Microeconomics Concepts Quiz
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Questions and Answers

In which stage of production does Total Production (TP) increase at a decreasing rate?

  • Stage 1
  • Stage 2 (correct)
  • Stage 3
  • None of the above

According to the Law of Diminishing Marginal Returns, what happens to Marginal Productivity (MP) as more units of a variable input are added to a fixed input, holding other factors constant?

  • It decreases at an increasing rate. (correct)
  • It continues to increase.
  • It remains constant.
  • It decreases at a decreasing rate.

What is the relationship between Marginal Cost (MC) and Average Total Cost (ATC) when MC is increasing?

  • The relationship cannot be determined based on the information given.
  • ATC is increasing. (correct)
  • ATC is decreasing.
  • ATC is constant.

What is the correct formula for Total Cost?

<p>TVC + TFC = Total Cost (D)</p> Signup and view all the answers

Which economic theory explains how individuals or organizations make decisions in situations where the outcome of each participant's depends on the choices of others?

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

What is the difference between Total Variable Cost (TVC) and Total Fixed Cost (TFC)?

<p>TVC is variable, and TFC is fixed. (D)</p> Signup and view all the answers

Which of the following is NOT a stage of production based on the Law of Diminishing Marginal Returns?

<p>Stage 4 (C)</p> Signup and view all the answers

What is the significance of Pareto Efficiency?

<p>It suggests that no further improvement can be made without making someone worse off. (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of a perfectly competitive market?

<p>High barriers to entry (A)</p> Signup and view all the answers

Which market structure is characterized by a few dominant firms that are interdependent on each other's actions?

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

A company that sells luxury handbags and experiences an increase in demand as the price increases is likely operating in which type of market?

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

What is the difference between GDP and GNP?

<p>GDP accounts for the total value of all goods and services within a country's borders, while GNP includes the money earned by people and businesses working or investing outside the country. (A)</p> Signup and view all the answers

What is the "Free Rider Problem"?

<p>When individuals benefit from a public good without paying for it (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of a monopolistic competition?

<p>High barriers to entry (C)</p> Signup and view all the answers

If a company produces a product that is highly differentiated and has a significant degree of market power, what type of market structure is it likely to operate in?

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

The airline industry, with a small number of dominant players, is an example of which market structure?

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

Which of these factors has the potential to directly impact the exchange rate of a currency?

<p>The level of foreign direct investment (FDI) into the country (C)</p> Signup and view all the answers

Which of these is NOT a factor that can influence the exchange rate of a currency?

<p>Government spending levels (B)</p> Signup and view all the answers

Which of the following represents an example of Foreign Institutional Investment (FII)?

<p>A pension fund invests in the shares of a foreign company (C)</p> Signup and view all the answers

What is the main difference between direct taxes and indirect taxes?

<p>Direct taxes are levied on income and wealth, while indirect taxes are levied on goods and services. (B)</p> Signup and view all the answers

Which of the following is a characteristic of a progressive tax system?

<p>Tax rates are higher for high-income earners than for low-income earners. (B)</p> Signup and view all the answers

Which of these is an example of an indirect tax?

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

Which of the following statements correctly describes the relationship between government spending and inflation?

<p>Increased government spending can lead to higher inflation, but only if the economy is already at full capacity. (C)</p> Signup and view all the answers

Which of these is a potential drawback of a regressive tax system?

<p>It can disproportionately impact lower-income households. (C)</p> Signup and view all the answers

What is the main objective of imposing an Anti-Dumping Duty?

<p>To protect domestic industries from unfair competition (B)</p> Signup and view all the answers

Which of the following is NOT a component of a Revenue Budget?

<p>Privatization of PSU (A)</p> Signup and view all the answers

What is the difference between Fiscal Deficit and Primary Deficit?

<p>Fiscal Deficit includes interest payments, while Primary Deficit does not (B)</p> Signup and view all the answers

Which of the following is an example of Revenue Expenditure?

<p>Providing subsidies to farmers (B)</p> Signup and view all the answers

What is the key distinction between Nationalisation and Privatisation?

