1. Introduction to economics

Question 1

Adam Smith

Answer 1

• father of modern economics (now also classical economics)
• introduced the free market - ,,invisible hand” of competition will result in the most efficient outcome

Question 2

Free market

Answer 2

Free market: one where consumers may buy what they like and producers may produce what they like, with no gov interferences

Question 3

Social science

Answer 3

Social science: a study of people in a society and how they interact wtih each other.

Question 4

Tangible - intangible goods

Answer 4

Tangable goods: physical goods that can be touched, such as apples or pens.

Intangible goods: non-physical goods that cannot be touched, ex: insurance or haircut service.

Question 5

Conflict between wants, needs and resources.

Answer 5

Human needs and wants are infinite while resources on Earth are finite

Question 6

Economics

Answer 6

a social science studying how scarce resources are allocated to fulfill the infinite wanst of consumers.

Question 7

Economic good

Answer 7

Economic good: any good or service that has a price and is thus being rationed

Question 8

Scarcity

Answer 8

SCARCITY: basic economic problem, the gap between limited resources and limitless wants of consumers

Question 9

Opportunity cost

Answer 9

Opportunity cost: the next best alternative forgone when an economic decision is made

Question 10

The basic economic problem

Answer 10

1. What to produce and in what quantities?
2. How things should be produced?
3. Who should things be produced for?

Question 11

Factors of production

Answer 11

Factors of production: four resources that allow an economy to produce output

C - capital

E - entrepreneurship

L - land

L - labour

Question 12

Labour

Answer 12

Labour: human physical and mental contribution of the existing workforce to production.

Question 13

Capital

Answer 13

Capital: factor of production that comes from investment in physical capital and human capital.

Question 14

Entrepreneurship

Answer 14

Entrepreneurship: ability to manage and tak risks in production.

Question 15

PPC

Answer 15

Production possibilities curve

• used to represent scarcity, choice and opportunity cost
• shows the maximum combination of goods and services that can be produced by an economy in a given time period, if all the resources in the economy are used fully and efficiently and the state of technology is fixed (at potential output)
• shifts can occur if factors of production increase/decrease

Question 16

Utility (total, marginal)

Answer 16

Utility: a measure of usefulness and pleasure (how much consumer receives when thwy consume the product).

Total utility: total satisfaction gained from consuming a certain quantity of a product.

Marginal utility: extra utility gained from consuming one more unit of a product (usually decreases with number).

Question 17

Positive statement

Answer 17

Positive statement: is one that may be proven right or wrong by looking at the facts

Ex: The unemployment rate in China is 4.8%.

Question 18

Normative statement

Answer 18

Normative statement: is a matter of opinion and cannot be proven right or wrong

Ex: The Chinese gov put too little emphasis on rural unemployment.

Question 19

Ceteris paribus

Answer 19

Ceteris paribus: all other things being equal.

Used because economics use models and when analysing one factor, ceteris paribus allows not to take other factors into account

Question 20

Circular flow of income

Answer 20

Circular flow of income:

Question 21

Rationing systems:

Answer 21

1. Planned economy
2. Free market economy

Question 22

Planned economy

Answer 22

Planned economy (command economy): one where the decisions what to produce, how to produce and who to produce are made by the government.

• all resources are collectively owned
• gov bodies arrange production, set wages and prices: planned centrally
• problem: hard to forsee the future and plan
• ex: USSR, to some extent China

DISADV of pure planned:

• difficult to plan accurately: shortage/surplus
• resources not efficiently used
• no incentives to work
• gov might take over freedom of choice
• gov have different aims from society

Question 23

Free market economy

Answer 23

Free market economy (capitalism): one where production is in private hands and demand and supply are left free to set wages and prices in the economy

• should work relatively efficiently, few cases of surplus and shortage
• individuals make decisions in production to gain the largest profits

DISADV fo pure free market:

• overprovided demerit goods
• underprovided merit goods
• resources used up too quickly
• firms may grow to domninate economies

Question 24

Sustainable development

Answer 24

Sustainable development: dveelopment that meets the needs of current generation without limiting the ability of future generations ton meet their needs