1.1 understanding the nature of economics

Question 1

How is economics a social science?

Answer 1

Economics is a social science because it deals with the study of human society and behaviour. Particularly, how people behave to organise their activities and fullfill their needs and wants. It Is a social science because its approach to studying human society is based on a scientific method.

Question 2

What is microeconomics

Answer 2

Examines the behaviour of individual decision making units in the economy. 2 main groups of decision makers we study are consumers (households) and firms (businesses).

• How these decision makers behave
• How they make choices
• Consequences of their decisions
• How their interactions in markets determine prices?

Question 3

Macroeconomics

Answer 3

Examines the economy as a whole to obtain a broad or overall picture of the economy. Uses aggregates, which are wholes or collections of many individual units, such as the
SUM OF CONSUMERS BEHAVIOURS, SUM OF FIRM’S BEHAVIOUR,
TOTAL INCOME AND OUTPUT OF THE ENTIRE ECONOMY,
TOTAL EMPLOYMENT
OVERALL PRICE LEVEL.

Question 4

Scarcity

Answer 4

Refers to the idea that resources are insufficient to satisfy unlimited human needs and wants. Economics is the study of how our scarce or limited resources can best be used in order to satisfy the unlimited needs and wants of human beings

Question 5

Choice

Answer 5

Choices must be made about what will be produced and what will be foregone. Economics studies how different decision makers make choices between competing alternative options and analyses the present and future consequences of their actions

Question 6

Equity

Answer 6

Equity is the idea of being fair or just. In Economics the ideas of equity and inequity are usually identified with equality and inequality, and are used mostly in connection with equality in the distribution of income, wealth and human opportunity.

In all economic systems, these kinds of inequities or inequalities are present both within and between societies and are significant issues as many people cannot meet their basic needs and lack opportunities.

Question 7

Efficiency

Answer 7

Refers to make the best possible use of scarce resources to avoid resource waste. In view of the scarcity of resources, it is important to use these in ways that ensure they are not wasted.

Efficiency means using the fewest possible resources to produce goods and services.

It requires that scarce resources are used to produce the goods and services that mostly satisfy society’s needs and wants. Known as allocative efficiency.

Question 8

Economic Well-being

Answer 8

Refers to levels of prosperity, economic satisfaction and standards of living among members of society.

• Security with respect to income, wealth, job and housing
• The ability to pursue one’s goals, work production and develop one’s potential.
• The ability to have a satisfactory quality of life such as health, education, social connections, environmental quality, personal security.
• The ability to maintain all of above over time.

Question 9

Sustainability

Answer 9

Refers to the ability of the present generation to satisfy its needs by the use of resources and especially non-renewable resources, without limiting future generations’s ability to satisfy their own needs.

Issue is how to develop methods of production and patterns of consumption that will not result in such environmental and resources destruction and degradation.

Question 10

Change

Answer 10

Much of what we study is in a continuous state of change:
1. Economic theory –> Economists very often study change between one situation and another situation that has been caused by a change in one or more variables.
2. Real World Events –> The world is characterised by continuous change in the institutional, technological, social, political and cultural events in which economic events occur.

Question 11

Interdependence

Answer 11

Interdependence arises from the fact that no one is self sufficient, requiring ever increasing degrees of interactions and interdependence.

Question 12

Intervention

Answer 12

Typically refers to government intervention, meaning that government becomes involved with the workings of markets. Generally recognised that markets on their own often cannot achieve important societal goals, such as goals of equity, sustainability, economic well-being or efficiency.

A key debate involves the advantages & disadvantages of free markets versus government intervention.

Question 13

Scarcity

Answer 13

Is the situation in which available resources or factors of production are finite, whereas wants are infinite. These are not enough resources to produce everything that humans need and want.

Question 14

The problem of scarcity

Answer 14

• Evolved to ‘one who is prudent in the use of resources’
• All the physical objects people need and want are called goods
• The non-physical activities are called services
• Resources are the inputs used to produce goods and services wanted by people. For this reason are also known as factors of production

Question 15

Factors of production

Answer 15

Do not exist in unlimited abundance: they are scarce, or limited and insufficient in relation to unlimited uses that people have for them

Question 16

Economics

Answer 16

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

Question 17

Issue of economic growth

Answer 17

Economic growth which involves increases in the amount of goods and services produced, results in increased air and water pollution.

Question 18

Sustainable Development

Answer 18

developments which meets the needs of the present without compromising the ability of future generations to meet their own goods.

Question 19

Sustainability

Answer 19

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

Question 20

Threats to sustainability

Answer 20

Do not only result from high income production and consumption patterns that rely strongly on polluting fossil fuels as well as other activities that destroy the environment.

Question 21

LAND
FACTOR OF PRODUCTION

Answer 21

LAND
- consists of natural resources, including all agricultural and non-agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water. Also called ‘gifts of nature’

Question 22

LABOUR
FACTOR OF PRODUCTION

Answer 22

LABOUR
- Includes the physical and mental effort that people contribute to the production of goods and services. The efforts of all contribute to producing goods and services, all examples of labour.

Question 23

CAPITAL
FACTOR OF PRODUCTION

Answer 23

CAPITAL
Physical capital is a man made factor of production used to produce goods and services. Also referred to as a capital good or investment good.

Question 24

ENTREPRENEURSHIP
FACTOR OF PRODUCTION

Answer 24

ENTREPRENEURSHIP
Special human skill possessed by some people, involving the ability to innovate by developing new ways of doing things, taking business risks and to seek new opportunities for opening and running a business.

Question 25

Types of capitals

Answer 25

• Physical capital is used to produce more goods and services in the future
• Human Capital refers to the skills, abilities and knowledge acquired by people as well as old levels of health, all of which make them more productive.
• Natural capital also known as environmental capital, refers to an expanded meaning of the factor of production ‘land’ includes everything included in land and everything else included in land such as air, biodiversity, soil quality, ozone layer etc.
• Financial Capital refers to investments in financial instruments like stocks and bonds, or the funds that are used to buy financial instruments.