<p>Nationalisation involves transferring ownership from the private sector to the public sector, while Privatisation does the opposite (B)</p> Signup and view all the answers

Which type of economic planning involves the government setting targets and guidelines, but allowing the private sector to make most economic decisions?

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

What is the primary goal of Disinvestment?

<p>To increase government revenue by selling shares of public sector enterprises (C)</p> Signup and view all the answers

Which of the following scenarios would NOT be considered a capital receipt?

<p>Collection of taxes on income (D)</p> Signup and view all the answers

Which curve represents the most efficient use of resources?

<p>Curve 'BDC' (C)</p> Signup and view all the answers

What does the shape of the production possibility frontier curve indicate?

<p>All of the above (D)</p> Signup and view all the answers

What is an example of an implicit cost?

<p>The opportunity cost of using a self-owned building for the business instead of renting it out (B)</p> Signup and view all the answers

Which of the following is NOT an explicit cost?

<p>The opportunity cost of the owner's time (D)</p> Signup and view all the answers

What is the significance of the break-even point for a business?

<p>It indicates the minimum level of output required to cover all costs (B)</p> Signup and view all the answers

Which of the following best describes the equilibrium point in a market?

<p>The point where supply and demand are equal (D)</p> Signup and view all the answers

What does Curve 'X' represent in the context of the production possibility frontier?

<p>An increase in the production of both goods (C)</p> Signup and view all the answers

How does the production possibility frontier illustrate the concept of opportunity cost?

<p>It shows that the production of one good requires giving up some production of another good (B)</p> Signup and view all the answers

Which of the following is NOT a component of the Balance of Payments?

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

What is the primary difference between a time deposit and a demand deposit?

<p>All of the above are correct. (D)</p> Signup and view all the answers

What does a credit rating assess?

<p>The ability of a borrower to repay their debt. (C)</p> Signup and view all the answers

Which of the following is NOT a characteristic of a credit rating?

<p>Is a measure of the liquidity of an asset. (D)</p> Signup and view all the answers

Which of the following is TRUE about a trade surplus?

<p>It indicates a positive balance in a country's balance of trade. (A)</p> Signup and view all the answers

What is SWIFT used for?

<p>Facilitating international financial transactions between banks. (B)</p> Signup and view all the answers

Which of these is NOT a type of investment included in the Financial Account of the Balance of Payments?

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

What is the main difference between a fixed exchange rate and a floating exchange rate?

<p>A fixed exchange rate is set by the government, while a floating exchange rate is determined by market forces. (C)</p> Signup and view all the answers

Flashcards

Curve 'A'

Represents underutilization of resources in economics.

Curve 'X'

Shows economic growth within the production possibility frontier.

Curve 'BDC'

Indicates optimum utilization of resources in production.

Concave to Origin

Production possibility frontier is shaped like a curve that bows inward toward the origin.

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Implicit Cost

Costs representing opportunity costs of self-owned resources.

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Explicit Cost

Direct out-of-pocket expenses for a specific activity or transaction.

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Opportunity Cost

Cost of forgoing the next best alternative when making a decision.

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Break Even Point

Point when revenue equals total costs, leading to no profit or loss.

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Economy of Scale

Increasing production reduces average costs per unit.

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Law of Diminishing Marginal Returns

Adding inputs increases output initially, then effect declines.

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Total Production (TP)

Total output produced by all inputs in a timeframe.

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Marginal Productivity (MP)

Additional output gained from adding one more input.

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Average Productivity (AP)

Total production divided by the number of inputs used.

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Marginal Cost (MC)

The cost of producing one more unit of output.

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Nash Equilibrium

Situation where no participant benefits by changing strategy unilaterally.

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Gini Coefficient

Measure of income inequality within a population.

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Time Deposits

Savings account where money is locked for a specified period to earn interest.

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Free Rider Problem

When individuals benefit from a public good without paying for it.

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Demand Deposits

Accounts allowing withdrawals on demand without penalty, usually no interest earned.

