Supply and Demand

In a market economy, prices are determined by (a)  

• By government regulations

• Through supply and demand

• By random selection

• Through barter system

Answer explanation

In a market economy, prices are primarily determined by supply and demand. This interaction between buyers and sellers influences how much goods and services cost, making it the correct choice.

The relationship between supply and demand affects pricing in economics. Which of the following best describes this relationship?

• When demand increases and supply remains unchanged, a shortage occurs, leading to higher prices.

• When supply increases and demand remains unchanged, a surplus occurs, leading to higher prices.

• When both supply and demand decrease, prices remain unchanged.

• Supply and demand have no effect on pricing.

Answer explanation

When demand increases and supply remains unchanged, the quantity demanded exceeds the quantity supplied, creating a shortage. This imbalance drives prices up, making the first choice the correct description of the relationship.

Match the following descriptions with the correct category: wants or needs.

• Luxury items like a sports car or designer clothes.

• Wants and needs are both essential for survival.

• Basic necessities like food and shelter.

• Wants are essential for survival, needs are not.

• Items that are not required for living or comfort.

• Neither wants nor needs are essential for survival.

• Both food and luxury items are crucial for living.

• Needs are essential for survival, wants are not.

Scarcity can lead to higher prices because:

• It increases demand while supply remains limited.

• It decreases demand while supply increases.

• It balances demand and supply.

• It has no effect on demand and supply.

Answer explanation

Scarcity leads to higher prices because when resources are limited, demand often remains high or increases, causing prices to rise as consumers compete for the limited supply.

Match the following scenarios with their examples of inflation's impact.

• Rising costs of food items in the market

• An increase in the price of groceries over a year

• Oil market fluctuations lead to cheaper fuel

• A sudden drop in fuel prices due to market changes

• Consistent housing market without price changes

• Stable prices of housing for a decade

• Technological advancements make gadgets cheaper

• A decrease in the price of electronics over time

What is opportunity cost and how does it impact financial decisions? Provide an example.

• Opportunity cost is the potential gain from other alternatives when one alternative is chosen. It impacts financial decisions by highlighting the benefits of the next best option.

• Opportunity cost is the amount of money spent on a particular choice. It impacts financial decisions by increasing the total expenditure.

• Opportunity cost is the time taken to make a decision. It impacts financial decisions by delaying the process.

• Opportunity cost is the risk associated with a financial decision. It impacts financial decisions by increasing uncertainty.

Answer explanation

Opportunity cost refers to the potential gain from the next best alternative when a choice is made. It influences financial decisions by making individuals consider what they are giving up, thus guiding them towards more informed choices.

Which of the following best describes the characteristics of capitalism and how it differs from socialism?

• Capitalism is characterized by private ownership and free markets, while socialism emphasizes public ownership and planned economy.

• Capitalism focuses on public ownership and planned economy, whereas socialism is based on private ownership and free markets.

• Both capitalism and socialism prioritize public ownership and planned economy.

• Capitalism and socialism are both characterized by private ownership and free markets.

Answer explanation

The correct choice highlights that capitalism is defined by private ownership and free markets, contrasting with socialism, which focuses on public ownership and a planned economy. This distinction is fundamental to understanding both systems.

In capitalism, competition plays a role in (a)   according to the text.

• It drives innovation and efficiency

• It leads to monopolies.

• It has no significant impact.

• It discourages entrepreneurship.

Answer explanation

In capitalism, competition drives innovation and efficiency by encouraging businesses to improve their products and services to attract customers, leading to better options and advancements in the market.

A business can manage costs effectively to make a profit by:

• Increasing prices significantly

• Reducing unnecessary expenses

• Expanding rapidly without planning

• Ignoring market trends

Answer explanation

Reducing unnecessary expenses helps a business lower costs, which directly contributes to profitability. Unlike increasing prices or ignoring market trends, this approach is sustainable and effective for long-term success.

Understanding economics is important in making informed decisions because:

• It helps in analyzing market trends.

• It is not relevant to decision-making.

• It complicates the decision-making process.

• It only applies to financial decisions.

Answer explanation

Understanding economics is crucial for analyzing market trends, which aids in making informed decisions. The other options either misrepresent the relevance of economics or limit its application.