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SACE Stage 2 Economics study materials
SACE Stage 2 Economics study resources

SACE Stage 2 Economics practice questions

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Question 1Knowledge and Understanding

In economics, the fundamental problem of scarcity arises because:

  1. Governments restrict the supply of goods
  2. Wants are unlimited but resources are limited Correct answer.
  3. Resources are unlimited but wants are limited
  4. Consumers always prefer cheaper goods

Explanation

Scarcity is the core economic problem: human wants are infinite, while the resources available to satisfy them are finite. This forces individuals and societies to make choices about how to allocate resources.

Question 2Knowledge and Understanding

Which of the following best defines opportunity cost?

  1. The total cost of producing a good
  2. The value of the next best alternative forgone Correct answer.
  3. The money paid for a good or service
  4. The benefit gained from consuming a good

Explanation

Opportunity cost is the value of the next best alternative that is given up when a choice is made. It reflects the trade-off inherent in allocating scarce resources to one use rather than another.

Question 3Knowledge and Understanding

A production possibility frontier (PPF) that is concave to the origin illustrates:

  1. Constant opportunity cost
  2. Decreasing opportunity cost
  3. Zero opportunity cost
  4. Increasing opportunity cost Correct answer.

Explanation

A concave PPF shows that as more of one good is produced, increasing amounts of the other good must be given up. This reflects the law of increasing opportunity cost, because resources are not perfectly adaptable between uses.

Question 4Knowledge and Understanding

The law of demand states that, all else equal, as the price of a good rises:

  1. Demand increases
  2. Demand decreases
  3. Quantity demanded increases
  4. Quantity demanded decreases Correct answer.

Explanation

The law of demand describes an inverse relationship between price and quantity demanded, ceteris paribus. A higher price reduces the quantity demanded because consumers switch to substitutes and their purchasing power falls.

Question 5Knowledge and Understanding

A movement along a demand curve is caused by a change in:

  1. Tastes and preferences
  2. The price of the good itself Correct answer.
  3. Consumer income
  4. The price of a substitute

Explanation

A movement along a demand curve occurs only when the price of the good changes, causing a change in quantity demanded. Changes in other factors shift the entire demand curve.

Question 6Knowledge and Understanding

If the price of coffee rises and the demand for tea increases, coffee and tea are:

  1. Inferior goods
  2. Substitute goods Correct answer.
  3. Independent goods
  4. Complementary goods

Explanation

Substitute goods are alternatives that can be used in place of each other. When the price of one rises, demand for the other increases as consumers switch to the cheaper alternative.

Question 7Knowledge and Understanding

A bakery can produce either 100 loaves of bread or 50 cakes per day. The opportunity cost of producing one cake is:

  1. 2 loaves of bread Correct answer.
  2. 100 loaves of bread
  3. 50 loaves of bread
  4. 0.5 loaves of bread

Explanation

The opportunity cost of one cake is the number of loaves given up divided by the number of cakes gained: 100 loaves ÷ 50 cakes = 2 loaves per cake. This shows the trade-off between the two products.

Question 8Knowledge and Understanding

Which of the following is a factor of production classified as capital?

  1. A worker's labour
  2. Coal deposits in the ground
  3. A factory building Correct answer.
  4. A company director's entrepreneurial ability

Explanation

Capital refers to man-made resources used in production, such as machinery, tools, and buildings. A factory building is a produced means of production, distinguishing it from land, labour, and entrepreneurship.

Question 9Knowledge and Understanding

The economic problem of 'what to produce' is primarily concerned with:

  1. Which goods and services should be produced and in what quantities Correct answer.
  2. How goods and services are distributed among consumers
  3. Who receives the income generated by production
  4. The methods used to produce goods and services

Explanation

The 'what to produce' question asks which goods and services an economy should produce and in what quantities, given scarce resources. It is one of the three fundamental allocation questions, alongside how and for whom to produce.

Question 10Knowledge and Understanding

In a market economy, the allocation of resources is primarily determined by:

  1. The price mechanism Correct answer.
  2. Trade union negotiations
  3. Custom and tradition
  4. Government central planning

Explanation

In a market economy, prices act as signals that guide resource allocation. Changes in prices reflect changes in demand and supply, leading producers and consumers to adjust their behaviour.

Question 11Knowledge and Understanding

A government decides to increase the tax on cigarettes to reduce smoking. This is an example of:

  1. A subsidy to producers
  2. A command-and-control regulation
  3. A public good provision
  4. A market-based incentive Correct answer.

