Basic Economics: Concepts, Supply & Demand, and Market Equilibrium

What is economics?

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

What does scarcity refer to in economics?

The limited availability of factors of production, leading to limited production of goods and services.

What is the difference between macroeconomics and microeconomics?

Macroeconomics focuses on the economy as a whole, while microeconomics examines individual actors within the economy.

What are the four factors of production?

Labor, land (natural resources), physical capital, and entrepreneurial ability.

What is opportunity cost?

The value of the next best alternative that is given up when making a choice.

How does the Production Possibilities Curve (PPC) illustrate opportunity cost?

The PPC shows the trade-offs between two goods, with its slope representing the opportunity cost of one good in terms of the other.

What is the shape of the Production Possibilities Curve and why?

The PPC is typically concave-shaped due to increasing opportunity costs as resources are allocated to different goods.

What is productive efficiency?

When an economy produces the maximum output for a given level of technology and resources.

What is allocative efficiency?

When the economy produces the optimal mix of goods and services that provides the most net benefit to society.

What is absolute advantage?

The ability to produce goods/services more efficiently using fewer inputs.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than another producer, leading to gains from trade.

What is economic growth?

The ability to produce a larger total output over time, often due to increases in resources or technological advancements.

What is economic contraction?

A decrease in a country's economic output, often due to reduced spending.

What are trade-offs?

The choices individuals, firms, and governments must make due to scarce resources.

What is the role of government in a mixed economy?

To play a role in organizing the economy, balancing between command and market structures.

What is market failure?

When a market fails to produce the allocatively efficient quantity of goods and services.

How can opportunity costs increase?

Opportunity costs can increase as more alternatives are given up with each decision made.

What is the significance of the slope of the PPC?

The slope measures the opportunity cost of the good on the x-axis and its inverse measures the opportunity cost of the good on the y-axis.

What is the relationship between efficiency and opportunity cost?

To decrease opportunity costs, efficiency must be increased by using fewer resources for the same output.

What does it mean to have increasing opportunity costs?

It means that as production of one good increases, the opportunity cost of producing additional units rises.

What is the implication of decreasing opportunity costs?

It suggests that resources can be used more efficiently to produce the same output, though it is not possible in real life.

What is the importance of specialization in trade?

Specialization allows producers to focus on goods they can produce at a lower opportunity cost, leading to more efficient trade.

What is the impact of technological advancements on economic growth?

Technological advancements can lead to increased efficiency and productivity, contributing to economic growth.

What is a mixed economy?

An economic system that incorporates elements of both command and market economies.

What factors can lead to economic growth?

An increase in the number of resources, improvement in the quality of existing resources, and technological advancements.

What does the term 'Laissez Faire' refer to?

A philosophy advocating minimal government intervention in the economy, emphasizing the importance of property rights.

How do trade-offs affect individual decision-making?

Individuals must weigh the benefits and costs of their choices, leading to trade-offs based on scarce resources.

What is the comparative advantage of a pizza parlor?

The pizza parlor has a comparative advantage in pizza crusts.

How do you determine comparative advantage?

Calculate per unit opportunity cost using the formula give up/gain.

What happens if two countries can produce the same amount of a good?

Neither country has an absolute advantage.

What do countries export and import based on?

Countries export what they have a comparative advantage in and import what they don't.

What is the law of demand?

Holding all else equal, when the price of a good rises, consumers decrease the quantity demanded.

What is the difference between change in quantity demanded and change in demand?

Change in quantity demanded occurs due to price changes; change in demand shifts the entire curve.

What does the INSECT acronym stand for in demand determinants?

I = Income, N = Number of Buyers, S = Substitutes, E = Expectations, C = Complements, T = Tastes.

How does an increase in consumer income affect normal goods?

Demand for normal goods increases with an increase in consumer income.

What is supply?

Supply is the different quantities of goods and services that are willing to produce at various price levels.

What is the law of supply?

When the price level increases, the quantity supplied increases.

What is the difference between quantity supplied and supply?

Quantity supplied is the amount produced at a particular price; supply refers to the entire curve.

What does the ROTTEN acronym stand for in supply determinants?

R = Resources, O = Other good prices, T = Taxes, T = Technology, E = Expectations, N = Number of competitors.

How does an increase in production costs affect supply?

An increase in production costs typically decreases supply.

What is market equilibrium?

Market equilibrium is the price where buyers buy the exact amount sellers are willing to produce.

What occurs during market disequilibrium?

Market disequilibrium occurs when there is a shortage or surplus.

What happens when demand increases while supply remains constant?

Equilibrium price and quantity increase.

What is a market shortage?

A market shortage occurs when quantity demanded exceeds quantity supplied, leading to price increases.

What is a market surplus?

A market surplus occurs when quantity supplied exceeds quantity demanded, leading to price decreases.

How does an increase in supply affect equilibrium price?

An increase in supply decreases equilibrium price.

What is the effect of a decrease in demand on equilibrium price and quantity?

Equilibrium price and quantity both decrease.

What is the effect of an increase in demand on equilibrium price and quantity?

Equilibrium price and quantity both increase.

What is the effect of a decrease in supply on equilibrium price and quantity?

Equilibrium price increases while quantity decreases.

What is the effect of an increase in supply on equilibrium quantity?

Equilibrium quantity increases while price decreases.

What factors influence the demand curve?

Income, number of buyers, substitutes, expectations, complements, and tastes.

What happens to the demand for inferior goods when consumer income increases?

Demand for inferior goods tends to decline.

What is the relationship between the number of competitors and supply?

As the number of sellers increases, supply also increases.

What role do consumer expectations play in demand?

Consumer expectations significantly influence the determination of price.