Microeconomics Basics Quiz

Economics

• Economics is the study of how societies allocate scarce resources to satisfy unlimited wants and needs.
• It's broadly divided into microeconomics and macroeconomics.

Microeconomics

• Focuses on the behavior of individual economic agents (consumers, firms, and markets).
• Examines how these agents make decisions in the face of scarcity.
• Key Concepts:
  • Supply and demand: Explains how prices and quantities are determined in markets.
  • Market structures: Different types of markets like perfect competition, monopolies, and oligopolies.
  • Elasticity: Measures responsiveness of one variable to changes in another variable, like price elasticity of demand.
  • Production and cost: Analyzes how firms produce goods and services at the lowest possible cost.
  • Consumer choice: Explains how consumers allocate their limited income to maximize their utility.
• Key Principles:
  • Optimization: Individuals and firms aim to maximize their well-being or profits.
  • Equilibrium: Markets move towards a state where supply and demand are equal.
  • Efficiency: Resources are used to produce maximum output.
  • Marginal analysis: Decisions are made based on the additional benefits and costs of a small change.
• Applications:
  • Pricing strategies.
  • Resource allocation.
  • Market failures and government intervention.

Macroeconomics

• Focuses on the overall performance of the economy (e.g., national income, inflation, unemployment, and economic growth).
• Examines aggregate economic variables.
• Key Concepts:
  • Gross Domestic Product (GDP): Measures the total value of goods and services produced in a country.
  • Inflation: Measures the rate of increase in the overall price level.
  • Unemployment: Measures the percentage of the labor force that is unemployed.
  • Economic Growth: Increase in real GDP over time.
  • Fiscal policy: Government policies related to taxation and government spending.
  • Monetary policy: Actions of the central bank to control the money supply and interest rates.
  • Aggregate demand and aggregate supply: Explain how overall demand and supply interact to determine the level of national output and the price level.
• Key Principles:
  • Aggregate demand (AD): Shows the relationship between the price level and the total quantity of goods and services demanded in an economy.
  • Aggregate supply (AS): Shows the relationship between the price level and the total quantity of goods and services supplied in an economy.
  • Business cycles: Fluctuations in economic activity around the trend of economic growth.
  • Economic shocks: Unexpected events that impact aggregate demand or aggregate supply.
• Applications:
  • Economic forecasting.
  • Policy making.
  • Understanding economic fluctuations.

Relationship between Micro and Macro

• Microeconomic principles are fundamental to understanding macroeconomic phenomena. Macroeconomic variables are aggregated outcomes of individual decisions made in micro markets.
• Macroeconomic policies can affect microeconomic outcomes—e.g., taxes affect decisions of consumers and businesses and policies affect aggregate supply and demand.