Introduction to Economics
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Questions and Answers

What happens to Average Cost (AC) when Marginal Cost (MC) rises above AC?

  • AC remains unchanged
  • AC will fluctuate unpredictably
  • AC continues to decrease
  • AC begins to increase (correct)

Diseconomies of scale occur when a firm expands its production and its Long Run Average Cost (LRAC) curve decreases.

False (B)

What is the principle that states profits gained from investments will yield proportionally smaller returns as more resources are invested?

Law of Diminishing Returns

A firm achieves ______ of scale when it expands its scale of production and its LRAC curve decreases.

<p>Economies</p> Signup and view all the answers

Match the type of economies of scale with their definitions:

<p>Technical = Increased output by larger percentage than input growth Commercial = Cost benefits from purchasing in bulk Managerial = Specialization increasing productivity and lowering costs Financial = Greater ease of obtaining loans at lower interest rates</p> Signup and view all the answers

What is the primary focus of microeconomics?

<p>The economic interactions of individuals and companies (B)</p> Signup and view all the answers

Macroeconomics deals with the behavior and performance of entire economies.

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

Define scarcity in the context of economics.

<p>Scarcity is the excess of human wants over what can actually be produced to satisfy those needs.</p> Signup and view all the answers

An economy deals with the production, consumption, and distribution of goods and services produced from its __________ resources.

<p>scarce</p> Signup and view all the answers

Match the following economic concepts with their definitions:

<p>Scarcity = The gap between limited resources and unlimited wants Microeconomics = Study of individual economic units Macroeconomics = Study of economy-wide phenomena Wants = Desires for products that are not essential for survival</p> Signup and view all the answers

Which of the following questions falls under the category of economic problems?

<p>How should it be produced? (A)</p> Signup and view all the answers

A need is defined as a desire for a product that is not vital to one’s existence.

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

What effect do excise taxes on products like cigarettes and gasoline typically have on consumption?

<p>Curb consumption (C)</p> Signup and view all the answers

Positive industrial relations have no impact on a firm's success.

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

What must firms do if they fail to recover their costs?

<p>Go out of business</p> Signup and view all the answers

A person may purchase goods or services due to peer influence, known as the ______ effect.

<p>bandwagon</p> Signup and view all the answers

Which of the following is a factor influencing a firm's production decisions?

<p>Consumer demand (D)</p> Signup and view all the answers

Excise duties are imposed solely on luxury goods.

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

What law in Trinidad and Tobago prohibits discrimination against disabled persons in employment?

<p>Equal Opportunity Act, 2000</p> Signup and view all the answers

Firms must balance their ______ to maximize profitability while managing production costs.

<p>expenses</p> Signup and view all the answers

Which of the following is an example of a merit good?

<p>Public Education (A)</p> Signup and view all the answers

Demerit goods are considered beneficial to consumer health.

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

What is the definition of public goods?

<p>Goods and services provided by the government that benefit everyone, regardless of payment.</p> Signup and view all the answers

A Giffen good is characterized by an increase in demand as the price ______.

<p>increases</p> Signup and view all the answers

Match the following types of goods to their correct descriptions:

<p>Merit Goods = Essential goods provided by the government Demerit Goods = Harmful goods that are over-consumed Private Goods = Goods purchased by individuals, reducing availability for others Public Goods = Goods that benefit all without exclusive payment</p> Signup and view all the answers

What does human capital refer to?

<p>Investment in education and skills of individuals (C)</p> Signup and view all the answers

The short run is characterized by fully adjusted market conditions.

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

List one factor that can cause the Production Possibility Frontier (PPF) to shift to the right.

<p>Discovery of new resources, technological improvement, or an increase in labor.</p> Signup and view all the answers

____ are tangible products, while ____ are intangible products.

<p>Goods; Services</p> Signup and view all the answers

What happens when the PPF shifts to the left?

<p>Worsening of the economy for both goods and services (B)</p> Signup and view all the answers

Which economic system is characterized by government planning of production and allocation of goods?

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

Higher interest rates encourage borrowing to purchase expensive items.

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

What is a primary activity in the primary sector of the economy?

<p>Mining</p> Signup and view all the answers

A __________ economy relies on the laws of demand and supply.

<p>Free Market</p> Signup and view all the answers

Match the following sectors with their primary focus:

<p>Primary Sector = Extraction of natural resources Secondary Sector = Manufacturing goods from raw materials Tertiary Sector = Providing services Quaternary Sector = Knowledge-based services</p> Signup and view all the answers

What is a disadvantage of a Free Market Economy?

<p>Wealth inequality (D)</p> Signup and view all the answers

Natural disasters lead to increased spending and decreased savings.

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

Identify one advantage of a Mixed Economy.