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Veblen Goods

Luxury goods where demand increases as prices rise due to status.

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Credit Rating

An assessment of a borrower's creditworthiness indicating credit risk level.

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Liquidity

The ease of converting an asset into cash quickly.

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Perfect Competition

Market with many buyers and sellers of homogeneous goods.

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Collateral

An asset offered to a lender as security for a loan.

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Monopoly

Market dominated by one seller with a unique product.

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Monopolistic Competition

Market with many sellers offering differentiated products.

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Default

Failure to make loan or debt payments as agreed.

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Oligopoly

Market structured with a few dominant sellers and interdependent pricing.

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Balance of Trade

The difference between a country's exports and imports of goods and services.

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Fixed Exchange Rate

A currency's value fixed to a reference currency or a basket of currencies.

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Duopoly

Market with only two sellers providing a service or product.

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Gross Domestic Product (GDP)

Total value of all goods and services produced within a country's borders in a year.

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Anti-Dumping Duty

A tax on imported goods sold below fair market value to protect domestic industries.

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Budgeting

The process of estimating revenues and planning expenditures for government functions.

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Capital Budget

Allocation for long-term capital receipts and expenditures, like infrastructure.

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Revenue Budget

Allocation for day-to-day revenue receipts and expenditures.

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Budget Deficit

When total expenditures exceed total receipts.

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Nationalisation

Transfer of private sector ownership to government control.

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Privatisation

Transfer of public sector ownership to private individuals or companies.

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Indicative Planning

Government provides guidelines but allows private sector autonomy.

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Floating Exchange Rate

An exchange rate determined by market forces of supply and demand.

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Factors Affecting Exchange Rates

Elements that influence currency value, including interest rates, inflation rates, political stability, and market sentiment.

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Foreign Direct Investment (FDI)

Investment by a foreign entity in a business or project in another country.

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Foreign Institutional Investment (FII)

Investing in financial assets like stocks and bonds in another country’s markets.

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Direct Taxes

Taxes paid directly to the government that cannot be transferred, like income tax.

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Indirect Taxes

Taxes paid when consuming goods and services, which can be shifted to consumers like GST.

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Progressive Tax

A tax system where the rate increases as income increases.

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Regressive Tax

A tax system where lower-income earners pay a larger percentage of their income than higher earners.

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Study Notes

Demand & Supply

  • Microeconomics begins with scarcity, meaning limited resources exceed human needs. This forces economic agents (consumers, businesses, governments, banks) to make choices.
  • Market price and quantity are influenced by demand and supply.
  • Demand is the quantity a customer is willing to buy at various prices during a specific period.
  • Supply is the quantity producers are willing to offer at different prices during the same period.
  • Both demand and supply curves are U-shaped, downward-sloping (convex to the origin) for demand, and upward-sloping (cannot be negative, but can start from zero) for supply.

General Demand & Supply Factors

  • Demand:

    • Price: Higher prices decrease demand, lower prices increase demand.
    • Income: Higher income increases demand (except for inferior goods).
    • Related goods: The price of related goods influences demand (complementary or substitute).
    • Population: Increased population generally increases demand.
    • Taste: Changes in customer preferences impact demand.
  • Supply:

    • Price: Higher prices increase supply to maximize profits.
    • Production Cost: Increased costs limit the willingness to supply more.
    • Related Goods: Prices of related goods (complementaries) affect supply.
    • Government Policies: Policies like regulations impact supply decisions.
    • Future Price Expectations: Expectations on future prices influence present-day supply.

Demand-Income Relation

  • Normal Goods: Demand increases with income.
  • Inferior Goods: Demand decreases with income.
  • Giffen Goods: A specific type of inferior good where demand increases as price rises.
  • Cross-Price Effect: Change in demand for one good due to a price change in another good.
    • Substitute Goods: If the price of one good rises, demand for a substitute good increases.
    • Complementary Goods: If the price of one good rises, demand for a complementary good decreases.

