Basic Economic Ideas and Resource Allocation
What is the fundamental economic problem?
Scarcity—unlimited wants, limited resources.
What is the law of demand?
As price rises, quantity demanded falls, ceteris paribus.
What is a public good?
Non-rival and non-excludable good.
What is the formula for Aggregate Demand (AD)?
AD = C + I + G + (X - M).
What is fiscal policy?
Taxation and government spending.
What is the opportunity cost of a government choosing a school over a hospital?
The hospital—the next best alternative forgone.
Consumers continue buying them despite price increases.
Why impose a maximum price?
To make goods affordable.
What does GDP measure?
Total value of output.
What is a budget deficit?
Spending exceeds revenue.
What are the three fundamental economic questions?
What to produce, how to produce, and for whom to produce.
How does total revenue change if demand is elastic and price rises?
Revenue falls since consumers reduce quantity demanded significantly.
Why tax cigarettes?
To reduce consumption/demand.
Difference between real and nominal GDP?
Real GDP is inflation-adjusted.
How does expansionary monetary policy affect borrowing?
Lowers interest rates so potentially higher borrowing.
What is the main role of an entrepreneur?
To take risks and to organide resources.
How do price changes differ from changes in income or preferences?
Price change moves along demand curve; income/preferences shift it.
How does a buffer stock scheme stabilise prices?
Goverment buys when prices/demand are low, sells when prices/demand are high .
Why does economic growth reduce unemployment?
More jobs are created when more output is produced.
Goal of supply-side policies?
Increase productivity.
How are resources allocated in a mixed economy?
Through market forces and government intervention.
How do subsidies affect supply and prices?
They lower production costs, increasing supply and reducing prices.
How do progressive taxes affect inequality?
Reduce inequality.
What causes cost-push inflation?
Higher costs of production.
Why does contractionary fiscal policy lower AD?
Higher taxes, less government spending, lower spending by consumers and/or firms.