Economic Theory & Principles Flashcards

When a good has many close substitutes, its price elasticity of demand tends to be:

Answer: Elastic

Availability of substitutes makes consumers highly responsive to price changes, resulting in elastic demand.

Which market structure is characterized by a few large firms, mutual interdependence, and significant barriers to entry?

Answer: Oligopoly

Oligopoly features a small number of dominant firms whose strategic decisions are interdependent.

The income effect of a price decrease suggests that consumers will:

Answer: Feel relatively richer and increase consumption of normal goods

A price decrease increases real purchasing power, allowing consumers to buy more of normal goods via the income effect.

In game theory, a Nash Equilibrium occurs when:

Answer: Each player's strategy is optimal given the strategies of all other players

At Nash Equilibrium, no player can unilaterally improve their outcome by changing their own strategy.

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

Answer: A beekeeper's bees pollinating neighboring farms

Bees pollinating neighboring farms creates benefits for third parties not compensated by the market — a positive externality.

The concept of 'price discrimination' requires which key condition?

Answer: The ability to prevent resale between market segments

Price discrimination only works if the seller can segment markets and prevent arbitrage (resale between segments).

Stagflation, a challenge for policymakers, is defined as a period of:

Answer: Simultaneous high inflation and high unemployment

Stagflation combines stagnant economic growth (high unemployment) with rising inflation, which traditional policy tools struggle to address.