1. Foundations of Economics

Question 1

Define opportunity cost

Answer 1

The next best alternative foregone when an economic decision is made

Question 2

What are the factors of production used to produce goods and services

Answer 2

CELL Capital Entrepeneurship Land Labor

Question 3

Define land as an FOP

Answer 3

All resources provided by nature used to produce goods - Natural capital

Question 4

Define labor as an FOP

Answer 4

Physical and mental contribution of the existing workforce to production - human capital

Question 5

Define capital as an FOP

Answer 5

Includes all buildings, officed, factories, machines, tools, infrastructure - physical capital, needed to produce things

Question 6

Define entrepreneurship as an FOP

Answer 6

Organizing and risk taking

Question 7

Define an economic good

Answer 7

useful to people but scarce

Question 8

Define a free good

Answer 8

no opportunity cost - sun, air

Question 9

A PPC curve shows…

Answer 9

Maximum combo of two types of output that can be produced in an economy at a given time when resources are used efficiently and state of tech is fixed

Question 10

What does it mean to produce at an extreme point on the line? (close to either axis)

Answer 10

The economy would be dedicating more of its resources for one over the other

Question 11

Points beyond the PPC are unattainable given..

Answer 11

The current amount of resources and state of technology

Question 12

Points beyond the PPC are unattainable given..

Answer 12

The current amount of resources and state of technology- scarcity

Question 13

Points within the PPC..

Answer 13

means unemployment or inefficient use of resources - (lack of) efficiency

Question 14

Using FOPs more efficiently the economy could move closer to the PPC meaning..

Answer 14

actual economic growth

Question 15

Why might productive efficiency (the economy using everything at its full extent) be bad?

Answer 15

1. An unsustainable rate of resource use and extraction - threatening environment and sustainability
2. could reduce production possibilities in the future
3. could create costs for future economic well being

Question 16

Why is the PPC concave?

Answer 16

Moving resources from the left to the right of the diagram increases opportunity costs- the FOPs for the products might not be interchangeable and the same

Question 17

When might a PPC be straight?

Answer 17

Where there is constant opportunity costs perhaps for a combination of very similar or substitute goods (limes and lemons)

Question 18

When might a PPC shift outwards?

Answer 18

A growth in production possibilities:

• changes in education system could improve quality of L
• increases in immigration could improve quantity and quality of L
• better educated pop. could develop improved tech
• new forms of energy (fuel) could increase quantity of resources produced

Question 19

When might a PPC shift inwards?

Answer 19

A reduction in quantity or worsening of quality of FOPS

• wars
• epidemics
• natural disasters

Question 20

Explain the role of firms in a TWO sector circular flow of income model (households and firms)

Answer 20

they are the productive units

• hire FOPs from households
• use factors to produce output sold to those households
• receive expenditure by those households

Question 21

Explain the role of households in a TWO sector circular flow of income model (households and firms)

Answer 21

SRB

• supply FOPs to firms
• recieve income for factors
• buy stuff

Question 22

Leakage

Answer 22

income that leaves the sector and is not passed on to domestic households by producers

Question 23

3 types of leakage from the circular flow of income model

Answer 23

TIS
Tax- goes to gov
Imports- not everything people need is made locally, money would go to foreign producers
Savings- reserve income in banks, stock markets, pension funds - financial sector

Question 24

3 types of injections into the circular flow of income model

Answer 24

GIE
Government spending- public amenities, infrast.,salaries
Investment- when the financial sector lends money to firms
Exports- foreign households and firms buy a country’s exports injecting money

Question 25

Planned economy

Answer 25

• what how and for whom to produce is decided by the government
• resources collectively owned - arranged and planned by gov
• in theory in their best interests

Question 26

free market economy

Answer 26

• prices used to ration goods and services
• private production
• demand and supply set wages and prices
• should be few cases of shortage and surplus

Question 27

Name a disadvantage of pure free markets

Answer 27

1. demerit goods could be overproduced, driven by high price thus high profit motive
2. merit goods underprovided: only produced for those who can afford them
3. resources may be used too quickly damaging environment when driven by high profit motive
4. orphans, the sick and long term unemployed wont be able to look after themselves
5. large firms may grow to dominate industries - high prices excessive power

Question 28

Name a disadvantage

of planned economy

Answer 28

1. too complicated to plan efficiently - misallocation
2. no price system- resources wont be used efficiently
3. output and quality may suffer- workers may be difficult to motivate when employment is guaranteed while gaining no share of profits
4. loss of personal liberty and freedom of choice
5. government may not share same aims and interests as the people

Question 29

law of diminishing marginal utility

Answer 29

the satisfaction or utility someone derives from a product decreases as they consume more and more, ceterus pareibus

Question 30

what is scarcity

Answer 30

resources are insufficient to satisfy unlimited human needs and wants

Question 31

utility

Answer 31

total satisfaction received from consuming a good or service