Principles of Economics - WGU D089 (2026)Actual Exam Test | Complete Questions With Verified Answers With Rationales (100% Accurate Solutions)

How are Positive and Normative economics different from each other?

Positive economics clearly states and economic issue, and normative economics provides the value-based solution for the issue.

What are factors of production?

The resources the economy has available to produce goods and services

How can Labor's contribution to an economy's output of goods and services be increased?

By increasing either the quantity of labor of human capital.

What are two keys to the use of an economy's factors of production?

Technology and, in the case of a market economic system, the efforts of entrepreneurs

For every factor of production (or input) what is there an associated factor of?

Payment

What are factor payments?

What the firm pays for the use of the factors of production

When human want exceeds the available resources what is the result?

Scarcity

If the inputs of production are underutilized, is a decrease in production of the other good required when increasing production to the point that the output combinations sit on the production possibilities frontier?

No

How is opportunity cost calculated?

By dividing the amount of a good you have given up by the amount of the good you have gained.

How does opportunity cost appear along a linear production possibilities frontier?

As a constant

What is happening to opportunity cost along a bowed out production possibilities frontier?

An increase in the quantity demanded

What is the inverse relationship between price and quantity known as?

The law of demand

What does a fall in the price of a good almost always cause?

An increase in the quantity demanded

What are positive and normative economic thought?

Two specific aspects of economic reasoning

What does the law of demand assume?

That all variables that affect demand, other than price, remain constant

What is a demand curve?

a graphical representation depicting the relationship between a good or service's price and the quantities consumers are willing to buy at those prices.

What is a demand schedule?

A table view of the price-quantity pairings that compose the demand curve

What will result in movement along a demand curve (up or down)?

A change in price - a change in quantity demanded

What will result in a shift in a demand curve (left or right)?

A change in a non-price - a change in demand

What causes changes in demand (shifts in the demand curve)?

- Changes in consumer income, tastes, and preferences

- The size of the population

- prices of other goods such as complements and substitutes

- expectations about the future.

What fundamental similarity do nearly all demand curves share?

They slope down from left to right

What is the positive relationship between price and quantity known as?

The law of supply

What does the law of supply assume?

That all variables affecting supply, other than price, remain constant

What does a rise in the price of a good or service increase?

The quantity supplied of that good or service

What does a supply curve depict?

The relationship between the price of a good or service and the quantities companies are willing to sell at those prices

What is a supply schedule?

A table view of the price-quantity pairing that compose the supply curve.

What will suppliers do to adjust for non-price changes related to the determinants of supply?

Shift production

What will suppliers do to adjust for price-related changes on the supply curve?

Move production levels

what are changes in supply (shifts in the supply curve) caused by?

Prices of inputs, technology,expectations, number of sellers, and government policies and regulations

What fundamental similarity do nearly all supply curves share?

They slope up from left to right

When does the equilibrium price and equilibrium quantity occur?

Where the supply and demand curves cross.

When does equilibrium occur?

When the quantity demanded is equal to the quantity supplied

Why would the price be below the equilibrium level?

The quantity demanded will exceed the quantity supplied. -- Excess demand or a shortage will exist.

What is occurring if the price is above the equilibrium level?

The quantity supplied will exceed the quantity demanded. -- Excess supply or a surplus will exist

When does the equilibrium in the market change?

When an event shifts either the supply or demand curve

What does price elasticity measure?

The responsiveness of the quantity demanded or supplied of a good to a change in its price.

How is price elasticity of demand calculated?

% change in quantity demand / % change in price

What are the three ways to describe elasticity?

- Elastic (Quantity is very responsive)

- Unit Elastic (equal change in quantity)

- Inelastic (Quantity is not very responsive)

What is indicated by an elastic demand or supply curve?

The quantity demanded or supplied responds to price changes in a greater than proportional manner.

What is indicated by an inelastic demand or supply curve?

A given percentage change in price will cause a smaller percentage change in the quantity demanded or supplied.

What is indicated by a unitary elasticity demand or supply curve?

A given percentage change in price leads to an equal percentage change in the quantity demanded or supplied.

What happens if demand is inelastic?

An increase in price causes an increase in total revenue.

What happens if demand is elastic?

An increase in price causes a decrease in total revenue

Why would a price floor or a price ceiling be imposed?

It will prevent a market from adjusting to its equilibrium price and quantity and thus will create an inefficient outcome

What is the outcome of a price ceiling being set below the equilibrium price?

Quantity demanded will exceed quantity supplied and excess demand or shortages will result.

What is the outcome of a price floor being set above the equilibrium price?

Quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

When might government-imposed price controls have a positive effect

If they are used to correct an existing market failure

What happens when price controls are applied to well-functioning markets?

The market outcome is inefficient

What happens to market outcomes when information about the quality of products is imperfect?

Market outcomes will be inefficient

What does a buyer rely on to judge the quality of products when confronted with imperfect information?