<p>Increased efficiency and productivity</p> Signup and view all the answers

The __________ sector consists of companies that provide services like retail and entertainment.

<p>Tertiary</p> Signup and view all the answers

Which of the following is NOT a primary sector business activity?

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

Flashcards

Economics

The study of how societies use limited resources to satisfy unlimited wants.

Microeconomics

Focuses on individual decisions and how they affect markets. It's about how individual businesses, consumers, and workers interact.

Macroeconomics

Studies the big picture of an entire economy, looking at things like inflation, unemployment, and economic growth.

Economy

A system that produces, consumes, and distributes goods and services using limited resources.

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Scarcity

When resources are limited, but wants are unlimited, leading to choices and trade-offs.

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Basic Economic Question: What to Produce?

Deciding which goods and services to prioritize, considering limited resources and consumer needs.

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Economic Agents

Groups or individuals who participate in the economy, making decisions and affecting how resources are used.

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Excise Duties

Taxes on the production and consumption of goods that negatively impact society, such as cigarettes and gasoline. These taxes raise the price for consumers, discouraging consumption and production.

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Industrial Zones

Designated areas that encourage and support businesses by providing infrastructure and incentives, often near ports or transportation hubs.

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Minimum Wage

A legally mandated lowest hourly wage that employers must pay their workers, aiming to ensure a basic standard of living.

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Demand in Firm Decisions

Firms base production decisions on consumer demand, expanding production when demand is high and reducing it when demand falls.

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Cost Reduction in Firms

Firms strive to minimize their production costs to maximize profitability, tracking spending and seeking competitive pricing for materials.

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Profitability in Firms

Firms need to grow production, increase revenue, and reduce costs to be profitable, ensuring benefits outweigh the costs of expansion.

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Resources in Firm Decisions

Firms consider resource availability (land, labor, capital, entrepreneurship) when making decisions, factoring in costs and competition, particularly for land.

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Industrial Relations in Firms

The successful relationship between employers, employees, and their representatives, with strong communication and conflict resolution, crucial for firm success.

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Bandwagon Effect in Households

Individuals in households often make purchasing decisions influenced by trends set by others, swayed by peer pressure.

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Subsistence Economy

An economy focused on producing basic necessities like food, clothing, and shelter for immediate needs, not for market sale.

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Free Market Economy

An economy controlled by private businesses, where prices and production are determined by supply and demand.

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Command Economy

An economy where the government controls all production, jobs, and resource allocation.

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Mixed Economy

An economy that combines elements of both free market and command systems, allowing for both government intervention and private business activity.

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Primary Sector

The sector that extracts and harvests natural resources from the earth, such as minerals, metals, and agricultural products.

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Secondary Sector

The sector that processes, manufactures, and constructs goods using raw materials from the primary sector.

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Tertiary Sector

The sector that provides services to businesses and consumers, such as retail, finance, tourism, and entertainment.

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What is the relationship between education level and income?

Higher education levels generally lead to higher salaries and increased earning potential.

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How do interest rates affect saving and borrowing?

Higher interest rates encourage saving (because of higher returns) and discourage borrowing (due to a higher cost). Lower interest rates encourage borrowing and discourage saving.

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How can natural disasters affect economic behavior?

Natural disasters often lead to decreased spending and increased saving as people focus on rebuilding and preparing for future disasters.

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Pivoting PPF Inwards

The PPF curve shifts inward when the economy experiences a decrease in production capacity due to factors like resource scarcity, lack of technological advancements, or labor shortages.

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Total Fixed Cost (TFC)

Costs that remain constant regardless of the level of production, such as rent, salaries, and interest.

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Total Variable Cost (TVC)

Costs that vary directly with the level of production, such as raw materials, utilities, and labor for production.

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Total Cost (TC)

The sum of all costs that a firm incurs in the production of a certain quantity of goods or services.

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Average Cost (AC)

The cost per unit of output, calculated by dividing total cost by the quantity produced.

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Merit Goods

Goods and services that are underprovided by the market but considered essential by the government for societal well-being.

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Demerit Goods

Goods and services whose consumption is considered harmful to the consumer and society, often addictive or detrimental.

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Private Goods

Products or services purchased by individuals or entities, where consumption by one reduces availability for others.

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Public Goods

Goods and services provided by the government, benefiting everyone even if they don't directly pay for them.

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Giffen Goods

Goods where demand increases as price increases, defying the usual relationship.

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Veblen Goods

Luxury goods where demand increases as price increases, driven by prestige and exclusivity.

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Factors of Production

The inputs used to produce goods and services: land, labor, capital, and entrepreneurship.

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What is 'Land' in factors of production?

All naturally occurring resources, both on and beneath the earth's surface.

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What is 'Capital' in factors of production?