Explanation

Taxes alter relative prices and therefore provide a financial incentive for consumers to change behaviour. This is a market-based approach because it uses price signals rather than direct regulation.

Question 12Knowledge and Understanding

The law of supply states that, all else equal, as the price of a good rises:

  1. Supply decreases
  2. Supply increases
  3. Quantity supplied decreases
  4. Quantity supplied increases Correct answer.

Explanation

The law of supply describes a direct relationship between price and quantity supplied, ceteris paribus. Higher prices increase the potential for profit, encouraging producers to supply more.

Question 13Knowledge and Understanding

Which of the following would cause the supply curve for oranges to shift to the left?

  1. An increase in the price of oranges
  2. An improvement in harvesting technology
  3. A severe drought affecting orange groves Correct answer.
  4. A decrease in the cost of fertiliser

Explanation

A drought reduces the ability of producers to supply oranges at any given price, shifting the supply curve leftward. This is a change in supply caused by a non-price factor, namely adverse weather conditions.

Question 14Knowledge and Understanding

When the price of a good is above the equilibrium price, the market experiences:

  1. A surplus, putting downward pressure on price Correct answer.
  2. A surplus, putting upward pressure on price
  3. A shortage, putting upward pressure on price
  4. A shortage, putting downward pressure on price

Explanation

At a price above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Sellers respond by lowering prices to clear the surplus, moving the market toward equilibrium.

Question 15Knowledge and Understanding

A price ceiling set below the equilibrium price will most likely result in:

  1. A surplus of the good
  2. An increase in supply
  3. Market equilibrium
  4. A shortage of the good Correct answer.

Explanation

A binding price ceiling is set below equilibrium, so quantity demanded exceeds quantity supplied. This creates a shortage because the price is not allowed to rise to clear the market.

Question 16Knowledge and Understanding

The price elasticity of demand measures:

  1. The total revenue earned by producers
  2. The responsiveness of quantity demanded to a change in price Correct answer.
  3. The slope of the demand curve
  4. The responsiveness of quantity demanded to a change in income

Explanation

Price elasticity of demand quantifies how much quantity demanded changes in response to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Question 17Knowledge and Understanding

If a 10% increase in the price of a good leads to a 5% decrease in quantity demanded, demand is:

  1. Perfectly elastic
  2. Elastic
  3. Inelastic Correct answer.
  4. Unit elastic

Explanation

Price elasticity of demand is calculated as 5% ÷ 10% = 0.5, which is less than 1. Therefore demand is inelastic, meaning quantity demanded is relatively unresponsive to price changes.

Question 18Knowledge and Understanding

Which of the following goods is most likely to have inelastic price elasticity of demand?

  1. A luxury holiday
  2. Insulin for a diabetic patient Correct answer.
  3. A new smartphone model
  4. A particular brand of cereal

Explanation

Goods that are necessities with few or no substitutes tend to have inelastic demand. Insulin is essential for diabetic patients and has no close substitutes, so quantity demanded responds little to price changes.

Question 19Knowledge and Understanding

When demand is price elastic, a decrease in price will cause total revenue to:

  1. Remain unchanged
  2. Decrease
  3. Increase Correct answer.
  4. Fall to zero

Explanation

With elastic demand, the percentage increase in quantity demanded exceeds the percentage decrease in price. As a result, total revenue rises when price falls.

Question 20Knowledge and Understanding

A good with a negative income elasticity of demand is classified as:

  1. A luxury good
  2. A substitute good
  3. An inferior good Correct answer.
  4. A normal good

Explanation

Negative income elasticity means that as income rises, quantity demanded falls. This is the defining characteristic of an inferior good, for which consumers switch to better alternatives as their income increases.

Question 21Knowledge and Understanding

The main reason a government might impose a price floor on agricultural products is to:

  1. Ensure farmers receive a minimum income Correct answer.
  2. Make food more affordable for consumers
  3. Clear excess supply from the market
  4. Increase the quantity demanded of the product

Explanation

A price floor sets a legal minimum price above equilibrium, guaranteeing producers a higher price than the market would otherwise provide. This supports producer incomes, though it typically creates a surplus.

Question 22Knowledge and Understanding

Which of the following is an example of a public good?

  1. A cinema ticket
  2. National defence Correct answer.
  3. A toll road
  4. A private gym membership

Explanation

Public goods are non-rival and non-excludable, meaning one person's use does not reduce availability to others and no one can be prevented from using them. National defence exhibits both characteristics.

