Test 1 - Definitions

Question 1

What is the circular flow diagram?

Answer 1

A diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

This diagram illustrates the flow of goods, services, and money in an economy.

Question 2

Define command economy.

Answer 2

An economy where economic decisions are passed down from government authority and where the government owns the resources

In a command economy, the government controls all aspects of production and distribution.

Question 3

What is division of labor?

Answer 3

The way in which different workers divide required tasks to produce a good or service

This concept helps increase productivity by allowing workers to specialize in specific tasks.

Question 4

What does economics study?

Answer 4

The study of how humans make choices under conditions of scarcity

It examines how resources are allocated and the trade-offs involved in decision-making.

Question 5

What are economies of scale?

Answer 5

When the average cost of producing each individual unit declines as total output increases

This phenomenon occurs because fixed costs are spread over a larger number of goods.

Question 6

Define exports.

Answer 6

Products (goods and services) made domestically and sold abroad

Exports contribute to a country’s economic growth and trade balance.

Question 7

What is fiscal policy?

Answer 7

Economic policies that involve government spending and taxes

Fiscal policy is used to influence economic conditions and promote economic stability.

Question 8

Define globalization.

Answer 8

The trend in which buying and selling in markets have increasingly crossed national borders

Globalization affects trade, investment, and cultural exchange between countries.

Question 9

What is the goods and services market?

Answer 9

A market in which firms are sellers of what they produce and households are buyers

This market facilitates the exchange of finished products between producers and consumers.

Question 10

What does gross domestic product (GDP) measure?

Answer 10

The size of total production in an economy

GDP is a key indicator of economic health and growth.

Question 11

Define imports.

Answer 11

Products (goods and services) made abroad and then sold domestically

Imports can affect a country’s trade balance and economy.

Question 12

What is the labor market?

Answer 12

The market in which households sell their labor as workers to business firms or other employers

This market determines wages and employment levels.

Question 13

What does macroeconomics focus on?

Answer 13

Broad issues such as growth, unemployment, inflation, and trade balance

Macroeconomics examines the economy as a whole rather than individual markets.

Question 14

Define market.

Answer 14

Interaction between potential buyers and sellers; a combination of demand and supply

Markets can take various forms, including physical locations and online platforms.

Question 15

What is a market economy?

Answer 15

An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

Market economies are characterized by competition and consumer choice.

Question 16

What does microeconomics focus on?

Answer 16

Actions of particular agents within the economy, like households, workers, and business firms

Microeconomics analyzes individual economic behaviors and decisions.

Question 17

What is a model in economics?

Answer 17

A representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

Models are used to predict and analyze economic behavior.

Question 18

Define monetary policy.

Answer 18

Policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

Monetary policy is typically managed by a country’s central bank.

Question 19

What is a private enterprise system?

Answer 19

Where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

This system promotes competition and consumer choice.

Question 20

Define scarcity.

Answer 20

When human wants for goods and services exceed the available supply

Scarcity is a fundamental concept in economics, driving the need for choices.

Question 21

What is specialization?

Answer 21

When workers or firms focus on particular tasks for which they are well-suited within the overall production process

Specialization can lead to increased efficiency and productivity.

Question 22

What is a traditional economy?

Answer 22

Typically an agricultural economy where things are done the same as they have always been done

Traditional economies rely on customs and historical practices.

Question 23

Define underground economy.

Answer 23

A market where the buyers and sellers make transactions in violation of one or more government regulations

The underground economy can include illegal activities and unreported income.

Question 24

What is allocative efficiency?

Answer 24

When the mix of goods produced represents the mix that society most desires

This concept emphasizes the optimal distribution of resources to meet consumer preferences.

Question 25

Define budget constraint.

Answer 25

All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set ## Footnote This illustrates the trade-offs consumers face in their purchasing decisions.

Question 26

What is comparative advantage?

Answer 26

When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production ## Footnote This principle explains how countries can benefit from trade by specializing in the production of goods they can produce most efficiently.

Question 27

What does the term 'invisible hand' refer to?

Answer 27

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes ## Footnote This idea suggests that personal gain can inadvertently benefit society as a whole.

Question 28

What is the law of diminishing marginal utility?

Answer 28

As we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units ## Footnote This principle highlights the decreasing satisfaction experienced with each additional unit consumed.

Question 29

Explain the law of diminishing returns.

Answer 29

As we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline ## Footnote This concept is crucial in understanding production efficiency and resource allocation.

Question 30

What is marginal analysis?

Answer 30

Examination of decisions on the margin, meaning a little more or a little less from the status quo ## Footnote This approach helps in making informed decisions by evaluating the additional benefits and costs.

Question 31

What is a normative statement?

