Economic Theory & Principles Flashcards

Which concept explains why a firm will continue producing as long as marginal revenue exceeds marginal cost?

Answer: Profit maximization principle

Firms maximize profit by producing up to the point where MR = MC, stopping if MR would fall below MC.

In a perfectly competitive market, long-run equilibrium results in firms earning:

Answer: Normal (zero economic) profits

Free entry and exit drive economic profits to zero in the long run under perfect competition.

The concept of 'consumer sovereignty' in market economies refers to:

Answer: Consumers' power to direct resource allocation through purchasing decisions

Consumer sovereignty means that consumer preferences, expressed through market demand, guide what goods are produced.

If the cross-price elasticity of demand between two goods is negative, the goods are:

Answer: Complements

Negative cross-price elasticity indicates complements — a rise in one good's price reduces demand for the other.

The 'invisible hand' metaphor introduced by Adam Smith describes:

Answer: How self-interested behavior leads to socially beneficial outcomes in free markets

Smith argued that individuals pursuing self-interest in competitive markets unintentionally promote the public good.

Which of the following best defines 'economic rent'?

Answer: Payment to any factor of production above its opportunity cost

Economic rent is the surplus a factor earns above the minimum necessary to keep it in its current use.

The Laffer Curve illustrates the relationship between:

Answer: Tax rates and tax revenue

The Laffer Curve shows that both a 0% and 100% tax rate yield zero revenue, with a revenue-maximizing rate in between.