Question 23Knowledge and Understanding

A negative externality occurs when:

  1. A producer's private costs exceed social costs
  2. A third party bears a cost not reflected in market prices Correct answer.
  3. A firm produces at minimum average cost
  4. The government subsidises a good

Explanation

A negative externality is a cost imposed on third parties that is not included in the market price. Pollution from a factory is a classic example, leading to overproduction relative to the social optimum.

Question 24Knowledge and Understanding

Which of the following is a characteristic of an oligopoly market structure?

  1. Many small firms with identical products
  2. Free entry and exit with no market power
  3. A few large firms with interdependence in decision-making Correct answer.
  4. A single firm supplying the entire market

Explanation

An oligopoly is characterised by a small number of large firms whose decisions are interdependent. Each firm must consider the likely reactions of rivals when setting price or output.

Question 25Knowledge and Understanding

A firm in perfect competition is a price taker because:

  1. It produces a differentiated product
  2. Its output is too small to influence the market price Correct answer.
  3. It faces high barriers to entry
  4. It is the only seller in the market

Explanation

In perfect competition, each firm's output is a tiny fraction of total market supply, so it cannot affect the market price. The firm must accept the price determined by market demand and supply.

Question 26Knowledge and Understanding

Which of the following best describes the nature of wants in economics?

  1. Wants and resources are both unlimited, so scarcity never arises
  2. Wants are unlimited while the resources available to satisfy them are limited Correct answer.
  3. Wants are limited while resources are unlimited in every economy
  4. Wants are fixed at birth and cannot be influenced by advertising

Explanation

Economics treats wants as effectively unlimited, whereas the productive resources used to satisfy them are finite. This mismatch between unlimited wants and scarce resources is the foundation of the economic problem and forces choices to be made.

Question 27Knowledge and Understanding

A production possibility frontier that is bowed outward from the origin illustrates which concept?

  1. That resources are equally suited to producing both goods
  2. Increasing opportunity cost as production shifts between goods Correct answer.
  3. Constant opportunity cost as output expands
  4. The complete absence of scarcity in production

Explanation

A concave, outward-bowed frontier reflects resources that are not perfectly interchangeable between uses. As more of one good is produced, increasingly less suitable resources must be transferred, so each additional unit costs more of the other good to forgo.

Question 28Knowledge and Understanding

Which statement correctly distinguishes a movement along a demand curve from a shift of the demand curve?

  1. A change in consumer income causes a movement along the demand curve
  2. A change in the good's own price causes a movement along the demand curve Correct answer.
  3. Both a price change and a change in tastes cause movements along the curve
  4. A change in the good's own price causes a shift of the demand curve

Explanation

Only a change in the good's own price alters quantity demanded while holding other influences constant, which is a movement along the curve. Changes in non-price determinants such as income, tastes or related-good prices shift the whole demand curve.

Question 29Knowledge and Understanding

The market for a product is in equilibrium. Simultaneously, consumer incomes rise (the good is normal) and a new tax on producers is introduced. What is the certain effect on equilibrium price?

  1. Price definitely rises Correct answer.
  2. Price stays exactly the same
  3. Price definitely falls
  4. The effect on price is indeterminate without knowing the relative size of the shifts

Explanation

Higher incomes for a normal good shift demand rightward, which raises price, and the tax shifts supply leftward, which also raises price. Because both shifts push price upward, the price must rise even though the effect on quantity is uncertain.

Question 30Knowledge and Understanding

The price elasticity of supply is likely to be highest for which of the following?

  1. Seats at a stadium for a match starting in one hour
  2. Fresh strawberries harvested once a season
  3. A manufactured toy that can be produced in an existing factory Correct answer.
  4. Original paintings by a deceased artist

Explanation

Elasticity of supply rises when producers can respond to price changes quickly and cheaply. A manufactured good made in an existing factory allows output to be expanded relatively easily, so supply is more responsive to price.

Question 31Knowledge and Understanding

A firm lowers its price from $10 to $9 and finds that total revenue falls. What can be concluded about demand over this range?

  1. Demand is price elastic
  2. Demand is unit elastic
  3. Demand is perfectly inelastic
  4. Demand is price inelastic Correct answer.

Explanation

When price falls and total revenue also falls, the percentage rise in quantity is smaller than the percentage fall in price. That relationship means the price elasticity of demand has an absolute value below one, so demand is inelastic.

Question 32Knowledge and Understanding

Which of the following is most likely to be a fixed cost for a café in the short run?

