1.1 Nature Of Economics

Question 1

What forms an economy’s ’economic activity’ ?

Answer 1

Economic activity includes a wide range of actions such as :
- Production of goods and services.
- Consumption of goods and services.

Question 2

As resources are scarce, what three questions must we ask concerning economic activity ?

Answer 2

What to produce ?
Whom to produce for ?
How to produce ?

Question 3

How many economic agents are there ?

Answer 3

3

Question 4

What are the three main economic agents ?

Answer 4

Producers - people/firms that produce goods or supply services.
Consumers - people/firms who purchase the goods/services.
Governments - establishes rules for economies.

Question 5

What do economic agents base thier decisions on ?

Answer 5

Various incentives -
- firms - profit maximisation
- consumers - satisfaction
- governments - welfare

Question 6

What are the two categories for types of resources ?

Answer 6

Renewable and non-renewable

Question 7

What is meant by a renewable resource ?

Answer 7

Non-finite sources, which regenerate faster than the rate they are used at.

Question 8

What are some examples of renewable resources ?

Answer 8

Oxygen
Wind energy
Solar energy

Question 9

What is meant by non-renewable resources ?

Answer 9

There is a finite supple of these resources - they are being used up faster than they are able to be produced.

Question 10

What does a PPF diagram showcase ?

Answer 10

The PPF shows an economies maximum / potential productive potential.

Question 11

How is opportunity cost shown on a PPF diagram ?

Answer 11

On the slope of the PPF.

Question 12

Why is the PPF curved ?

Answer 12

This is due to the law of diminishing returns.

Question 13

What is meant by the ‘ law of diminishing returns’ ?

Answer 13

As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline.

Question 14

What does an outward shift mean on a PPF diagram ?

Answer 14

Sign of economic growth - this is because the productive capacity in an economy has increased.

Question 15

What are the trade offs when producing on a PPF ?

Answer 15

To produce more of one good, then you must produce less of the other. ( movement along the curve shows this ).

Question 16

When is an economic performing at full capacity ?

Answer 16

When it is exactly on the frontier.

Question 17

When is an economy performing below potential capacity ?

Answer 17

When the dot representing the economy is below the frontier.

Question 18

What is meant when a point is beyond the frontier ?

Answer 18

An economy is not currently possible to produce at this point.

Question 19

What is meant by an economy working below capacity ?

Answer 19

There are spare resources, as not all the resources is employed.

Question 20

What does efficiency refer to ?

Answer 20

The lack of waste.

Question 21

What does static efficiency refer to ?

Answer 21

Refers to the efficiency at a point in time.

Question 22

What is meant by productive efficiency ?

Answer 22

This is the ability of firms to produce goods and services at the lowest possible cost, given the level of output and the available technology. It means that a firm is using all its resources in the most efficient way possible, producing the maximum output with the minimum input.

Question 23

What is meant by allocative efficiency ?

Answer 23

Allocative efficiency is reached when no one can be made better off without making someone else worse off. Most efficient allocation for resources.

Question 24

What is true of every point of the PPF and what may not be true?

Answer 24

At each point on the PPF it is productively efficient. However not very point is allocatively efficient.

Question 25

Reallocation of resources is shown how on a PPF diagram ?

Answer 25

Movement along the curve ( fixed amount of resources ).

Question 26

Increases / decreases in resources are shown how on a PPF diagram ?

Answer 26

Shifts inwards / outwards.

Question 27

What are the two categories for goods ?

Answer 27

Capital goods
Consumer goods