Elasticity

  • Elasticity is the percentage change in quantity divided by the percentage change in price.
  • Perfectly Inelastic: Elasticity = 0. Demand is unresponsive to price changes.
  • Inelastic: Elasticity < 1. Demand is relatively unresponsive to price changes.
  • Elastic: Elasticity > 1. Demand is highly responsive to price changes.
  • Perfectly Elastic: Elasticity = ∞. Demand is infinitely responsive to price changes.
  • Unit Elastic: Elasticity = 1. Percentage change in quantity demanded equals percentage change in price.

Budget Line

  • A budget line shows all possible combinations of goods and services that can be purchased with a certain budget.
  • It is always a straight line concave to the origin.

Utility

  • Total Utility: Overall satisfaction from consuming a quantity of a good or service.
  • Marginal Utility: Extra satisfaction gained from consuming one more unit of a good.
  • Diminishing Marginal Utility: Marginal utility decreases as more units of a good or service are consumed.
  • Rational Choice: Consumers aim to maximize total utility while considering marginal utility and budget constraints.

Indifference Curves

  • Graphical representation of various combinations of two goods that provide the consumer with the same level of satisfaction.
  • Downward sloping, concave to the origin.
  • They do not intersect.

Production Theory

  • Production involves using factors of production (land, labor, capital, and entrepreneurship) to create goods and services.
  • Production Possibility Frontier (PPF): A graphical representation of the maximum possible output combination given the available resources and technology.
  • Implicit Cost: Cost of forgone opportunities.
  • Explicit Cost: Actual out-of-pocket expenses.
  • Opportunity Cost: Cost of the next best alternative forgone.
  • Break-Even Point: Where total cost equals total revenue.
  • Equilibrium Point: Where supply equals demand in a market.
  • Economies of Scale: Reductions in average cost as production increases.

Law of Diminishing Marginal Returns

  • Increasing one input (such as labor) while holding other inputs constant will eventually lead to diminishing increases in production.

Cost Functions

  • Relationship between production (inputs) and costs.
  • Total Cost (TC): Sum of fixed cost (FC) and variable cost (VC).
  • Marginal Cost (MC): The change in total cost resulting from producing one more unit of output.
  • Average Total Cost (ATC): Total cost divided by the number of units produced.

General Microeconomic Key Points

  • Marginal Productivity: Explains differing earnings based on input contribution (labor, rent).
  • Nash Equilibrium: Participants' strategy decisions are independent of others decisions in a game, making changes in strategy not beneficial for a participant.
  • Pareto Efficiency: A state where one participant cannot be made better off without making someone else worse off.
  • Gini Coefficient: Measure of income inequality.
  • Free Rider Problem: Benefiting from a public good without contributing.
  • Veblen Goods: Luxury goods with increasing demand as price rises.

Market Structures

  • Perfect Competition: Many buyers and sellers; homogeneous products.
  • Monopoly: One seller with unique product; high barriers to new entry.
  • Monopolistic Competition: Many sellers; differentiated products.
  • Oligopoly: Few dominant sellers; interdependent firms.
  • Duopoly: Only two sellers.

Macroeconomics

  • GDP: Total value of goods and services produced within a country's borders.
  • GNP: Total value of goods and services produced by a country's citizens, including earnings from abroad.
  • NNP: Gross National Product minus depreciation.
  • National Income: Wage, rent, and profit before taxes.
  • Personal Income: Income earned by people after taxes and other obligations.
  • Disposable income: Money left after taxes and obligations.
  • Real income: Money adjusted for inflation.
  • GDP Calculation (3 approaches):
    • Production: Sum of value added each stage of production.
    • Income: Sum of all income earned.
    • Expenditure: Sum of all expenditures.

Inflation & Deflation

  • Inflation: Rising prices, decreasing purchasing power.
  • Deflation: Falling prices, increasing purchasing power.
  • Nominal GDP: Uncorrected GDP measures.
  • Real GDP: Adjusted GDP for inflation.
  • Recessions: Negative economic growth periods.
  • Depressions: Severe and prolonged recessions.
  • Economic Models:
    • Classical Model: Free Market
    • Keynesian Model: Government Intervention

Fiscal and Monetary Policy

  • Fiscal Policy: Government spending and taxation to manage the economy.
  • Monetary Policy: Central bank actions to control money supply and credit conditions.