Price

What is the result of buyer's relying on price to indicate the quality of products when confronted with imperfect information?

Markets may have difficulty reaching an equilibrium price and quantity

In high-quality or medium quality goods markets with imperfect information where sellers find it difficult to demonstrate the quality of their goods to buyers, what are buyer's unwilling to do?

Pay a higher price for the goods

What can imperfect information lean to?

Riskier behavior due to moral hazard

What are used to mitigate the risk of imperfect information?

Guarantees, warranties, and service contracts

When does an externality occur?

When an exchange between a buyer and a seller has an impact on a third party who is not part of the exchange

How do markets react when a positive externality is present?

They under-produce, generating inefficient outcomes.

What can government intervention in markets with positive externalities encourage?

Actions that create benefits for others by providing incentives to increase production

How do markets react when a negative externality is present?

They overproduce, generating inefficient outcomes.

What do government intervention in markets with negative externalities discourage?

Actions that create costs for others by imposing costs on production

What are explicit costs?

Out of pocket costs

What are implicit costs?

Opportunity costs

In the short run, there is at least one input that cannot be changed. What is this input called?

A fixed input

What are fixed costs and when do they occur?

Costs that do not change with the level or production. These cost occur in the short run.

What is the law of diminishing marginal returns?

The marginal product of labor decreases as additional units are added to the fixed input

What law is being described when the variable cost rises at an increasing rate as firms increase the output?

The Law of Diminishing Marginal Returns

When are all inputs variable?

In the long run

In the short run, what happens to fixed costs when a firm increases production?

The fixed costs can be allocated over more output, and the per-unit fixed cost decreases

What is variable cost based on?

Factors such as labor and the cost of materials

When do variable costs increase?

When the number of units produced increases

What is the total cost made up of?

Variable and fixed costs

What happens initially to the average total cost when the total cost increases?

The average total cost decreases initially as production increases.

Why does the average total cost decrease when the total cost increases?

The fixed cost is allocated over more output units until it reaches a point of diminishing marginal returns due to the congestion effect

How do marginal costs typically appear on a graph?

The are usually rising

How do average total costs typically appear on a graph?

The are usually U-shaped

How do average variable costs typically appear on a graph?

The are usually U-shaped

What does it mean when the marginal cost is below the average total cost?

The average total cost is falling

What does it mean when the marginal cost is above the average total cost?

The average total cost is rising

What do economies of scale refer to?

A situation where the cost per unit is less expensive the more that is produced.

What limits a firm's ability to exploit economies of scale?

The market's demand for its products

What does the LRAC (Long run cost curve) show?

The lowest possible average cost of production.

What kind of costs does the LRAC (Long run cost curve) contain?

Variable costs

What can be determined of all firms when the LRAC (long run cost curve) has only one quantity produced that results in the lowest possible average cost?

All competing firms in an industry should be of the same size

If the LRAC (Long Run Average Cost) has a flat segment at the bottom, so that a range of different quantities can be produced at the lowest average cost, what can be said about the firms competing in the industry?

They are in a range of sizes

If the quantity demanded in the market of a certain product is much greater than the quantity found at the bottom of the LRAC curve where the cost of production is lowest what is the volume of firms that are competing in the market?

Many firms will be competing

If the quantity demanded in the market is less than the quantity at the bottom of the LRAC, what is the volume of firms competing in the market?

There will be one firm competing

What is it called when a single firm produces a product for which there are no close substitutes?

A monopoly

What is it called when the market structure has a few firms producing products that range from similar to highly different?

An oligopoly

What is monopolistic competition?

A market structure in which many companies sell products that are similar but not identical

What is perfect competition in a market?

A structure in which there are many firms, none large enough to influence the industry, producing homogeneous products.

What market type results when marginal costs equal marginal benefits?

Competitive Market

what can disrupt market efficiencies and allow an imbalance of information access to give some participants in the market an advantage over others?

Rent-seeking

What does the concentratio ration measure?

The share of the total sales in an industry of the top four to eight firms.

How is the Herfindahl-Hirschman Index (HHI) caclulated?

by summing the squares of the market share of each firm in the industry.

What is a shared weakness between the concentration ration and the Herfindahl-Hirschman Index (HHI)?

The assumption that the market is well defined and that the competitive environment is consistent across the market.

What does the expanded circular flow diagram include?

Interactions between households, firms, governments, and the rest of the world, as well as the financial, factor, and goods and services markets.

What does the firm's component of the expanded circular flow diagram include?

Elements associated with flows into and out of the business sector.

What does the household's component of the expanded circular flow diagram include?

The behavior of private individuals in their roles as consumers, savers, and suppliers of the factors of production.

What does the government's component of the expanded circular flow diagram include?

It summarizes the actions of all levels of government.

How does the expanded circular flow incorporate dealings with the rest of the world?

It includes exports, imports, and borrowing from other countries.

How is GDP calculated?

By summing expenditures on consumption, investment, government spending, and net exports.