Scarcity is the basic economic problem due to the limited nature of resources compared to unlimited wants. The other options do not capture this fundamental constraint.

Money is simply a medium of exchange and is not considered one of the traditional factors of production. The traditional factors include land, labor, capital, and entrepreneurship.

The law of demand explains that, all else equal, an increase in a good's price will result in a decrease in the quantity demanded. This inverse relationship is a cornerstone of basic economic theory.

Opportunity cost represents the value of the best alternative that is forgone when a decision is made. It is essential for understanding trade-offs in economics.

A free-market economy is defined by minimal government influence, letting market forces determine production and pricing. The other systems typically involve varying levels of government control and planning.

The equilibrium price in a competitive market arises from the intersection of the supply and demand curves. No external intervention is assumed in this basic market scenario.

Price elasticity of demand quantifies the responsiveness of the quantity demanded when the price of a good changes. This measurement helps businesses and economists understand consumer behavior.

The introduction of a strong substitute generally reduces the demand for the original product as consumers switch to the alternative. This substitution effect is a key concept in consumer choice theory.

Technological innovation can enhance production efficiency, which shifts the supply curve to the right. This shift leads to changes in market dynamics, including potential reductions in costs and price adjustments.

Entrepreneurs are innovators who combine various factors of production while taking on the risk of starting and managing new ventures. Their role is central to driving economic growth and fostering competition.

Firms use marginal cost analysis to determine the optimal level of production, ideally producing until marginal cost equals marginal revenue. This approach helps maximize profits and ensure efficient resource allocation.

Comparative advantage is achieved when a country produces a good at a lower opportunity cost than its trading partners. This concept underpins the benefits of international trade by encouraging specialization.

A binding price floor set above the equilibrium price prevents the market from clearing, resulting in a surplus as supply exceeds demand. This is a common consequence of such government interventions.

Taxing activities that generate negative externalities effectively raises the cost of these activities, reducing their occurrence. This policy seeks to internalize external costs and achieve a more socially optimal outcome.

An increase in demand, while supply remains unchanged, typically leads to a higher equilibrium price as well as an increase in the quantity sold. This adjustment reflects the market's response to consumers' increased willingness to purchase.

Allocative efficiency in a perfectly competitive market is achieved when the price of a good equals its marginal cost, indicating that resources are being used where they are most valued. This condition allows the market to maximize overall welfare.

Diminishing marginal returns occur when adding an extra unit of input results in a smaller increase in output than previous units did. This fundamental concept limits the benefits of continuously adding more of one input while holding others fixed.

When positive externalities are present, private markets tend to underproduce goods that confer external benefits. Government subsidies or incentives can encourage the production or consumption of these goods, aligning private incentives with social benefits.

A firm's short-run supply curve is the portion of the marginal cost curve that lies above its average variable cost. Producing below this level would mean the firm is not covering its variable costs.

The primary distinction between the short run and the long run is that in the short run, some factors of production are fixed, limiting a firm's ability to change all inputs. In contrast, the long run allows firms to adjust all inputs to optimize production decisions.