Economic Fundamentals
What are the three fundamental economic questions?
What is the definition of comparative advantage?
Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country.
Why is the demand curve downward-sloping?
The demand curve is downward-sloping because, as the price of a good decreases, consumers are willing and able to purchase more of it (the law of demand).
What is a price floor?
A price floor is a minimum price set by the government, typically above the equilibrium price, that prevents prices from falling too low.
What does the production possibilities curve represent?
The production possibilities curve shows the maximum combination of two goods that an economy can produce given its resources and technology.
What is the definition of economics?
Economics is the study of how individuals, businesses, and governments make choices about allocating scarce resources to satisfy unlimited wants.
What are the five sources of comparative advantage?
What is the difference between a change in demand and a change in quantity demanded?
A change in demand refers to a shift in the entire demand curve due to factors like income or preferences, while a change in quantity demanded refers to movement along the demand curve caused by a change in the price of the good.
What is a price ceiling?
A price ceiling is a maximum price set by the government, typically below the equilibrium price, that prevents prices from rising too high.
What does it mean to be "inside" the production possibilities curve?
Being inside the curve means the economy is not using all of its resources efficiently and could produce more of one or both goods.
What are the four categories of economic resources?
The four categories are land, labor, capital, and entrepreneurship.
How do absolute advantage and comparative advantage differ?
Absolute advantage refers to the ability of a country to produce more of a good or service than another country using the same amount of resources, while comparative advantage refers to the ability to produce a good at a lower opportunity cost.
What is an exchange rate?
An exchange rate is the price at which one currency can be exchanged for another, determining how much foreign currency can be obtained for a unit of domestic currency.
Why is a price ceiling for rent often introduced in markets?
Price ceilings for rent are often introduced to make housing more affordable in markets where rents are rising too quickly.
What does it mean to be "on" the production possibilities curve?
Being on the curve means the economy is using its resources efficiently, producing the maximum possible output of both goods.
What is the difference between scarcity and shortage?
Scarcity refers to the basic economic problem that arises because resources are limited, whereas a shortage occurs when the quantity demanded exceeds the quantity supplied at a particular price.
What is one common measure a nation might take to protect itself against trade?
Nations might impose tariffs, quotas, or subsidies to protect domestic industries from foreign competition.
What are the determinants of supply?
The determinants of supply include production technology, input prices, the number of sellers, and expectations of future prices.
What makes a price floor or a price ceiling effective or binding?
A price floor or ceiling is effective or binding when it is set above or below the market equilibrium price, causing a surplus (price floor) or a shortage (price ceiling).
Why does the production possibilities curve have a bowed-out shape?
The curve is bowed-out because of the law of increasing marginal opportunity costs holds; as more of one good is produced, the opportunity cost of producing additional units increases.
What is the difference between productive efficiency and allocative efficiency?
Productive efficiency occurs when goods and services are produced at the lowest possible cost, while allocative efficiency occurs when resources are distributed in a way that maximizes the overall benefit to society.
Why do some people think trade is "bad"?
Some people argue that trade can lead to job losses, exploitation of workers, environmental harm, and a loss of cultural identity, often seeing it as benefiting corporations at the expense of local industries or workers.
What happens to equilibrium price and quantity when demand increases while supply remains constant?
The equilibrium price and quantity will both increase. The increased demand causes a shift in the demand curve to the right, pushing the price and quantity higher.
What is a secondary rationing device?
A secondary rationing device is a mechanism, such as waiting lines, coupons, or lotteries, used to allocate goods when there is a shortage due to a price ceiling.
What happens to the production possibilities curve when there is an improvement in technology?
The curve shifts outward, indicating that the economy can produce more of both goods with the same amount of resources.