Unemployment

  • Cyclical Unemployment: Driven by economic downturns (recessions).
  • Frictional Unemployment: Temporary unemployment between jobs.
  • Structural Unemployment: Unemployment due to mismatch between skills and job market demands.
  • Key Economic Sectors:
    • Primary: Direct resource use (agriculture, mining).
    • Secondary: Manufacturing.
    • Tertiary: Services (retail, finance, tourism).

Money and Banking

  • Functions of Money: Medium of exchange, store of value, unit of account, standard of deferred payment.
  • Reserve Bank of India (RBI): Issuing currency, managing exchange reserves, and regulating banks.
  • RBI Monetary Tools: Statutory liquidity ratio (SLR), cash reserve ratio (CRR), open market operations (OMO), and repurchase agreements (REPO).
  • Commercial Banks: Accept deposits, make loans, support transactions (cheques, transfers, electronic payments).

International Trade

  • Balance of Trade: Difference between a country's exports and imports of goods.
  • Balance of Payments: Record of a country's transactions with the rest of the world.
  • Current Account: Exports, imports, income, and current transfers.
  • Capital Account: Capital transfers and ownership of non-produced assets.
  • Financial Account: Foreign investment (direct and portfolio).
  • Foreign Exchange Reserves: A country's central bank holds these reserves for stability.
  • Foreign Direct Investment (FDI): Long-term investment in a business activity.
  • Foreign Institutional Investors (FII): Short-term investments in financial assets (bonds, stocks).

Public Finances

  • Taxes: Government revenue from income, consumption, property, and other sources.
  • Direct Taxes: Paid directly by taxpayers.
  • Indirect Taxes: Paid indirectly through goods/services.
  • GST: Comprehensive value-added tax; widely implemented in India.
  • Government Budgeting: Estimating revenue and planning expenditures.
  • Capital Budget: Managing assets and investments.
  • Revenue Budget: Managing recurring revenue and expenditure.
  • Budget Deficit: Difference between total expenditure and total receipts.
  • Fiscal Deficit: Budget deficit excluding borrowing.

Nationalisation, Privatisation and Disinvestment

  • Nationalization: Transferring ownership and control from private to public sector.
  • Privatization: Transferring ownership and control from public to private sector.
  • Disinvestment: Reducing government stake in a public sector enterprise (e.g., by selling shares)

Economic Planning

  • Imperative Planning: Centralized government planning regarding production and distribution.
  • Indicative Planning: Government provides guidelines, but private sector retains flexibility.
  • Perspective Planning: Long-term planning covering several years.
  • Rolling Plan: Updated and revised plan regularly to allow for feedback

Environmental Reforms

  • Cost-Benefit Analysis : Assessing economic and environmental factors.
  • Environmental Valuation: Assigning economic values to environmental benefits in order to gain more support for conservation or restoration measures.
  • Green GDP: Modifying GDP to account for environmental effects of production/consumption.
  • Carbon Trading: Market system for trading emission permits in order to limit emission levels.
  • UNFCCC: United Nations Framework Convention on Climate Change
  • Kyoto Protocol: International agreement on reducing greenhouse gas emissions.

Sustainable Development Goals

  • The global effort to improve conditions and create a better future for all

Economic Laws and Theories

  • Say's Law: Supply creates its own demand.
  • Phillips Curve: Inverse relationship between inflation and unemployment.
  • Laffer Curve: The relationship between tax rates and tax revenue.
  • Trickle-Down Economics: Benefits for wealthy will "trickle down" to others.
  • Multiplier Effect: Initial spending leads to greater increases in income and activity.

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Test your knowledge of key microeconomic concepts such as production stages, marginal returns, cost formulas, and market structures. This quiz covers essential theories and principles that drive economic decision-making. Perfect for students looking to reinforce their understanding of microeconomics.

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