Basic Concepts
What is the basic economic problem all societies face?
Scarcity.
What happens to the demand curve when there is an increase in consumer income (normal good)?
It shifts to the right.
What is perfect competition?
A market with many buyers and sellers, identical products, and easy entry/exit.
What does price elasticity of demand measure?
The responsiveness of quantity demanded to a change in price.
What is a price ceiling?
A legal maximum price.
What does opportunity cost refer to?
The value of the next best alternative foregone.
What is the law of demand?
As price decreases, quantity demanded increases, ceteris paribus.
In what type of market is a firm a price taker?
Perfect competition.
What does it mean if a product has an elasticity greater than 1?
Demand is elastic.
Give one example of a public good.
National defense.
What is the difference between positive and normative economics?
or What does it mean if a good is scarce, and how is that different from being rare?
Positive economics describes "what is"; normative describes "what ought to be."
or A good is scarce if it has limited supply and there is demand for it; rarity refers to how uncommon something is, but it might not be in demand.
What causes a movement along the supply curve?
A change in the good’s own price.
Name one key feature of a monopolistically competitive market.
Product differentiation.
What is total revenue and how does it relate to elasticity?
TR = P × Q; if demand is elastic, a price increase lowers total revenue.
What is a negative externality?
A cost imposed on a third party not involved in the transaction.
What are the three economic questions every society must answer?
What to produce? How to produce? For whom to produce?
What is the effect of a price floor set above equilibrium?
A surplus.
What is allocative efficiency, and which market structure is most likely to achieve it?
When P = MC; achieved in perfect competition.
What factors influence price elasticity of demand? (Name at least two)
Availability of substitutes, necessity vs luxury, time horizon, proportion of income.
How can the government correct a positive externality?
Subsidize the good or service.
Define the Production Possibilities Curve (PPC) and what a point inside, on, and outside the curve represents.
A PPC shows maximum output combinations. Inside: inefficient, On: efficient, Outside: unattainable.
Draw and explain the effects of a simultaneous increase in demand and decrease in supply.
Price increases; quantity effect is indeterminate.
Why does a monopolist produce less and charge more than firms in perfect competition?
They maximize profit where MR = MC and restrict output to raise prices.
Calculate the price elasticity of demand if quantity demanded changes from 100 to 80 when price increases from $10 to $12.
PED = [(80 - 100)/((100+80)/2)] ÷ [(12 - 10)/((10+12)/2)] = (-20/90)/(2/11) ≈ -1.22 → Elastic.
Explain the concept of the Coase Theorem.
or What is a deadweight loss, and how can it result from government intervention?
Private parties can solve externalities if property rights are defined and transaction costs are low.
or Deadweight loss is the loss of total surplus due to market inefficiency; it can result from taxes, price floors/ceilings, or subsidies that prevent optimal allocation of resources.