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Economic Concepts and Terminology
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Economic Concepts and Terminology
Economic Concepts and Terminology
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1
Question
What is open opportunity?
Answer
The ability of everyone to enter and compete in the marketplace of his or her own free choice.
2
Question
What is legal equality?
Answer
A situation in which everyone has the same economic rights under the law.
3
Question
What is a free contract?
Answer
The ability for people to decide for themselves which legal agreements they want to enter into, such as business, job, or purchase commitments.
4
Question
What is a free rider?
Answer
A person who chooses not to pay for a good or service but who benefits from it when it is provided.
5
Question
What is the free-rider problem?
Answer
The situation where there is no incentive for businesses to produce public goods because people will not voluntarily pay for them, as they receive the benefits whether they pay or not.
6
Question
What is an externality?
Answer
A side effect of a transaction that affects someone other than the producer or the buyer.
7
Question
What is a negative externality?
Answer
An externality that is a negative effect, or cost, for people who were not involved in the original economic activity.
8
Question
What is a positive externality?
Answer
An externality that is a positive effect, or benefit, for people who were not involved in the original economic activity.
9
Question
What is the law of demand?
Answer
When the price of a good or service falls, consumers buy more of it. As the price of a good or service increases, consumers usually buy less of it.
10
Question
What is a demand schedule?
Answer
A table that shows how much of a good or service an individual is willing and able to purchase at each price.
11
Question
What is a market demand schedule?
Answer
A chart showing how much of a good or service all consumers are willing and able to buy at each price in a market.
12
Question
What is the difference between an increase in quantity demanded and an increase in demand?
Answer
An increase in quantity demanded is a movement along the demand curve due to a change in price. An increase in demand is a shift of the entire demand curve, meaning people are willing to buy more at every price.
13
Question
What causes an increase in quantity demanded?
Answer
A decrease in the price of the good or service.
14
Question
What causes an increase in demand?
Answer
Non-price factors such as higher income, changes in consumer preferences, increase in population, advertising, expectations of future price increases, or rising prices of substitutes.
15
Question
What is the difference between an increase in quantity supplied and an increase in supply?
Answer
An increase in quantity supplied is a movement along the supply curve due to a change in price. An increase in supply is a shift of the entire supply curve, meaning producers are willing to supply more at every price.
16
Question
What causes an increase in quantity supplied?
Answer
An increase in the price of the good or service.
17
Question
What causes an increase in supply?
Answer
Non-price factors that make producers willing to supply more at every price.
18
Question
What is market equilibrium?
Answer
The point where the quantity demanded by consumers equals the quantity supplied by producers at a specific price level.
19
Question
What is equilibrium price?
Answer
The price at which quantity demanded equals quantity supplied, also known as the market-clearing price.
20
Question
What is equilibrium quantity?
Answer
The quantity of goods or services exchanged at the equilibrium price.
21
Question
What happens if the price is above equilibrium?
Answer
There is a surplus (excess supply), leading to downward pressure on prices.
22
Question
What happens if the price is below equilibrium?
Answer
There is a shortage (excess demand), leading to upward pressure on prices.
23
Question
What is a subsidy?
Answer
A government payment that helps a producer or consumer.
24
Question
What is a subsidy?
Answer
A cost of an economic activity that is considered to be in the public interest, paid for with taxes and spreading the benefit of a positive externality.
25
Question
Give an example of a subsidy.
Answer
The federal government providing subsidies to drug companies to develop a new vaccine, or a local government subsidizing influenza shots for the community.
26
Question
What are transfer payments?
Answer
Transfers of income from one person or group to another even though the receiver does not provide any goods or services in return.
27
Question
What is a public transfer payment?
Answer
A payment in which the government transfers income from taxpayers to recipients who do not provide anything in return.
28
Question
How do public transfer payments relate to different economic systems?
Answer
They are not a characteristic of pure market economies, but are more characteristic of command economies, making the U.S. economy a mixed economy.
29
Question
What is the income effect?
Answer
A change in the amount of a product that a consumer will buy because the purchasing power of his or her income changes, even though the income itself does not change.
30
Question
What is the substitution effect?
Answer
The pattern of behavior that occurs when consumers react to a change in the price of a good or service by buying a substitute product.