Economics 2301 Exam 1 Practice Quiz

Scarcity refers to the fundamental economic problem that resources are limited relative to human wants. This forces individuals and societies to make choices about how to allocate scarce resources.

Opportunity cost represents the value of the next best alternative that is foregone when making a decision. It is a key concept for understanding trade-offs in economic decision-making.

The law of demand states that, ceteris paribus, when the price of a good increases, the quantity demanded decreases. This inverse relationship is a fundamental principle in understanding market behavior.

Market equilibrium is achieved when the quantity supplied equals the quantity demanded. At this point, there is neither a surplus nor a shortage, and the market tends to be stable.

A price ceiling is a government-imposed limit on how high a price can be charged for a good or service. Its aim is to keep essential goods affordable by preventing prices from rising too high.

An improvement in consumer tastes increases the desirability of a product, causing demand to increase at every price level. This shifts the demand curve to the right regardless of price changes.

Price elasticity of demand measures how much the quantity demanded changes in response to a change in price. A high elasticity indicates that consumers are very responsive to price changes.

Diminishing marginal returns occur when the addition of extra inputs results in progressively smaller increases in output. This is a common phenomenon in production settings due to fixed resources.

A subsidy lowers production costs for producers, leading to an increase in supply. As a result, the market experiences lower prices and a higher equilibrium quantity.

Public goods are characterized by non-excludability and non-rivalry. National defense is a classic example since its benefits are available to all citizens regardless of individual contributions.

GDP, or Gross Domestic Product, quantifies the market value of all final goods and services produced within a country during a given period. It is widely used as an indicator of a country's economic performance.

When demand is inelastic, consumers are less responsive to price changes. Therefore, a tax on such a good leads to only a minimal reduction in quantity demanded, meaning consumers largely bear the tax burden.

A binding price floor sets a minimum price above the equilibrium, resulting in higher quantity supplied than demanded. This discrepancy leads to a surplus in the market.

The supply curve is influenced by factors such as input prices, technology, and the number of sellers. Consumers' tastes affect the demand curve rather than the supply curve.

Marginal cost is the additional cost incurred from producing one more unit of output. It is a crucial concept for determining the optimal level of production for firms.

A rightward shift in the PPF signifies that an economy can produce more goods and services than before. This improvement usually results from technological advancements or an increase in resources, indicating economic growth.

The multiplier effect describes how an initial increase in autonomous spending can lead to a larger increase in national income through successive rounds of expenditure. This process demonstrates the interdependent nature of economic activity.

Tariffs are taxes on imported goods, which raise the price of these goods in the domestic market. This makes domestic products more competitive by comparison, although it can also reduce the overall level of international trade.

Market failure often occurs when externalities are present, meaning that the costs or benefits of transactions are not fully captured by market prices. Pollution is a common example where the negative external effects lead to suboptimal outcomes.

Contractionary fiscal policy, such as reduced government spending or increased taxes, is designed to decrease aggregate demand. This policy is typically employed to counteract inflationary pressures in an economy.