Opportunity cost is best described as what?

The value of the best alternative given up when a choice is made

The cost of producing one more unit

The loss made when a business closes

David Ricardo's principle of comparative advantage says countries gain by doing what?

Specialising in what they give up least to produce

Producing only what they can make more cheaply than anyone else

Exporting manufactured goods and importing raw materials

Protecting new industries until they can compete

Adam Smith's "invisible hand" describes what?

Self-interested trade producing benefits nobody intended

Government intervention concealed from the public

Secret agreements between large firms

The influence of banks over who gets credit

What is an externality?

A cost or benefit falling on someone outside the transaction

A cost paid to a supplier in another country

A tax added at the point of sale

A price set by government rather than the market

The tragedy of the commons describes what?

A shared resource being exhausted because each user gains from taking more

A state monopoly wasting public money

A market collapsing when prices fall too quickly

A shortage caused by hoarding during a crisis

Price elasticity of demand measures what?

How much the quantity bought changes when the price changes

How fast prices rise during a period of inflation

The gap between wholesale and retail prices

How long a price remains unchanged

Diminishing marginal utility means what?

Each additional unit consumed gives less satisfaction than the one before

Prices fall as total production rises

Workers become less productive as a firm grows

John Maynard Keynes argued that governments should do what during a slump?

Spend to support demand rather than cut back

Raise interest rates to defend the currency

Balance the budget in every year

What is moral hazard?

Taking more risk because someone else bears the consequences

Concealing a defect in a product from buyers

Charging different customers different prices

Refusing to trade on ethical grounds

Thomas Malthus argued in 1798 that population would do what?

Grow faster than the food supply could

Shift steadily from countryside to town

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Economics & Money Hard ⚡ 10 Questions ⏱️ ~8 Mins +100 XP

The Ideas Economists Argue About

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Most economic disagreements are about a small number of ideas. These are the ones that keep coming back.

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About this topic

Economics has surprisingly few load-bearing ideas, and almost every public argument turns on one of them. Opportunity cost says every choice is paid for with the option you gave up. Comparative advantage says two countries can both gain from trade even when one is better at making everything. An externality is a cost that lands on somebody who was not part of the deal, which is the whole of environmental policy in one sentence. What makes them arguable is that they rarely point to a single answer. Hardin's tragedy of the commons was read for decades as a case for privatising shared resources, until Elinor Ostrom won a Nobel prize for documenting communities that had managed theirs for centuries without doing so. Malthus was wrong about the nineteenth century and his argument keeps returning in new forms. This quiz covers the ideas themselves rather than any particular verdict on them.

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The Ideas Economists Argue About: all 10 questions and answers

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1Opportunity cost is best described as what?
- A The cash price paid for a good
- B The cost of producing one more unit
- C The loss made when a business closes
- D The value of the best alternative given up when a choice is made Correct
Answer: D. The value of the best alternative given up when a choice is made

Why: It applies to time as much as to money, which is why an unpaid internship has a real cost. The idea is also why economists treat anything described as free with suspicion.
2David Ricardo's principle of comparative advantage says countries gain by doing what?
- A Exporting manufactured goods and importing raw materials
- B Protecting new industries until they can compete
- C Specialising in what they give up least to produce Correct
- D Producing only what they can make more cheaply than anyone else
Answer: C. Specialising in what they give up least to produce

Why: It holds even when one country is better at producing absolutely everything. The insight is that what matters is relative cost, not absolute cost.
3Adam Smith's "invisible hand" describes what?
- A The influence of banks over who gets credit
- B Self-interested trade producing benefits nobody intended Correct
- C Government intervention concealed from the public
- D Secret agreements between large firms
Answer: B. Self-interested trade producing benefits nobody intended

Why: The phrase appears only a handful of times across his writing. He also wrote a whole book on the moral sentiments that he thought restrained self-interest.
4What is an externality?
- A A cost or benefit falling on someone outside the transaction Correct
- B A cost paid to a supplier in another country
- C A tax added at the point of sale
- D A price set by government rather than the market
Answer: A. A cost or benefit falling on someone outside the transaction

Why: Pollution is the standard negative example and vaccination the positive one. Taxes, subsidies and tradable permits are the usual attempts to bring the effect back into the price.
5The tragedy of the commons describes what?
- A A state monopoly wasting public money
- B A market collapsing when prices fall too quickly
- C A shortage caused by hoarding during a crisis
- D A shared resource being exhausted because each user gains from taking more Correct
Answer: D. A shared resource being exhausted because each user gains from taking more

Why: Garrett Hardin popularised the phrase in a 1968 essay. Elinor Ostrom later won a Nobel prize for documenting communities that manage shared resources successfully without either privatising or nationalising them.
6Price elasticity of demand measures what?
- A The gap between wholesale and retail prices
- B How long a price remains unchanged
- C How much the quantity bought changes when the price changes Correct
- D How fast prices rise during a period of inflation
Answer: C. How much the quantity bought changes when the price changes

Why: Demand for insulin is inelastic; demand for one particular brand of biscuit is not. Goods with close substitutes are almost always the more elastic.
7Diminishing marginal utility means what?
- A Savings lose value over time
- B Each additional unit consumed gives less satisfaction than the one before Correct
- C Prices fall as total production rises
- D Workers become less productive as a firm grows
Answer: B. Each additional unit consumed gives less satisfaction than the one before

Why: It is why the second cup of coffee is worth less to you than the first. The idea is what gives a demand curve its downward slope.
8John Maynard Keynes argued that governments should do what during a slump?
- A Spend to support demand rather than cut back Correct
- B Raise interest rates to defend the currency
- C Balance the budget in every year
- D Fix wages and prices by law
Answer: A. Spend to support demand rather than cut back

Why: His General Theory appeared in 1936, in the middle of the Depression. Critics argue that such spending arrives late and proves very hard to withdraw afterwards.
9What is moral hazard?
- A Concealing a defect in a product from buyers
- B Charging different customers different prices
- C Refusing to trade on ethical grounds
- D Taking more risk because someone else bears the consequences Correct
Answer: D. Taking more risk because someone else bears the consequences

Why: Insurance and bank rescues are the classic settings for it. It is one reason policies include an excess that the holder has to pay themselves.
10Thomas Malthus argued in 1798 that population would do what?
- A Level off once wages rose
- B Shift steadily from countryside to town
- C Grow faster than the food supply could Correct
- D Fall as cities expanded
Answer: C. Grow faster than the food supply could

Why: He expected famine and disease to check the growth. Agricultural productivity rose far faster than he allowed for, though versions of his argument keep returning.

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