Principles of Economics Quiz & Flashcards

Microeconomics examines individual markets and the choices of consumers and businesses, whereas macroeconomics looks at the economy as a whole.

In a market economy, prices are determined by the forces of supply and demand without direct control by the government.

A price ceiling set below the equilibrium price often leads to a shortage as demand exceeds supply.

Comparative advantage suggests that countries should specialize in producing goods where they have a lower opportunity cost, enhancing mutual trade benefits.

An increase in supply, assuming demand remains constant, typically leads to a decrease in price.

Incentives motivate individuals to make certain economic choices and can significantly influence behavior.

Tariffs typically raise prices on imported goods, protecting domestic industries but potentially leading to higher consumer prices.

A minimum wage set above equilibrium can lead to decreased employment as employers may hire fewer workers due to higher costs.

The Federal Reserve aims to control inflation and stabilize the economy through monetary policy.

The law of diminishing returns states that adding more of one input, while holding others constant, will eventually result in lower additional output.

Public goods are non-excludable and non-rivalrous, meaning they are available to everyone and one person's use doesn't reduce availability to others.

Opportunity cost is the value of the next best alternative foregone, such as choosing tea over coffee.

In a command economy, the government controls resources and makes all economic decisions.

Inflation erodes purchasing power by reducing the amount of goods and services that can be bought with a given amount of money.

GDP measures the total value of all goods and services produced within a country, reflecting economic activity.

The PPF illustrates the maximum possible output combinations of two goods that can be produced with available resources and technology.

Subsidies decrease production costs, encouraging producers to increase output.

Public goods are non-excludable and non-rivalrous, meaning they are accessible to all and one person's use doesn't reduce another's ability to use them.

Elasticity of demand helps businesses understand how price changes affect demand, guiding pricing strategies.

Fiscal policy uses government spending and taxation to influence economic conditions, such as growth and employment.

A trade deficit often leads to increased borrowing from abroad to finance the gap between imports and exports.

Changes in consumer preferences can cause the demand curve to shift, reflecting changes in demand at all price levels.

The 'invisible hand,' a concept by Adam Smith, suggests that individuals' self-interested actions can lead to positive social outcomes.

For normal goods, an increase in consumer income generally leads to an increase in demand.

Monopolies can limit consumer choice and lead to higher prices due to lack of competition.

A free market is characterized by unrestricted competition between privately owned businesses with minimal government intervention.

Technological advancements can increase production efficiency, shifting the supply curve to the right.

Money functions as a medium of exchange, unit of account, and store of value in the economy.

Scarcity refers to the fundamental economic problem of having limited resources to satisfy unlimited wants and needs.

Increasing interest rates typically makes borrowing more expensive, reducing consumer spending and investment.

A mixed economy features both private enterprise and government intervention in economic activities.

Technological advancements typically lead to increased production efficiency and output.

A progressive tax system imposes higher tax rates on higher income brackets, making taxation more equitable based on ability to pay.

The GDP deflator adjusts nominal GDP to reflect real GDP, accounting for changes in price levels.

A command economy is characterized by centralized planning where the government makes all economic decisions.

A price floor set above equilibrium can lead to a surplus as supply exceeds demand at the mandated minimum price.

The law of supply states there is a direct relationship between the price of a good and the quantity supplied, meaning higher prices incentivize more supply.

Pollution is a negative externality because it imposes costs on third parties not involved in the transaction.

Entrepreneurs organize resources to create goods and services, driving innovation and economic progress.

A supply curve represents the relationship between the price of a good and the quantity that producers are willing to supply.

Inflation is characterized by an increase in the general price levels of goods and services over time.

Tariffs are primarily used to protect domestic industries by making imported goods more expensive relative to local products.

A change in consumer income can shift the demand curve, reflecting changes in the quantity demanded at every price level.

Subsidies lower production costs, increasing the supply of goods and services in the market.