Microeconomics: Basic Economic Concepts Flashcards

When economists say that 'there is no such thing as a free lunch,' they mean:

Answer: Every choice involves a cost, even if no money changes hands

This expression captures the idea that every decision involves opportunity costs — something is always given up when a choice is made.

Which of the following is classified as physical capital in economics?

Answer: A factory building and its machinery

Physical capital refers to manufactured goods — like factories and machinery — used in the production of other goods and services.

A market economy allocates resources primarily through:

Answer: The interaction of supply and demand and the price system

In a market economy, prices generated by supply and demand interactions signal producers and consumers about resource allocation.

The concept of 'ceteris paribus' is used in economic analysis to:

Answer: Hold all other variables constant while examining one relationship

Ceteris paribus, meaning 'all else equal,' allows economists to isolate the effect of one variable by holding all others constant.

Human capital refers to:

Answer: The knowledge, skills, and education embodied in workers

Human capital encompasses the productive skills, knowledge, and experience embodied in people that increase their economic value.

Which of the following is an example of a positive externality?

Answer: A homeowner who maintains an attractive garden, raising neighbors' property values

A positive externality is a benefit to a third party not directly involved in the transaction, such as neighbors benefiting from an attractive garden.

According to the circular flow model, households provide which of the following to firms in the factor market?

Answer: Land, labor, capital, and entrepreneurship

In the factor market, households supply factors of production (land, labor, capital, entrepreneurship) to firms in exchange for income.