Fundamental Concepts
What is the definition of opportunity cost?
The value of the next best alternative forgone when making a choice.
What law states that as price increases, quantity demanded decreases?
The Law of Demand.
Identify the formula for GDP
GDP = C + I + G + (X – M)
What is a negative externality?
A cost imposed on a third party not involved in the transaction (e.g., pollution).
What is the formula for price elasticity of demand?
% change in quantity demanded ÷ % change in price.
The study of how people make choices under conditions of scarcity is called what?
Economics
What does it mean when demand is “inelastic”?
Quantity demanded changes little when price changes. (Ex. gas, diapers, electricity bill)
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured at current prices; real GDP is adjusted for inflation.
Give one example of a government policy that addresses climate change.
Carbon tax, subsidies for renewable energy, cap-and-trade, regulations on emissions.
What does the Lorenz curve measure?
Income distribution and inequality.
What are the three basic economic questions every society must answer?
What to produce? How to produce? For whom to produce?
In perfect competition, what does the demand curve for an individual firm look like?
Perfectly elastic (horizontal line).
What type of unemployment occurs naturally in any economy?
Frictional and structural unemployment (together called the natural rate).
What is the tragedy of the commons?
Overuse of shared resources when individuals act in their own self-interest.
If the reserve ratio is 10%, what is the simple money multiplier?
1 / 0.10 = 10.
Name two differences between a command economy and a market economy.
In a command economy, decisions are made by central planners; in a market economy, they are made by buyers and sellers. Prices are set by the government in a command economy, by supply & demand in a market.
Define marginal cost and explain how it relates to supply.
The additional cost of producing one more unit; supply curve is essentially the marginal cost curve above AVC.
What is the multiplier effect, and how is it calculated?
Initial spending leads to larger increases in GDP; multiplier = 1 / (1 – MPC) or 1 / MPS.
Explain how a carbon tax is meant to change producer behavior.
Increases cost of polluting, giving incentive to reduce emissions or adopt cleaner methods.
Show the formula for GDP deflator, and explain what it measures.
GDP Deflator = (Nominal GDP ÷ Real GDP) × 100; measures overall price level.
Describe a production possibilities frontier (PPF) and explain what a point inside, on, and outside the curve means.
It is a graph that illustrates the maximum combination of two goods an economy can produce given its limited resources. Inside = inefficient, On = efficient, Outside = unattainable with current resources.
Explain the concept of diminishing marginal returns.
Adding more of a variable input to fixed inputs eventually causes the marginal product to decline.
Explain the difference between monetary policy and fiscal policy.
Monetary policy = central bank controls money supply/interest rates; Fiscal policy = government changes spending/taxes.
What is cap-and-trade, and how does it work?
System where government sets a cap on total emissions and issues tradable permits; firms can buy/sell rights to pollute.
If nominal GDP is $15 trillion and real GDP is $12 trillion, what is the GDP deflator, and what does it indicate?
GDP deflator = (15 ÷ 12) × 100 = 125. This indicates that the overall price level has increased by 25% since the base year.