Assets used to produce more goods, not wanted for their own sake, but for their role in production.

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What is 'Entrepreneurship' in factors of production?

The factor that combines land, labor, and capital, taking risk and innovating to create a business.

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Study Notes

Introduction to Economics

  • Economics is the social science of resource utilization and management to satisfy unlimited societal wants with limited resources.
  • It studies how scarce resources are allocated among competing uses.

Branches of Economics

Microeconomics

  • Analyzes how incentives and actions impact resource use and distribution.
  • Explains value differences, efficient production/exchange, and coordination.

Macroeconomics

  • Analyzes the functioning of entire economies.
  • Studies macroeconomic phenomena like inflation, growth, income, GDP, and unemployment.

Differences Between Micro and Macroeconomics

  • Microeconomics focuses on individual entities (people, firms), while macroeconomics analyzes the entire economy.

Definition of an Economy

  • An economy manages the production, consumption, and distribution of goods/services from limited resources to meet unlimited wants.

Fundamental Economic Problems

  • Scarcity: Wants exceed production capacity.
  • Wants: Desires not essential for survival.
  • Needs: Essentials for survival.

Fundamental Economic Questions

  • What to produce? Choosing between different goods/services.
  • How to produce? Finding the most efficient production methods.
  • For whom to produce? Targeting specific consumer groups.

Economic Agents

Government

  • Influences the economy through laws, grants, taxes, infrastructure, and regulations.
  • Examples include minimum wage laws, industrial zones, and regulations on industries like gaming.

Firms

  • Production units that create goods/services for households.
  • Decisions influenced by demand, costs, profitability, resources, and industrial relations.

Households

  • Individuals or groups making economic decisions to maximize well-being.
  • Influence of income, education, interest rate, political climate, natural disasters, and consumer trends.

Economic Systems

  • Methods of resource, service, and good distribution.

Types of Economic Systems

Traditional/Subsistence Economy

  • Production for basic needs (food, shelter) rather than the market.

Free Market Economy

  • Private businesses answer economic questions through demand and supply.

Command Economy

  • Government plans production, jobs, and allocation.

Mixed Economy

  • Combines free market and command approaches, with government and private sectors both playing roles.

Economic Sectors

Primary Sector

  • Extracts and harvests natural resources (mining, agriculture, forestry).
  • Less prominent in developed economies.

Secondary Sector

  • Processes, manufactures, and constructs goods from primary resources.

Tertiary Sector

  • Provides services (retail, finance, tourism).

Types of Goods

Merit Goods

  • Goods deemed essential by the state, often underprovided by the market (education, healthcare).

Demerit Goods

  • Goods whose consumption is socially harmful (alcohol, cigarettes).

Private Goods

  • Goods that can be purchased and consumed by one individual, reducing availability for others (clothing, food).

Public Goods

  • Goods that are consumed collectively and shared (roads, national defense).

Factors of Production

  • Land: Natural resources.
  • Labor: Available workers.
  • Capital: Tools, machinery, and other goods used to produce goods/services.
  • Entrepreneurship: Risk-taking and organization in production.

Production

  • The conversion of factors of production into goods/services.

Production Possibility Frontier (PPF)

  • Graph showing maximum output combinations of two goods.

Shifts of the PPF

  • A shift rightwards indicates an increase in production capacity, while a leftward shift shows a decrease.
  • This can be due to resource discovery, technological advancements, or increased labor.

Cost Calculations

  • Total Cost (TC): Fixed cost (FC) + Variable cost (VC).
  • Average Cost (AC): TC/Output.
  • Marginal Cost (MC): Change in TC/Change in Output.
  • Relationship between MC and AC: MC intersects AC at the latter's minimum point.

Product Calculations

  • Total Product (TP): Total output from factors.
  • Marginal Product (MP): Additional output from one more unit of input.
  • Average Product (AP): Output per unit of input.
  • Relationship between MP and AP: MP intersects AP at the latter's maximum point.

Economies and Diseconomies of Scale

  • Economies of scale: Decreasing long-run average costs as output increases.
  • Diseconomies of scale: Increasing long-run average costs as output increases.
  • Causes of diseconomies of scale include excessive specialization, communication problems, and coordination difficulties.

Minimum Efficient Scale (MES)

  • Lowest output level where economies of scale are fully exploited.

Returns to Scale

  • Measure of output change in response to proportional input changes.
  • Types: increasing, constant, decreasing returns to scale.
  • Sources include division of labor, specialization, and indivisibility.

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Description

This quiz covers the basics of economics, including its definition, branches, and the differences between microeconomics and macroeconomics. You'll learn about how economies manage resources to fulfill societal wants amid scarcity. Test your understanding of key concepts and fundamental economic problems.

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