  1. Packaging for each takeaway order
  2. Monthly rent on the premises under a signed lease Correct answer.
  3. The cost of coffee beans used in each cup
  4. Wages paid to casual staff hired only during busy hours

Explanation

Fixed costs do not vary with the level of output in the short run. Rent under a binding lease must be paid regardless of how many cups are sold, so it is a fixed cost.

Question 33Knowledge and Understanding

A firm's total fixed cost is $200 and its total variable cost at 10 units is $300. What is the average total cost at this output?

  1. $30
  2. $500
  3. $50 Correct answer.
  4. $20

Explanation

Total cost equals fixed cost plus variable cost, which is $500 at 10 units. Average total cost is total cost divided by output, giving $50 per unit.

Question 34Knowledge and Understanding

In the short run, a perfectly competitive firm should continue producing even if it is making a loss, provided that:

  1. Price exceeds average total cost
  2. Price covers average variable cost but is below average total cost Correct answer.
  3. Price is below average variable cost
  4. Total revenue exceeds total fixed cost

Explanation

A loss-making firm still contributes toward fixed costs as long as revenue covers variable costs. Shutting down would then leave it bearing the entire fixed cost, so producing minimises the loss.

Question 35Knowledge and Understanding

Which feature most clearly distinguishes a monopoly from other market structures?

  1. Significant barriers preventing new firms from entering the market Correct answer.
  2. Product differentiation through branding
  3. Mutual interdependence between a few large firms
  4. A large number of independent sellers

Explanation

A monopoly exists where a single seller supplies a market that new entrants cannot easily join. High barriers to entry protect that position and allow the firm to sustain supernormal profits in the long run.

Question 36Knowledge and Understanding

A firm in monopolistic competition earns supernormal profit in the short run. What is the expected long-run outcome?

  1. Government regulation fixes the price at the profit-maximising level
  2. The firm becomes a natural monopoly and keeps the profit indefinitely
  3. New entrants attracted by profit shift each firm's demand curve leftward until normal profit remains Correct answer.
  4. The firm's costs rise until the profit is exactly eliminated by higher input prices

Explanation

Low barriers to entry allow rival firms to enter when supernormal profit exists. Entry increases the number of substitutes available, shifting each existing firm's demand curve leftward until only normal profit is earned.

Question 37Knowledge and Understanding

Which of the following is an example of a merit good that governments often subsidise or provide directly?

  1. Cigarettes
  2. Bottled water sold in supermarkets
  3. A luxury sports car
  4. Public education Correct answer.

Explanation

Merit goods generate benefits to society that individuals tend to underestimate, so they are under-consumed in a free market. Education is a standard example because its wider social benefits justify government support.

Question 38Knowledge and Understanding

A factory discharges waste into a river, harming downstream residents who receive no compensation. Which policy most directly corrects this market failure?

  1. A tax set equal to the estimated marginal external cost of the pollution Correct answer.
  2. A public awareness campaign encouraging residents to move away
  3. A subsidy paid to the factory for each unit produced
  4. A price ceiling on the factory's product

Explanation

The pollution is a negative externality because the factory does not bear the full social cost of production. A tax equal to the marginal external cost internalises that cost, aligning private cost with social cost and reducing output toward the socially efficient level.

Question 39Knowledge and Understanding

Which of the following best explains why a pure public good is unlikely to be supplied by private markets?

  1. Governments forbid private firms from producing it
  2. Its benefits are non-excludable, so consumers can free-ride Correct answer.
  3. It is always too expensive for any firm to produce
  4. Its consumption by one person reduces availability to others

Explanation

A pure public good is non-excludable, meaning producers cannot prevent non-payers from enjoying it. Consumers therefore have an incentive to free-ride, and firms cannot recover costs through market sales.

Question 40Knowledge and Understanding

The consumer price index rises from 120 to 126 over a year. What is the inflation rate for that year?

  1. 1.05%
  2. 6.0%
  3. 5.0% Correct answer.
  4. 4.8%

Explanation

Inflation is measured as the percentage change in the index between periods. Here the change of 6 index points is divided by the base of 120, giving 5 percent.

Question 41Knowledge and Understanding

A person who is willing and able to work, has actively looked for work in the past four weeks, and is currently without a job is officially classified as:

  1. Employed part-time
  2. Underemployed
  3. Not in the labour force
  4. Unemployed Correct answer.

Explanation

Official unemployment counts people who are jobless, available to start work and actively seeking it. A person meeting all these criteria belongs in the unemployed category of the labour force.

Question 42Knowledge and Understanding

Which type of unemployment is most likely to increase when an economy enters a severe recession?

