Economics Chapter 3-4 Review

Question 1

What Were Adam Smiths Major Economic Theories?

Answer 1

Theory of the Invisible Hand,Laissez-Faire Capitalism

Question 2

Explain Adam Smiths Major Theories

Answer 2

Theory of the Invisible Hand: that in a free-market system, individuals pursuing their self-interest unintentionally promote the well-being of society as a whole. Market forces, like supply and demand, guide resources and lead to efficient economic outcomes.

Theory of Comparative Advantage: Smith proposed that countries should specialize in producing goods and services where they have a comparative advantage, meaning they can produce more efficiently than others. International trade then allows nations to exchange these specialized goods, benefiting everyone and increasing overall wealth.

Laissez-Faire Capitalism: Smith advocated for limited government interference in the economy. He believed that markets function best when left to their own devices, with minimal regulations or interventions.

Question 3

What are Karl Marx’s major economic ideas?

Answer 3

Marxism, communist manifesto

Question 4

Explain Karl Marx’s economic ideas.

Answer 4

Communist Manifesto: Karl Marx co authored the communist Manifesto along with his friend Fredrick Engels, they argue that in capitalist societies the rich exploit the poor, they call for a revolution where the working class takes over and wealth and resources are shared equally.

Marxism: this theory revolves around the idea that in capitalist societies there’s a conflict between the working class and the capitalist class, it was believed that this conflict would lead to revolution in the working class would overthrow the capitalist system where resources and wealth are collectively owned and distributed based on need rather than profit.

Question 5

What are Adam smiths Major economic ideas?

Answer 5

invisible hand, Divison of labour, laissez faire

Question 6

Explain Adam Smiths Major ideas

Answer 6

Law of Self-Interest, often associated with his theory of the invisible hand, is the idea that individuals, when acting in their own self-interest, unintentionally contribute to the greater good of society. In a market system, people pursuing their own economic well-being by making choices that benefit them personally can lead to overall economic prosperity and the efficient allocation of resource

Theory of the Invisible Hand: Smith argued that in a free-market system, individuals pursuing their self-interest unintentionally promote the well-being of society as a whole. Market forces, like supply and demand, guide resources and lead to efficient economic outcomes.

Question 7

What is a market?

Answer 7

network that brings buyers and sellers together in order to facilitate the exchange of goods and/or services. 4 distinct, but related meanings. In a market economy, the market determines prices from the combined forces of supply and demand

Question 8

What is demand?

Answer 8

The quantity of a good or service that buyers are willing & able to purchase at various prices during a given period of time

The relationship between a products price and quantity demanded
Ie: a pair of shoes you can actually buy (want & can afford) means you have a “demand” for those shoes
Demand exists only for goods that you want and can afford to buy (desire + financial resources = demand)

Question 9

What is quantity Demanded?

Answer 9

refers to the quantity of a particular good or service that buyers are willing and able to buy at a specific price during a specific time frame.

Question 10

What is the law of demand?

Answer 10

The quantity demanded varies inversely with price (assuming ceteris paribus/all other factors remain constant)
In simple terms: The quantity of a product purchase depends on its price (higher price=less demand/purchased, lower price=more demand/purchased)

Question 11

What is the substitution Effect?

Answer 11

the price of a good rises, we tend to substitute similar goods for it, if possible

Question 12

What is the income effect?

Answer 12

if someone’s income increases, they are more likely to buy more of certain goods and services, even if the prices remain the same. Conversely, if their income decreases, they may buy less of these goods and services.

Question 13

What is the demand schedule

Answer 13

A method of portraying the relationship between price and quantity demanded for a particular product

Question 14

What does ceteris paribus mean?

Answer 14

Latin term that translates to “other things being equal”.

Question 15

Explain the differences between demand vs quantity demanded

Answer 15

demand” is the entire relationship between price and quantity, while “quantity demanded” is the specific amount consumers are willing to purchase at a given price. Changes in price affect the quantity demanded, which is illustrated along the demand curve.

Question 16

What were David Ricardo’s Major Economic theories

Answer 16

Comparative Advantage & Labor Theory of Value

Question 17

Explain David Ricardo’s Major Economic Ideas

Answer 17

Comparative Advantage:
Ricardo introduced the concept of comparative advantage, which suggests that even if one country is less efficient in producing all goods compared to another country, both can benefit from specialization and trade. This forms the basis for international trade theory.

Labor Theory of Value:
He believed that the value of a good is determined by the amount of labor required to produce it. This idea contributed to classical economics and the understanding of how prices are determined.

