Introduction to Economics

Question 1

Explain the economic problem.

Answer 1

The economic problem refers to a problem of scarcity, and a problem of choice - it is limited resources against unlimited wants.

Question 2

Define opportunity cost.

Answer 2

The benefit you miss when you make a choice.
It represents the real economic cost for a decision.

Question 3

Outline the importance of economic models.

Answer 3

Economic models are simplified versions of reality; a decision-making process that enables economists to understand the implementation of theories in an economy.

Question 4

Explain the concept of the Production Possibility Frontier model.

Answer 4

The Production Possibilities Frontier (PPF) model is a graphical representation of all the (quantitative) combinations that can be produced of two products, given constant resources.

Question 5

How does the PPF model display opportunity cost?

Answer 5

As the quantity produced of A is increased, the opportunity cost of B increases - law of increasing opportunity cost.

You miss the ability to produce more of B, because your resources have been allocated to produce more of A.

Question 6

Identify the characteristics of a market economy.

Answer 6

1. Private ownership - individuals control their resources.
2. Rational self-interest - individuals value their purchasing power, therefore will purchase or sell a product that maximises the value of their money (e.g. purchase cheaper, sell expensive).
3. Competition - several businesses involved in the same market, therefore their is price competition.
4. Limited role of government - limited government intervention of economic policies enable the ‘invisible hand’ to allocate the resources of a market economy efficiently.