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Introductory Economics Review
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Introductory Economics Review
Introductory Economics Review
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1
Question
What occurs when the market on its own does not produce the best result for society?
Page 1
Answer
This situation is described as a market failure.
2
Question
What costs are included in Marginal Social Cost ( ext{MSC}) that are excluded from regular supply?
Page 1
Answer
Marginal Social Cost includes external costs, such as pollution, while regular supply only shows private costs.
3
Question
At what point does a socially efficient equilibrium occur in a market failure graph?
Page 1
Answer
Socially efficient equilibrium occurs where Marginal Social Cost ( ext{MSC}) equals Marginal Social Benefit ( ext{MSB}).
4
Question
What is represented by the deadweight loss ( ext{DWL}) triangle on a market failure graph?
Page 1
Answer
The deadweight loss represents the lost benefit to society when the market produces too much or too little of a good.
5
Question
How can a government use taxes to correct a market failure involving external costs?
Page 1
Answer
A tax can shift the supply curve upward to match the Marginal Social Cost ( ext{MSC}).
6
Question
How does the abuse of a dominant position (monopoly) affect market outcomes?
Page 1
Answer
Monopolies produce too little of a good at a higher price than what is socially efficient.
7
Question
What is the 'tragedy of the commons' in economic theory?
Page 1
Answer
It is the market failure where public or shared resources are overused and depleted.
8
Question
What is the free-rider problem associated with public goods?
Page 1
Answer
The free-rider problem occurs when everyone benefits from a public good, but no one wants to pay for it, leading to underprovision.
9
Question
What is the formula for the 4-Firm Concentration Ratio?
Page 1
Answer
ext{Sales of top 4 firms} ext{ ÷ } ext{total industry sales}
10
Question
Why is labour considered a 'derived market'?
Page 1
Answer
The demand for workers comes from the demand for the products they produce.
11
Question
How is the Value of Marginal Product ( ext{VMP}) calculated?
Page 2
Answer
ext{VMP} = ext{Price of output} ext{ × } ext{Marginal Product}
12
Question
What does the Law of Diminishing Returns state regarding labour?
Page 2
Answer
Each extra worker eventually adds less output, causing the Marginal Product ( ext{MP}) to fall.
13
Question
Why does the labour supply curve bend backward at very high wages?
Page 2
Answer
At very high wages, people choose more leisure over work because of the income effect.
14
Question
What is the definition of the reservation wage?
Page 2
Answer
The lowest wage an individual is willing to accept to work.
15
Question
What is a compensatory wage differential?
Page 2
Answer
It is when dangerous or unpleasant jobs pay more to attract workers.
16
Question
How is the Lorenz Curve used to measure economic inequality?
Page 2
Answer
The Lorenz Curve shows how evenly income is distributed; a straighter diagonal line represents perfect equality, while a deeper curve shows more inequality.
17
Question
What are three methods governments use to reduce income inequality through fiscal policy?
Page 2
Answer
Progressive taxes, transfer payments, and social programs.
18
Question
What is the standard formula for calculating Gross Domestic Product ( ext{GDP})?
Page 2
Answer
ext{GDP} = ext{C} + ext{I} + ext{G} + ext{X} − ext{M}
19
Question
What is the difference between Nominal ext{GDP} and Real ext{GDP}?
Page 3
Answer
Nominal ext{GDP} uses current prices, while Real ext{GDP} is adjusted for inflation to show 'true' growth.
20
Question
What are the four phases of the business cycle?
Page 3
Answer
Expansion, Peak, Contraction, and Trough.
21
Question
What results from economic growth and competition for resources during an expansion phase?
Page 3
Answer
Competition for resources leads to inflation during an expansion.
22
Question
What do positions inside, on, and outside the Production Possibilities Frontier ( ext{PPF}) represent?
Page 3
Answer
Inside represents underutilization; on the curve represents efficiency; outside is impossible with current resources.
23
Question
What are the three main types of unemployment?
Page 3
Answer
Frictional (between jobs), Structural (skills mismatch), and Cyclical (recession-caused).
24
Question
What is fiscal policy as defined in the study notes?
Page 3
Answer
The government's use of spending and taxes to manage the economy.
25
Question
What creates a government budget deficit, and what is its long-term consequence?
Page 4
Answer
A deficit occurs when spending is greater than revenue, and it adds to the national debt.
26
Question
What are the two primary goals mentioned for income tax systems?
Page 4
Answer
Simplicity (easy to understand) and Fairness (payment based on ability).
27
Question
What is the Bank of Canada's ideal inflation target range?
Page 4
Answer
The target range is 1–3%, with an ideal aim of approximately 2%.
28
Question
How does Aggregate Demand ( ext{AD}) relate to consumer confidence and employment?
Page 4
Answer
Aggregate Demand depends on consumer confidence, which is influenced by the employment rate and inflation.
29
Question
What effects does a rightward shift in Aggregate Supply ( ext{AS}) have on the economy?
Page 4
Answer
A rightward shift in ext{AS} leads to economic growth and downward pressure on inflation.
30
Question
Where does the supply of loanable funds come from?
Page 5
Answer
The supply of loanable funds comes from household savings.