Economic Performance Practice Quiz

Scarcity refers to the basic economic problem of having limited resources to satisfy unlimited wants. This concept underpins many economic theories and decision-making processes.

Opportunity cost is the value of the next best alternative that is not chosen. It is a fundamental concept in economics that helps in understanding the trade-offs involved in decision-making.

Market equilibrium occurs when the amount of goods produced is exactly equal to the amount consumers wish to purchase at the current price. This balance stabilizes the market without inherent shortages or surpluses.

A market economy is characterized by decision-making based on supply and demand forces, where individual consumers and firms determine economic activity. Government influence is minimal, allowing market forces to guide resource allocation.

GDP stands for Gross Domestic Product and is the most widely used indicator of a country's economic performance. It quantifies the total economic output within national borders over a specific time period.

Price elasticity of demand measures the responsiveness of the quantity demanded to a change in the product's price. This understanding is crucial for firms to set prices strategically and for analyzing consumer behavior.

A decrease in interest rates lowers the cost of borrowing, which typically encourages businesses and consumers to invest and spend more. This increased activity generally supports economic growth.

High inflation erodes the purchasing power of money, meaning that consumers are able to buy less with the same amount of income. This situation can particularly harm individuals on fixed incomes.

Marginal cost represents the extra cost incurred for producing one additional unit of a product. It is a key concept in determining optimal production levels and maximizing profit.

Fiscal policy involves the use of government spending and taxation to influence the economy. It can stimulate economic performance by boosting aggregate demand or slow it down by reducing spending.

A supply shock occurs when an unexpected event disrupts the production process, leading to a sudden change in supply. This can result from natural disasters, geopolitical events, or abrupt changes in regulations.

Market failure occurs when the free market fails to allocate resources efficiently on its own. This inefficiency often provides a rationale for government intervention in the economy.

Comparative advantage is the principle that an entity should produce goods for which it has the lowest opportunity cost compared to others. This concept is central to the benefits of trade and specialization.

A subsidy reduces production costs for firms, which can lead to an increase in supply in the market. This policy is often used to encourage the production of certain goods or bolster struggling industries.

Unemployment represents unused labor resources, which leads to a reduction in overall consumer spending and production capacity. This underutilization of human resources often stifles economic growth.

In the short run, an increase in aggregate demand tends to boost output and push up prices as more money chases the available goods and services. This relationship is fundamental to understanding business cycles and inflationary pressures.

Technological innovation improves productivity, allowing more goods and services to be produced with the same resources. This shift outward of the PPF represents economic growth and an enhanced production capacity.

The multiplier effect refers to the phenomenon where an initial increase in spending leads to progressively larger changes in national income. This concept demonstrates that fiscal stimulus can have a more significant impact than the original amount spent.

In a perfectly competitive market, firms are price takers, so each additional unit sold earns the same price as previous sales. Therefore, marginal revenue equals average revenue in such markets.

A price floor set above the market equilibrium prevents prices from falling to their natural level, causing producers to supply more than consumers are willing to buy. This imbalance creates a surplus and can lead to inefficiencies in the market.