Economics Theories Flashcards

Which economic concept explains why individuals contribute less to public goods when they expect others to pay?

Answer: Free-rider problem

The free-rider problem occurs because non-excludable public goods allow people to benefit without contributing to their cost.

According to the theory of the firm, a profit-maximizing firm should produce where:

Answer: Marginal cost equals marginal revenue

Setting MC = MR ensures that each additional unit adds at least as much to revenue as to cost, maximizing profit.

The concept of 'adverse selection' in economics most commonly arises because of:

Answer: Asymmetric information between buyers and sellers

Adverse selection occurs before a transaction when one party has private information that leads to unfavorable market outcomes, as in Akerlof's 'market for lemons.'

The multiplier effect in Keynesian economics predicts that an initial increase in government spending leads to:

Answer: A larger total increase in GDP due to successive rounds of spending

Each round of spending becomes income for others who spend a fraction of it, amplifying the initial fiscal injection.

Mercantilism, an early economic theory, held that national wealth was best accumulated by:

Answer: Maximizing exports and accumulating gold reserves

Mercantilist policy favored trade surpluses and protectionism to build national gold stocks, which Adam Smith later criticized.

The concept of 'consumer surplus' represents:

Answer: The difference between what consumers are willing to pay and what they actually pay

Consumer surplus measures the net benefit buyers receive when the market price is below their maximum willingness to pay.

In institutional economics, Thorstein Veblen introduced the concept of 'conspicuous consumption' to describe:

Answer: Purchasing goods to signal social status rather than for utility

Veblen argued that the wealthy buy expensive goods not for their intrinsic value but to display their social standing.