econ mcq test

Why does scarcity exist?

Human wants exceed the productive capacity of the economy.

What is the most fundamental issue that economics addresses?

Use of scarce resources.

What contributes to the economic problem of scarcity?

Resources are limited.

What is an example of a factor of production?

Capital.

What is the fundamental problem that economics attempts to address?

How to fulfill unlimited wants with limited resources.

Which is not considered an economic resource?

Stocks.

Any point inside a production possibilities curve is associated with what?

Inefficient use or unemployment of some resources.

What is always true of an economy operating on its production possibilities frontier?

Its resources are fully employed.

What would cause an economy's production possibilities curve to shift inward to the left?

A massive natural disaster that destroys physical infrastructure.

What would most likely cause an economy operating inside its PPC to move toward the current PPC in the short run?

An increase in employment.

When an economy operates inside its production possibilities curve, it can increase production of one good at what opportunity cost?

Zero opportunity cost in terms of the other good.

What determines comparative advantage?

Opportunity cost. The country with the lower opportunity cost has the comparative advantage.

What is the difference between absolute advantage and comparative advantage?

Absolute advantage means producing more with the same resources; comparative advantage means producing at a lower opportunity cost.

If Country A has a comparative advantage in smartphones, what must be true?

Country A produces smartphones at a lower opportunity cost than Country B.

How do you calculate the opportunity cost of 1 unit of a good?

Amount of other good given up ÷ amount of good produced.

What is the opportunity cost of 1 airplane for Country X if it can produce 60 cars or 20 airplanes?

3 cars.

What is the opportunity cost of 1 airplane for Country Y if it can produce 40 cars or 10 airplanes?

4 cars.

What makes terms of trade mutually beneficial?

The terms of trade must fall between the two countries' opportunity costs.

What terms of trade are mutually beneficial if Country X's opportunity cost is 3 cars per airplane and Country Y's is 4 cars per airplane?

1 airplane for 3.5 cars.

Why is 1 airplane for 3.5 cars mutually beneficial?

Country X gets more than its 3-car opportunity cost, while Country Y pays less than its 4-car opportunity cost.

If Colombia takes 2 hours to make coffee and 4 hours to make chocolate, what is the opportunity cost of 1 coffee?

0.5 chocolate.

If Brazil takes 5 hours to make coffee and 5 hours to make chocolate, what is the opportunity cost of 1 coffee?

1 chocolate.

Which country has the comparative advantage in coffee: Colombia or Brazil?

Colombia, because it has the lower opportunity cost.

Which country should specialize in chocolate if Colombia's opportunity cost is 2 coffee per chocolate and Brazil's is 1 coffee per chocolate?

Brazil, because it has the lower opportunity cost.

What should Colombia and Brazil specialize in?

Colombia should specialize in coffee; Brazil should specialize in chocolate.

What happens when countries specialize according to comparative advantage and trade?

Both countries can consume beyond their individual production possibilities.

What does specialization mean in international trade?

A country focuses on producing the good in which it has a comparative advantage.

If tea and coffee are substitutes, what happens to coffee demand when the price of tea increases?

The demand curve for coffee shifts right.

What happens to demand for a substitute when the price of another good increases?

Demand increases and the demand curve shifts right.

What is the income effect?

When the price of a good decreases, consumers' real purchasing power increases, allowing them to buy more.

Why does a decrease in price increase consumers' real purchasing power?

Consumers have more money left over, allowing them to buy more.

If consumers expect gasoline prices to double next week, what happens to current demand for gasoline?

Current demand increases because consumers buy before the expected price increase.

How do expectations of future prices affect current demand?

An expected higher future price increases current demand; an expected lower future price may decrease current demand.

What causes a demand curve for a normal good to shift right?

An increase in consumer income.

What happens to demand for a normal good when consumer income increases?

Demand increases and the demand curve shifts right.

What causes the demand curve for EVs to shift left?

A widespread change in consumer preferences away from green energy or EVs.

What does a leftward shift of the demand curve mean?

Demand decreases; consumers want less at every price.

What happens when the price of the good itself changes?

It causes a movement along the demand curve, not a shift.

What causes a movement along the demand curve for digital cameras?

A change in the price of digital cameras.

What is the difference between a shift in demand and movement along demand?

A price change causes movement along the curve; other demand factors cause a shift.

How are supply and demand curves similar?

Both show the relationship between the price and quantity of a good.

What does the demand curve show?

The relationship between price and quantity demanded.

What does the supply curve show?

The relationship between price and quantity supplied.

How does a trade agreement between two nations affect the supply of a good?

It likely increases supply and shifts the supply curve right because more suppliers can enter the market.

What happens to supply when technology makes production easier or cheaper?

Supply increases and the supply curve shifts right.

If producers can make either TVs or computer monitors, what happens to TV supply if monitor prices skyrocket?

The supply of TVs shifts left because producers switch resources toward making monitors.

What happens to the supply of a product when an alternative product becomes more profitable?

Supply of the original product decreases and shifts left.

What happens when the price of an input such as steel increases?

Supply decreases and the supply curve shifts left.

What happens to supply when input prices decrease?

Supply increases and the supply curve shifts right.

According to the law of supply, what happens when the price of a good decreases?

Producers are willing and able to sell less because their profits decrease.

What happens when the market price is above the equilibrium price?

There is a surplus, and prices tend to fall.

What happens when the market price is below the equilibrium price?

There is a shortage, and prices tend to rise.

How do you calculate a shortage?

Quantity demanded minus quantity supplied.

How do you calculate a surplus?

Quantity supplied minus quantity demanded.

What happens to equilibrium price and quantity when there is a negative supply shock?

Price increases and quantity decreases.

What happens when the supply curve shifts left?

Equilibrium price increases and equilibrium quantity decreases.

What is a price floor?

A legal minimum price that sellers can charge.

When does a price floor create a surplus?

When the price floor is set above the equilibrium price.

When does a price ceiling create a shortage?

When the price ceiling is set below the equilibrium price.

What happens when there is a surplus?

There is downward pressure on prices because sellers have unsold goods.

What happens when there is a shortage?

There is upward pressure on prices because consumers want more than producers are supplying.

What is equilibrium?

The point where quantity demanded equals quantity supplied.

What happens when demand and supply both increase?

The change in equilibrium price is indeterminate.

What does indeterminate mean in economics?

There is not enough information to know the direction of the change.

At a price below equilibrium, what happens to the market price?

A shortage causes upward pressure on price until equilibrium is reached.