Knowledge

• What are the two types of goods in economics?

  Capital goods and consumer goods
• What does the production possibility frontier (PPF) represent?

  • Maximum output combinations of two goods
  • Illustrates trade-offs in production
  • Shows opportunity cost
• What does an outward shift in the production possibility frontier indicate?

  Balanced economic growth
• How does war impact the production possibility frontier?

  It can shift the PPF inward
• What does the demand curve represent in a simple market diagram?

  Relationship between price and quantity demanded
• What is the difference between contraction in demand and decrease in demand?

  Contraction is a movement along the curve
• What does a shift from D1 to D2 in the demand curve indicate?

  Increase in demand at every price
• What is the market demand?

  Sum of demand for individual firms
• What do the diagrams showing complements and substitutes illustrate?

  Relationship between prices of related goods
• What does the supply curve represent?

  Relationship between price and quantity supplied
• What is market equilibrium?

  Point where supply equals demand
• What happens when there is a decrease in market demand?

  Market equilibrium price and quantity fall
• What is the effect of an increase in market supply on equilibrium?

  Equilibrium price falls, quantity rises
• What is the impact of a decrease in market supply on equilibrium?

  Equilibrium price rises, quantity falls
• How does a decrease in market supply of coffee affect equilibrium?

  Equilibrium price rises, quantity falls
• What is the effect of an increase in market demand for coffee?

  Equilibrium price rises, quantity increases
• What happens when both supply decreases and demand increases in the coffee market?

  Equilibrium price rises, quantity is uncertain
• What causes a decrease in the price of solar power?

  Increase in supply of solar power
• What does a shortage in the housing market indicate?

  Excess demand at original price
• What does a price inelastic demand curve indicate?

  Price increase leads to smaller quantity decrease
• What does a price elastic demand curve indicate?

  Price increase leads to larger quantity decrease
• How does price elasticity of demand change along a straight-line demand curve?

  • PED is not constant
  • Varies from elastic to inelastic
  • Unitary elasticity at midpoint
• What is the total revenue formula?

  Total revenue = price x quantity
• What happens to total revenue when price falls?

  Total revenue decreases if demand is elastic
• What is the impact of a price increase on total revenue?

  Total revenue increases if demand is inelastic
• What is the effect of a minimum wage in a competitive labour market?

  It can cause unemployment
• What happens when there is an increase in labour supply?

  Equilibrium wage decreases
• What happens when there is an increase in labour demand?

  Equilibrium wage increases
• What is the effect of a decrease in labour supply?

  Equilibrium wage increases
• What is the effect of a decrease in labour demand?

  Equilibrium wage decreases
• What are the key components of consumer and producer surplus?

  • Consumer surplus: area above price, below demand
  • Producer surplus: area below price, above supply
  • Total surplus: sum of consumer and producer surplus
• What is the impact of a price rise on consumer surplus?

  Consumer surplus decreases
• What happens to total revenue when price increases?

  Total revenue increases if demand is inelastic
• What is the effect of a specific indirect tax on the market?

  It raises the price and reduces quantity
• What is the impact of a price ceiling in a market?

  It creates excess demand
• What does a price floor create in a market?

  Excess supply
• What is the effect of a subsidy on market equilibrium?

  It lowers price and increases quantity
• What is the impact of a negative consumption externality?

  Welfare loss occurs when MSB < MPB
• What does a positive production externality indicate?

  Welfare loss occurs when MSC < MPC
• What is the effect of a specific tax on a negative production externality?

  It internalizes the externality