Core Economic Concepts: Systems, Models, Production, and Demand
Economic Systems and Resource Allocation
- An allocation of resources answers three fundamental economic questions: what to produce, how to produce, and for whom to produce.
- Societies employ different processes to answer these questions, varying in the degree of centralized decision-making.
- The optimal process for allocating resources depends on a society’s specific goals.
- The method a society uses to answer these three economic questions defines its economic system. Economic systems are identified by
Mastering Elasticity: Demand, Supply, and Market Dynamics
Test your understanding of economic elasticity concepts with these practice questions and answers. This section covers various aspects of price, income, and cross elasticity, along with their implications for market behavior and total revenue.
Price and Income Elasticity Fundamentals
Which of the following is not characteristic of the demand for a commodity that is elastic?
D. The elasticity coefficient is less than one.
The price elasticity of demand for widgets is 0.80. Assuming no change in the demand
Key Economic Concepts and Market Principles
Economic Profit Calculation
Economic Profit: This is the difference between total revenue and both explicit and implicit costs.
Formula: Economic Profit = Revenue – Explicit Costs – Implicit Costs
Example: A firm earns $500,000 in revenue, incurs explicit costs of $300,000, and implicit costs of $50,000.
Economic Profit = $500,000 – $300,000 – $50,000 = $150,000 (positive economic profit).
Present Value (PV) Explained
Present Value (PV): The current value of a future sum of money or stream of cash flows,
Read MoreEssential Microeconomics Concepts & Market Structures
Understanding Core Microeconomics Principles
Microeconomics focuses on individual decision-makers and their interactions within an economy. The central challenge is the economizing problem: how to allocate scarce resources to best satisfy unlimited wants. This always involves a clear goal, specific constraints, and the necessity of making choices.
Fundamental Economic Concepts
- People Face Tradeoffs: Decisions require giving up one thing for another.
- Opportunity Cost: The value of the next best alternative
Basic Economics Concepts Explained
What is Economics?
The science of how people, firms, and societies make choices under scarcity of resources to satisfy the greatest number of unlimited wants.
- Scarcity: When there is not enough of a resource available to satisfy all the potential ways in which people want to use it.
- Feasible: Possible to do easily or conveniently.
- Tradeoff: A compromise; giving up one thing to get another.
First Principle: Incentives
Incentives are opportunities to make oneself better off. They don’t always work as intended.
Read MoreMonopolist Profit Maximization and Equilibrium
Total Revenue vs Total Cost Approach
A monopolist earns maximum profits when the gap between Total Revenue (TR) and Total Cost (TC) is maximum. The TR curve starts from the origin as there is no revenue if output is zero, and TR is inverse ‘U’ shaped because of the inverse relation between price and quantity. TC is inverse ‘S’ shaped because of the Law of Variable Proportions. Total profits are derived by subtracting TC from TR. Initially, with TC being greater than TR, the firm incurs losses. Points
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