1 Introduction to Economics

Question 1

What is economics?

Answer 1

the study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.

Question 2

Why is economics a social science?

Answer 2

Because it studies human society and social relationships; concerned with discovering general principles describing how societies function and are organised.

Question 3

What is microeconomics?

Answer 3

Examines the behaviour of individual decision-making units in the economy.

Question 4

What is macroeconomics?

Answer 4

Examines the decision-making of the economy as a whole to obtain a broad or overall picture of the economy.

Question 5

What is scarcity?

Answer 5

Scarcity is the situation in which available resources, or factors of production, are finite, whereas wants are infinite. There are not enough resources to produce everything that human beings need and want.

Question 6

What is sustainability?

Answer 6

1. Sustainability refers to maintaining the ability of the environment and the economy to continue to produce an satisfy needs and wants into the future.
2. Sustainability depends crucially on sustainable resource use, referring to the preservation of the environment over time.
3. The problem of sustainability arises because resources are scarce.

Question 7

What are choices?

Answer 7

Choices are decisions that have to be made between competing alternatives given the limited resources and unlimited wants.

Question 8

What is efficiency?

Answer 8

It is the best possible use of scarce resources to avoid the wastage of resources.

Question 9

What are resources?

Answer 9

Resources are the inputs used to produce goods and services wanted by people.

Question 10

What are the different resources / factors of production?

Answer 10

1. Land
2. Labour
3. Capital
4. Entrepreneurship

Question 11

What is land?

Answer 11

Land consists of all natural resources.

Question 12

What is labour?

Answer 12

Physical and mental effort that people contribute to the production of goods and services.

Question 13

What is capital?

Answer 13

Man-made factor of production, used to produce goods and services. (i.e. machines, buildings).

1. Physical capital
2. Human capital
3. Natural captial
4. Financial capital

Question 14

What is entrepreneurship?

Answer 14

Organises the other 3 factors of production.

Question 15

What is opportunity cost?

Answer 15

The value of the next best alternative sacrificed to obtain something else.

Question 16

What are free goods?

Answer 16

A free good is a good that is not scarce (can be obtained without sacrificing something else) and therefore has 0 opportunity cost.

Example: oxygen in the unpolluted countryside.

Question 17

What are economic goods?

Answer 17

An economic good is a good that is scarce, because it is a naturally occurring resource or because it is produced by scarce resources. Economic goods have opportunity costs.

Question 18

What are the 3 basic economic questions?

Answer 18

1. What/how much to produce
2. How to produce
3. For whom to produce?

Question 19

What / how much to produce?

Answer 19

1. Decision on the types of goods to produce and how much of each good to produce.
2. Concerns the allocation of scarce resources.

(e.g. more military equipment or more hospitals?)

Question 20

How to produce?

Answer 20

1. Concerned with the method of production.
2. Aims to choose the most efficient method of production to make fullest use of scarce resources.

Question 21

For whom to produce?

Answer 21

1. Concern with the distribution of output.
2. Concerned with the distribution of incomes since the amount of output people can get depends on how much of it they can buy, which in turn depends on the amount of income they have.

Question 22

What are the 3 theoretical economic systems?

Answer 22

1. Free market economy
2. Command economy
3. Mixed economy

Question 23

Describe a free market economy

Answer 23

allocation of resources based on prices

1. Resource ownership: private sector
2. Economic decision-making: private sector
3. Rationing system: price rationing.

Question 24

Describe a Command Economy

Answer 24

allocation of resources based on government decision (based on commands)

1. Resource ownership: public sector
2. Economic decision-making: public sector
3. Rationing system: non-price rationing

Question 25

What is the production possibilities curve (PPC)

Answer 25

It represents

1. all combinations of the maximum amounts of 2 goods that can be produced by an economy
2. given its resources and technology,
3. when there is full employment of resources and efficiency in production.

Question 26

What assumptions are made by the PPC?

Answer 26

1. All resources are fully employed
2. All resources are used efficiently (output is produced by using the fewest possible resources / output is produced at the lowest possible cost)

Question 27

What factors affect the PPC?

Answer 27

1. Quantity of resources
2. Quality of resources
3. Technology

Question 28

What does the shape of the PPC mean?

Answer 28

1. Bends outwards to the right: increasing opportunity cost

• workers are not equally suitable for the production of different goods

2. Straight-line: Constant opportunity cost

• the rate at which one good is exchanged for another is constant.