Principles of Economics Exam
Questions with Answers
Four Economic Resources - ✔✔land, labor, capital, entrepreneurship
Microeconomics - ✔✔the study of how households and firms make decisions and how they
interact in markets; functioning of individual parts of the economy
Macroeconomics - ✔✔The study of the economy as a whole
Efficiency - ✔✔Getting the most that we can out of our scare resources
Equity - ✔✔Distributing output in a fair manner
Opportunity cost - ✔✔whatever must be given up to obtain an item; cost of the alternative
rational decision making - ✔✔think at the margin; marginal benefit must exceed marginal cost
Positive analysis - ✔✔the study of "what is?"; descriptive analysis
normative analysis - ✔✔the study of "what ought to be?"; prescriptive analysis, reflects
personal views, values and judgments
Circular Flow diagram - ✔✔a visual model of the economy that shows how dollars flow through
markets among households and firms
,Production Possibilities Frontier (PPF) - ✔✔a curve showing the maximum attainable
combinations of two products that may be produced with available resources and current
technology
law of increasing opportunity cost - ✔✔The more resources already devoted to an activity, the
smaller the payoff of devoting additional resources to that activity
Economic growth (production) - ✔✔the ability of the economy to increase the production of
goods and services; shifts in PPF
Scarcity - ✔✔Because of this, a country is limited to points on or below its PPF
Efficient production - ✔✔Maximum output from a given amount of input
Law of Demand - ✔✔consumers buy more of a good when its price decreases and less when its
price increases
change in quantity demanded - ✔✔movement along the same demand curve; caused by a
change in P
change in demand - ✔✔a shift of the demand curve, which changes the quantity demanded at
any given price
Determinants of Demand - ✔✔tastes and preferences; Prices of related goods (substitutes,
complements) income, consumers expectations, number of consumers, taxes or subsidies on
buyers
Law of Supply - ✔✔producers offer more of a good as its price increases and less as its price
falls
, Change in Quantity Supplied - ✔✔movement along the same supply curve caused by a change
in price
Change in Supply - ✔✔a shift of the supply curve, which changes the quantity supplied at any
given price
Determinants of Supply - ✔✔Level of technology, Price of inputs/resources, sellers' expectation
of the future, number of producers, taxes or subsidies on sellers
price elasticity of demand - ✔✔how much the quantity demanded of a good responds to a
change in price of that good
Determinants of price elasticity of demand - ✔✔necessity vs luxury, percentage of budget,
closeness of substitutes, market definition, durability of good, time period
Price elasticity of demand formula - ✔✔percentage change in quantity demanded/percentage
change in price
perfectly inelastic - ✔✔buyers are completely unresponsive to changes in price, vertical
demand curve
perfectly elastic - ✔✔flat demand curve; consumers are perfectly price sensitive
Elasticity - ✔✔changes along the same demand curve
perfect competition - ✔✔a market structure in which a large number of firms all produce the
same product
rationing mechanism of free competitive market - ✔✔price
Questions with Answers
Four Economic Resources - ✔✔land, labor, capital, entrepreneurship
Microeconomics - ✔✔the study of how households and firms make decisions and how they
interact in markets; functioning of individual parts of the economy
Macroeconomics - ✔✔The study of the economy as a whole
Efficiency - ✔✔Getting the most that we can out of our scare resources
Equity - ✔✔Distributing output in a fair manner
Opportunity cost - ✔✔whatever must be given up to obtain an item; cost of the alternative
rational decision making - ✔✔think at the margin; marginal benefit must exceed marginal cost
Positive analysis - ✔✔the study of "what is?"; descriptive analysis
normative analysis - ✔✔the study of "what ought to be?"; prescriptive analysis, reflects
personal views, values and judgments
Circular Flow diagram - ✔✔a visual model of the economy that shows how dollars flow through
markets among households and firms
,Production Possibilities Frontier (PPF) - ✔✔a curve showing the maximum attainable
combinations of two products that may be produced with available resources and current
technology
law of increasing opportunity cost - ✔✔The more resources already devoted to an activity, the
smaller the payoff of devoting additional resources to that activity
Economic growth (production) - ✔✔the ability of the economy to increase the production of
goods and services; shifts in PPF
Scarcity - ✔✔Because of this, a country is limited to points on or below its PPF
Efficient production - ✔✔Maximum output from a given amount of input
Law of Demand - ✔✔consumers buy more of a good when its price decreases and less when its
price increases
change in quantity demanded - ✔✔movement along the same demand curve; caused by a
change in P
change in demand - ✔✔a shift of the demand curve, which changes the quantity demanded at
any given price
Determinants of Demand - ✔✔tastes and preferences; Prices of related goods (substitutes,
complements) income, consumers expectations, number of consumers, taxes or subsidies on
buyers
Law of Supply - ✔✔producers offer more of a good as its price increases and less as its price
falls
, Change in Quantity Supplied - ✔✔movement along the same supply curve caused by a change
in price
Change in Supply - ✔✔a shift of the supply curve, which changes the quantity supplied at any
given price
Determinants of Supply - ✔✔Level of technology, Price of inputs/resources, sellers' expectation
of the future, number of producers, taxes or subsidies on sellers
price elasticity of demand - ✔✔how much the quantity demanded of a good responds to a
change in price of that good
Determinants of price elasticity of demand - ✔✔necessity vs luxury, percentage of budget,
closeness of substitutes, market definition, durability of good, time period
Price elasticity of demand formula - ✔✔percentage change in quantity demanded/percentage
change in price
perfectly inelastic - ✔✔buyers are completely unresponsive to changes in price, vertical
demand curve
perfectly elastic - ✔✔flat demand curve; consumers are perfectly price sensitive
Elasticity - ✔✔changes along the same demand curve
perfect competition - ✔✔a market structure in which a large number of firms all produce the
same product
rationing mechanism of free competitive market - ✔✔price
