Question

Economics checklist

Do you know the meaning of these terms? Can you explain them and apply them to real world

examples?

The law of supply

The law of demand

Economies of scale

Returns to scale

Economic profits

Accounting profits

The four factors of production

Markets

Externalities

Market failures

Answer 1

The law of supply

Law of supply states positive relationship between supply and price. When price of commodity rises, there is rise quantity supplied as well.  

The law of demand

Law of demand illustrates inverse relationship between price and quantity demanded. When there is rise in price of commodity, quantity demanded would also fall.

Economies of scale

Economies of scale occurs when rise in production level leads to fall in the average cost of production. For example, if car company increases its production, the average cost of production fall.

Returns to scale

Returns to scale occurs over the long run when all factor of production are variable.

Economic profits

Economic profit = Total Revenue - Implicit cost - explicit cost. For example opportunity cost is part of implicit cost. it subtracted while calculating economic profit.

Accounting profits

Accounting profit = Total Revenue - Explicit cost.

The four factors of production

inputs are: land, labor, capital and Entrepreneur

Markets

Market refers to mechanism where buyers and sellers meet each other. Buyers and sellers interacting through the telephone is an example of market.

Externalities

Externalities are side effects of production or consumption, these could be negative or positive. Firm creating pollution through its factory is an example of negative externalities. Such externalities are not taken into account while deciding the level of output. Hence, firm tends to overproduce.

Market failures

Market failure occurs where market mechanism or demand and supply forces do not deliver efficient result. Market either under produce or overproduce. Government intervention is required over here. Externalities are example of market failure.