  1. Seasonal unemployment among fruit pickers
  2. Structural unemployment caused by technological change
  3. Frictional unemployment during job search
  4. Cyclical unemployment caused by falling aggregate demand Correct answer.

Explanation

Cyclical unemployment arises when weak aggregate demand leads firms to reduce output and shed labour. Recessions are the classic setting for this demand-deficient unemployment.

Question 43Knowledge and Understanding

Gross domestic product measured at market prices includes which of the following?

  1. Transfer payments such as welfare benefits
  2. The market value of final goods and services produced within a country in a period Correct answer.
  3. The value of intermediate goods used in production
  4. The resale value of a house built twenty years ago

Explanation

GDP measures the market value of final output produced within a country's borders during a given period. Counting only final goods avoids double counting the intermediate inputs already embodied in them.

Question 44Knowledge and Understanding

An economy's nominal GDP rises by 7% in a year while the GDP deflator rises by 4%. What is the approximate growth in real GDP?

  1. 1.75%
  2. 7%
  3. 11%
  4. 3% Correct answer.

Explanation

Real GDP growth is approximately nominal growth minus the change in the price deflator. Subtracting 4 percent from 7 percent leaves about 3 percent of real growth.

Question 45Knowledge and Understanding

Which of the following would shift an economy's aggregate demand curve to the right in the short run?

  1. A fall in consumer confidence
  2. A decrease in export demand from trading partners
  3. An increase in government spending on infrastructure Correct answer.
  4. A rise in the general price level

Explanation

Aggregate demand is the total planned expenditure on domestic output at each price level. Higher government spending adds directly to that expenditure, shifting the curve rightward.

Question 46Knowledge and Understanding

An economy experiences a sharp rise in the price of imported oil. Which outcome is most consistent with standard aggregate supply and demand analysis?

  1. Aggregate supply shifts left, raising the price level and lowering real output Correct answer.
  2. The price level falls while real output remains unchanged
  3. Aggregate demand shifts right, raising both the price level and real output
  4. Aggregate supply shifts right, lowering the price level and raising real output

Explanation

Higher input costs reduce the quantity firms are willing to supply at each price level, shifting short-run aggregate supply leftward. This produces cost-push inflation together with a fall in real output.

Question 47Knowledge and Understanding

Which of the following is the most appropriate policy for a government seeking to reduce demand-pull inflation?

  1. Cutting personal income tax rates
  2. Raising the central bank's target interest rate Correct answer.
  3. Reducing the goods and services tax
  4. Increasing government spending on roads

Explanation

Demand-pull inflation arises when aggregate demand grows faster than productive capacity. A contractionary monetary policy such as a higher interest rate reduces consumption and investment spending, easing the pressure on prices.

Question 48Knowledge and Understanding

A government reduces income tax rates in an economy operating well below full employment. Which transmission channel best explains the intended expansionary effect?

  1. Higher disposable income raises consumption, which raises aggregate demand and output through the multiplier Correct answer.
  2. Reduced tax revenue automatically increases the money supply
  3. Higher disposable income shifts aggregate supply to the right in the short run
  4. Lower tax rates immediately raise the price level, which increases real output

Explanation

Cutting income tax raises disposable income, so households are likely to spend more. That initial spending increase is magnified through the multiplier as recipients spend part of their extra income, raising aggregate demand and output.

Question 49Knowledge and Understanding

A country's exchange rate depreciates against its trading partners' currencies. All else equal, what is the most likely effect on its trade balance?

  1. The trade balance is unaffected because exchange rates do not influence trade
  2. Both exports and imports become more expensive in domestic currency terms
  3. Exports become cheaper abroad and imports become more expensive, tending to improve the trade balance Correct answer.
  4. Exports become more expensive abroad and imports become cheaper

Explanation

Depreciation lowers the foreign-currency price of a country's exports and raises the domestic price of imports. This typically boosts export volumes and reduces import volumes, improving the trade balance if price elasticities are sufficiently large.

Question 50Knowledge and Understanding

Which of the following best describes the concept of comparative advantage between two nations?

  1. One nation has a larger total labour force than the other
  2. One nation has a fixed exchange rate with the other
  3. One nation can produce more of a good than the other using the same resources
  4. One nation can produce a good at a lower opportunity cost than the other Correct answer.

Explanation

Comparative advantage is based on opportunity cost, not absolute output levels. A nation gains from specialising where its opportunity cost of production is lower than its trading partner's, even if it is less productive in every good.