Answer 31

Statement which describes how the world should be ## Footnote Normative statements are subjective and based on personal beliefs or opinions.

Question 32

Define opportunity cost.

Answer 32

Measures cost by what we give up/forfeit in exchange; measures the value of the forgone alternative ## Footnote This concept is fundamental in economics for understanding trade-offs in decision-making.

Question 33

What is an opportunity set?

Answer 33

All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income ## Footnote This set illustrates the choices available to consumers based on their budget.

Question 34

What is a positive statement?

Answer 34

Statement which describes the world as it is ## Footnote Positive statements are objective and can be tested or validated.

Question 35

What is a production possibilities frontier (PPF)?

Answer 35

A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available ## Footnote The PPF illustrates trade-offs and opportunity costs in production.

Question 36

Define productive efficiency.

Answer 36

When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service) ## Footnote This concept is key to understanding the optimal use of resources in production.

Question 37

What are sunk costs?

Answer 37

Costs that we make in the past that we cannot recover ## Footnote Decision-making should ignore sunk costs as they do not affect future costs or benefits.

Question 38

What does utility refer to?

Answer 38

Satisfaction, usefulness, or value one obtains from consuming goods and services ## Footnote Utility is a central concept in economics, reflecting consumer preferences.

Question 39

What is ceteris paribus?

Answer 39

other things being equal

Question 40

What are complements?

Answer 40

goods that are often used together so that consumption of one good tends to enhance consumption of the other

Question 41

Define consumer surplus.

Answer 41

the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid

Question 42

What is deadweight loss?

Answer 42

the loss in social surplus that occurs when a market produces an inefficient quantity

Question 43

Define demand.

Answer 43

the relationship between price and the quantity demanded of a certain good or service

Question 44

What is a demand curve?

Answer 44

graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis

Question 45

What is a demand schedule?

Answer 45

table that shows a range of prices for a certain good or service and the quantity demanded at each price

Question 46

What is an economic/social surplus?

Answer 46

the sum of consumer surplus and producer surplus

Question 47

What is equalibrium?

Answer 47

the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change

Question 48

Define equalibrium price.

Answer 48

the price where quantity demanded is equal to quantity supplied

Question 49

Define equalibrium quantity.

Answer 49

the quantity at which quantity demanded and quantity supplied are equal for a certain price level

Question 50

Define excess demand.

Answer 50

at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

Question 51

Define excess supply.

Answer 51

at the existing price, quantity supplies exceeds the quantity demanded; also called a surplus

Question 52

Define factors of production.

Answer 52

the resources such as land, labor, capital, entreprenurial ability, and technology, that are used to produce goods and services; also called inputs!

Question 53

What is an inferior good?

Answer 53

a good in which the quantity demanded falls as income rises, and quantity demanded rises as income falls

Question 54

What is the law of demand?

Answer 54

the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, ceterus paribus.

Question 55

What is the law of supply?

Answer 55

the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, ceterus paribus.

Question 56

Define normal good.

Answer 56

a good in which the quantity demanded rises as income rises and in which quantity demanded falls as income falls

Question 57

What is a price ceiling?

Answer 57

legal maximum price ## Footnote Leads to shortage. Common examples: rent

Question 58

Define price control

Answer 58

government laws to regulate prices instead of letting market forces determine prices ## Footnote i.e. price ceilings and floors. leads to shortages and surpluses.

Question 59

What is a price floor?

Answer 59

a legal minimum price ## Footnote Leads to surpluses. Common examples: minimum wage & agriculture

Question 60

What is a producer surplus?

Answer 60

the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept

Question 61

Define quantity demanded.

Answer 61

the total number of units of a good or service consumers are willing to purchase at a given price

Question 62

Define quantity supplied.

Answer 62

the total number of units of a good or service producers are willing to sell at a given price

Question 63

What is a shift in demand?

Answer 63

when a change in some economic factor (OTHER THAN PRICE) causes a different quantity to be demanded AT EVERY PRICE

Question 64

What is a shift in supply?

Answer 64

when a change in some economic factor (OTHER THAN PRICE) causes a different quantity to be supplied AT EVERY PRICE

Question 65

Define shortage.

Answer 65

at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand

Question 66

What is social/total surplus?

Answer 66

the sum of consumer surplus and producer surplus

Question 67

Define substitute good.

Answer 67

a good that can replace another to some extent, so that greater consumption of one good can mean less of the other

Question 68

Define supply.

Answer 68

the relationship between price and the quantity supplied of a certain good or service

Question 69

What is a supply curve?

Answer 69

a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis

Question 70

What is a supply schedule?

Answer 70

a table that shows a range of prices for a good or service and the quantity supplied at each price

Question 71

Define surplus.

Answer 71

at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply