing another good increases.

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Potential growth

An increase in the maximum amount that can be produced, shifting the production possibilities curve outwards.

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Closed circular flow

A simplified economic model where money flows between households and firms, with no outside influence.

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Open circular flow

A more realistic economic model where money flows between households, firms, and the government, with international trade and leakages.

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Leakages

Money that flows out of an economy, such as savings, taxes, and imports.

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Injections

Money that flows into an economy, such as investments, government spending, and exports.

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Marginal Utility

The extra satisfaction gained from consuming one more unit of a good or service.

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Law of Demand

The inverse relationship between price and quantity demanded. As price rises, quantity demanded usually falls, ceteris paribus.

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Income Effect

The change in quantity demanded due to a change in purchasing power caused by a price change.

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Substitution Effect

The change in quantity demanded of a good due to a change in the relative price of another good.

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Diminishing Marginal Utility

The extra satisfaction from each additional unit consumed decreases as you consume more of a good.

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Shifters of Demand

Factors other than price that affect the demand for a good. Examples: income, tastes, prices of related goods, expectations.

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Veblen Good

A luxury good where demand increases as price increases, contradicting the law of demand.

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Non-price Determinants of Demand

Factors that influence demand besides price. These include income, tastes, price of related goods, consumer expectations, etc.

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Price Elasticity of Demand (PED)

A measure of how much the quantity demanded of a good changes when its price changes.

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Elastic Demand

When a small change in price leads to a large change in quantity demanded.

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Inelastic Demand

When a change in price has little effect on the quantity demanded.

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What happens to total revenue (TR) if the demand for a good is inelastic and the price increases?

Total revenue will increase. If the demand is inelastic, people will still buy the good even if the price goes up, leading to more revenue.

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What are the determinants of PED?

Factors influencing the sensitivity of demand to price changes, including: 1. Availability of substitutes: More substitutes, more elastic. 2. Necessity vs. Luxury: Luxuries are more elastic. 3. Proportion of income: Goods with a larger proportion of income are more elastic. 4. Time period: Demand becomes more elastic over longer periods.

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Percentage change formula

Used to calculate the change in a value, comparing the new value to the old value. The formula is (New Value - Old Value) / Old Value * 100.

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PED Formula

Calculates the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price.

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PED < 1

Indicates inelastic demand, meaning a change in price has a relatively small effect on the quantity demanded.

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Total Revenue

The total amount of money a business earns from selling its goods or services.

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Profit

The amount of money a business keeps after paying all its expenses.

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Unit Elastic Demand

When the price of a good changes, the quantity demanded changes by the same percentage.

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Study Notes

Introduction to Economics

  • Key concepts include scarcity, choice, efficiency, economic well-being, sustainability, change, and interdependence.
  • Two main types of economics: microeconomics (individual economic behavior) and macroeconomics (the economy as a whole).
  • Economics studies how people interact and how scarce resources meet unlimited needs.
  • Economic goods are scarce, limited resources.
  • Free goods are abundant; no scarcity; no opportunity cost of production.
  • Scarcity necessitates choices and trade-offs.
  • Opportunity cost is the value of the next best alternative.
  • Centers Paribus = The effect one economic variable has on another, provided all other variables remain the same.
  • Scarcity leads to choices, choices lead to trade-offs.

Factors of Production

  • Capital: physical (human-made resources) and human (skills/knowledge).
  • Entrepreneurship: individuals who combine factors for production.
  • Land: natural resources.
  • Labor: effort exerted for a task.
  • Decisions are made using marginal analysis (considering incremental changes).
  • Basic economic questions are: what to produce, how to produce, and for whom to produce.
  • Types of Economic Systems: Traditional (hunting, bartering), Command (government-controlled), Market (individual and business decisions). Free Market (no government intervention), Mixed economies (combination).

Production Possibilities Curve (PPC)

  • Assumptions:

    • Only two goods are produced.
    • Full employment.
    • Mixed resources.
    • Fixed technology.

  • Illustrates possible combinations of output given resources.

  • Efficiency: Resources are utilized optimally- no waste and no improvements possible.

  • Opportunity cost: Increases as more of one good is produced, indicating trade-offs.

  • Constant opportunity cost: Resources are equally applicable to both goods.

  • Increasing opportunity cost: Resources are not equally suited for both goods resulting in curved PPC.

Actual and Potential Growth

  • Actual growth is made with better use of available resources.
  • Potential growth is the maximum amount that can be generated, from improved resources (PPC shifts).
  • Factors that shift PPC - change in quality/quantity of factors, improvement in technology.
  • Scarcity occurs when demand exceeds availability.
  • Choices allow consumers and producers to select from available options.
  • Circular flow is a closed system, where inputs & outputs are transferred to Households & Businesses.

Open Circular Flow

  • Money flows into and out of the economy.
  • Leakages are factors that take money out of an economy (savings, taxes, imports)
  • Injections are factors putting money into an economy (investments, government spending, exports)
  • GDP (Gross National Income) grows when injections exceed leakages

Classical and Neoclassical Economics

  • Classical economics: advocates for private ownership, empowerment of individuals, and labor-based theories of value; Say's Law (supply creates its own demand) and comparative advantage.
  • Neoclassical economics: shifts focus to consumer utility (satisfaction) and value determination. Consumers and producers are rational actors.

Monetarism (New Classical)

  • Economic growth is driven by the total amount of money in the economy and a stable money supply.
  • Money supply growth should match output growth.
  • Government should not control demand.

21st Century Economics

  • Interdisciplinary approach incorporating psychology.
  • Growing awareness of environmental and social impact of economic activity.
  • Shift toward circular economic models (minimizing waste, maximizing resource reuse).
  • Doughnut model.

Microeconomics: Demand

  • Individual demand: one person's desire for a product.
  • Market demand: the sum of all individual demands at different prices.
  • Law of demand: inverse relationship between price and quantity demanded.
  • Income effect: as prices fall, purchasing power increases.
  • Substitution effect: Cheaper product attracts consumers.
  • Shifters of demand: income, quality, related goods price, preferences, expectations.

Microeconomics: Elasticities of Demand

  • Elasticity measures responsiveness of one variable to a change in another.
  • PED (price elasticity of demand) measures percentage change in quantity demanded compared to a percentage change in price.
  • Inelastic: price sensitivity is small.
  • Elastic: price sensitivity is large.
  • Unit elastic: price change equals quantity change.

Microeconomics: Supply

  • Law of supply: direct relationship between price and quantity supplied.
  • Higher prices incentivize higher production; lower prices reduce production.
  • Shifters of supply: technology, number of firms, future expectations, related good prices, and government interventions like taxes or subsidies.
  • Short run vs. long run supply. Short run limits flexibility; long run allows for full adjustments.

Price Control

  • Price ceiling(maximum price): leads to shortages, black markets if below equilibrium.
  • Price floor(minimum price): leads to surpluses, losses for consumers if above equilibrium

Indirect Taxes

  • Specific Tax: fixed amount per unit sold; upward shift in supply curve.
  • Ad Valorem (percentage) Tax: percentage of the price; rotational shift in supply curve.

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Description

This quiz covers key concepts in economics, including scarcity, choice, efficiency, and the two main branches: microeconomics and macroeconomics. It explores how economic goods and free goods differ and discusses the factors of production that influence economic interactions. Test your understanding of these foundational economic principles!

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