Basic Concepts

Question 1

What is economics?

Answer 1

Economics is the study of human behaviour in using
scarce resources to satisfy unlimited wants.

Question 2

Why does the fundamental economic problem exist?

Answer 2

The fundamental economic problem exists because
both goods and the resources needed to produce the
goods are scarce.

Question 3

What type of science is economics?

Answer 3

Economics is a social science

Question 4

What is the first step of the methodology?

Answer 4

Observe behaviour in the market

Question 5

What is the second step of the methodology?

Answer 5

Form a hypothesis to explain the behaviour.

Question 6

What is the third step of the methodology?

Answer 6

Developing predictions from the hypothesis.

Question 7

What is the final step of the methodology?

Answer 7

Use evidence (empirical data) to test the predictions.

Question 8

How to avoid the problem of variables?

Answer 8

Ceteris Paribus

Question 9

Positive economics is?

Answer 9

Facts and cause-and-effect
relationships are used to describe
and explain economic phenomena.
The focus is on developing and
testing economic theories based on
facts.

Question 10

Normative economics is?

Answer 10

This concerns what economic outcomes
ought to be. It studies public policies and
economic issues, and give opinions and
value judgments on them. Value
judgements influence decision-making
and government policy.

Question 11

What is a positive statement?

Answer 11

Positive statements are objective
statements that can be tested by
referring to the available evidence.

Question 12

What is a normative statement?

Answer 12

Normative statements are subjective statements which contain a value judgement - they are opinions.

Question 13

How can economic decisions be affected?

Answer 13

It may be affected by moral judgement, different
values and beliefs, political aims.

Question 14

What is a need?

Answer 14

Something people have to have, i.e. basic needs in
life and is essential for survival

Question 15

What is a want?

Answer 15

A want is something people would like to have but which is not essential to life. Can be material or non-material.

Question 16

When does economic welfare improve?

Answer 16

Economic welfare (happiness / utility) improves when
people’s needs and wants are satisfied.

Question 17

What are human wants?

Answer 17

Human wants are unlimited and can never be fully satisfied. When a particular want has been satisfied, new wants emerge.

Question 18

How are goods and services produced?

Answer 18

All goods and services are produced from scarce economic
resources.

Question 19

What are factors of production?

Answer 19

Factors of production are inputs into the production process
and are converted into output of goods and services.

Question 20

What are the two types of good?

Answer 20

These goods can be consumer goods for consumption or
capital goods for that are necessary for the production of
consumer goods.

Question 21

Four Factors of Production?

Answer 21

Land, Labour, Capital, Enterprise

Question 22

Why do we have to make choices?

Answer 22

Because of scarcity, we have to make choices. When we
choose something, we have to give up something else. There is a cost in making our decisions.

Question 23

What is opportunity cost?

Answer 23

Opportunity cost is the next best alternative that have
to be forgone.

Question 24

When does cost change?

Answer 24

Cost will change only if there is a change in the next
best option forgone

Question 25

What does no choice imply?

Answer 25

No cost.

Question 26

What happens when we make an economic decision?

Answer 26

we may have to forgo money as well as other resources. The ‘full cost’ includes money cost and non-money cost.

Question 27

What is production?

Answer 27

Production is an activity through which inputs are transformed into outputs : goods and services.

Question 28

What are goods?

Answer 28

Goods are tangible / physical products that one can touch.

Question 29

What are services?

Answer 29

Services are intangible things.

Question 30

What are goods and services referred to in economics?

Answer 30

Goods and services, in Economics, refers to “economic goods”

Question 31

Characteristics of economic goods:

Answer 31

• Supply is scarce when compared with demand for economic goods. Because supply is limited.
• Made by man.
• Cost when producing economic goods.
• Have a price.

Question 32

Characteristics of free goods (non-economic goods):

Answer 32

• Supply of free goods not scarce when compared with the demand for free goods. Because supply is unlimited.
• Free goods are gifts from nature
• There is no cost of production.
• Free goods do not have a price.

Question 33

What is consumption?

Answer 33

Consumption of goods and services satisfies people’s wants and needs.

Question 34

What is exchange?

Answer 34

Exchange is the buying and selling activities between producers and consumers.

Question 35

What do governments do?

Answer 35

Governments set the rules that other participants have to follow. They also produce and consume goods and services.

Question 36

What are the three basic economic questions?

Answer 36

What to produce?

How to produce?

For whom to produce?

Question 37

What does a PPF curve show?

Answer 37

Illustrates the different combinations of two goods that
can be produced with a fixed quantity of resource, assuming all available resources are being utilised to the full.

Question 38

What concepts does the PPF curve illustrate?

Answer 38

resources allocation, trade-off / opportunity cost,
productive efficiency, allocative efficiency,
unemployment and full employment of resources