Question 18

What is market demand

Answer 18

The sum total of all the consumers quantity demands for a product
Ex: There are 4 consumers with different demands for t-shirts. By examining figure 4.4, we can see that the market demand is the total of each of the individual demands of the 4 buyers at each price level

Question 19

What is supply?

Answer 19

The quantities that sellers will offer for sale at various prices during a given period of time

Like consumers, suppliers react to price changes but in a completely opposite way ; as price rises, they want more supply, while consumers want to purchase less.

Question 20

What is the law of supply

Answer 20

The quantity supplied will increase if price increases and fall if price falls, as long as other things remain constant.

In contrast to demand, where there is an inverse relationship between price and quantity demanded, quantity supplied is directly related to price.
-Changes in quantity supplied are caused only by price changes (shown by movement along the curve)
-Changes in supply are shown by shifts in the supply curve (caused by supply factors/determinants)

Question 21

Explain supply vs quantity supplied

Answer 21

Supply refers to the whole series of price and quantity relationship, as shown in the t-shirt supply schedule.

Quantity supplied refers to one relationship that is determined by price. Therefore, if you compare the quantities supplied when t-shirts are $24 (seller would like to sell 4) to when they’re $28 (seller would like to sell 8), we would say “quantity supplied rose by 4 t-shirts”, and NOT “supply increased by 4”.

Question 22

Explain how a “shortage” occurs

Answer 22

When quantity demanded exceeds quantity supplied, it results in a shortage (area/region below the equilibrium point of the graph)
(Prices rise)

Question 23

Explain how a surplus occurs

Answer 23

When quantity supplied exceeds quantity demanded, it results in a surplus (area/region above the equilibrium point of the graph)
(Prices drop)

Question 24

What is equilibrium price?

Answer 24

The price where there is no shortage or surplus.

Question 25

What is non price factors?

Answer 25

Responsible for the changes in supply or demand and shifts the whole supply or demand curve. Up to this point, we’ve assume that “other things do not change” in the discussion of supply and demand. These other things are all non-price factors that we have so far held constant in constructing our demand and supply curves

Question 26

What are the 5 demand factors/changes in demand?

Answer 26

1. Income
2. Population/Number Of Buyers
3. Taste & Preferences
4. Consumer Expectations
5. Price of substitute goods

Question 27

What are substitute goods?

Answer 27

Products that are cheaper alternatives to the more expensive ones.

An increase in price for one good leads to an increase in demand for its substitute good. Therefore, substitute goods have a direct relationship between price and quantity demanded.

Question 28

What are complementary goods?

Answer 28

Items that are typically bought together with other goods.

Ex: Gasoline and cars, nachos and salsa, country club memberships and golf equipment, tennis racquet and tennis ball, pencil and eraser, etc

Question 29

What are the 6 changes in supply/supply factors

Answer 29

1. Production costs
2. Number of sellers
3. Technology
4. Nature and the environment
5. Prices of related products
6. Consumer expectations

Question 30

In his theory of population Malthus Proposed that:

Answer 30

OPTION A: food production increases arithmetically and population increases geometrically.

Question 31

Which of the following is a key premise of revolutionary communism as advocated by Marx?

A] Capitalism must be reformed.

[B] Deferred savings are the principal means of financing a revolution.

[C] Heavy taxes must be paid by landlords and rich heirs.

[D] From each according to ability, to each according to need.

Answer 31

D: From each according to ability, to each according to need.

Question 32

Which of the following economic concepts is least associated with the others?

A] surplus value of labour

[B] reserve army of the unemployed

[C] iron law of wages

[D] Smith’s law of population

Answer 32

OPTION A: surplus value of labour

Question 33

Which of the following ensures the “invisible hand” in a market economy?

[A] government regulation

[B] underground or hidden activity

[C] competitive self-interest

[D] specialization and trade

Answer 33

OPTION C: Competitve Self-interest

Question 34

Which economist is credited with saving capitalism from the Great Depression?

[A] John Maynard Keynes

[B] Milton Friedman

[C] John Kenneth Galbraith

[D] Adam Smith

Answer 34

OPTION A: John Maynard Keynes

Question 35

Which of the following economic theories makes international trade profitable for participants?

[A] the reserve army of the unemployed

[B] comparative advantage

[C] the invisible hand

[D] surplus labour value

Answer 35

OPTION B: Comparative Advantage

Question 36

Does demand increase when price decreases if other things do not change?

Answer 36

OPTION C: No, because demand refers to a relationship between a series of prices and quantities.

Question 37

Which of the following would not cause an increase in the supply of wheat?

[A] a decrease in the price of fertilizers

[B] an increase in the subsidy paid to farmers

[C] an increase in the price of wheat

[D] improvements in the growing conditions of wheat

Answer 37

OPTION C: an increase in the price of wheat