CEA Economic Theory & Principles

Question 1

What does the law of demand state?

Accepted Answer

Demand decreases as price increases

Answer

The law of demand is a fundamental principle in economics that describes the inverse relationship between price and quantity demanded. As the price of a good or service rises, consumers typically demand less of it, assuming all other factors remain constant. Conversely, when prices fall, the quantity demanded tends to increase.

Question 2

What is opportunity cost?

Accepted Answer

Value of the foregone alternative

Answer

Opportunity cost is the value of the next best alternative that must be given up when a choice is made. It highlights that every decision involves a trade-off, as resources are scarce. For example, the opportunity cost of studying for an exam might be the income lost from not working during that time.

Question 3

What does the law of supply state?

Accepted Answer

Supply increases as price increases

Answer

The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied by producers also increases. This is because higher prices make production more profitable, incentivizing firms to produce and offer more of the good to the market. Conversely, lower prices lead to a decrease in the quantity supplied.

Question 4

What is market equilibrium?

Accepted Answer

Demand equals supply

Answer

Market equilibrium is the state in a market where the quantity of a good or service demanded by consumers precisely matches the quantity supplied by producers. At this point, there is no pressure for the price to change, as both buyers and sellers are satisfied. The equilibrium price and quantity are determined by the intersection of the supply and demand curves.

Question 5

What is elasticity of demand?

Accepted Answer

Sensitivity of demand to price

Answer

Elasticity of demand measures how responsive the quantity demanded of a good or service is to a change in its price. If demand is elastic, a small price change leads to a large change in quantity demanded, while inelastic demand means quantity demanded changes little with price fluctuations. This concept is crucial for businesses in setting prices and understanding consumer behavior.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Economic Theory & Principles