Basic Economic Ideas and Resource Allocation

Question 1

Opportunity cost

Answer 1

The benefit that is foregone from choosing one use of scarce resources over the next best alternative use of those same resources.

Question 2

Basic Economic Problem

Answer 2

Resources are scarce and human wants are infinite. There are not enough resources in the world to produce all the goods and services to satisfy all our needs and wants.

Question 3

Ceteris Paribus

Answer 3

Assuming all other conditions remain the same, other things being equal

Question 4

3 Basic questions of Economics

Answer 4

1. What will be produced?
2. How will it be produced?
3. Who will it be produced for?

Question 5

Decision making at the margin

Answer 5

The assumption that people make decisions based on marginal changes. The margin is the change in a variable caused by an increase of one unit of another variable.

Question 6

Short run

Answer 6

The period of production for when at least one factor of production is fixed.

Question 7

Long run

Answer 7

The period of production for when all factors of production are variable. No factor of production is fixed.

Question 8

Positive statement

Answer 8

Objective statements that can be tested by referring to available evidence.

Question 9

Normative statement

Answer 9

Subjective statements which contain a value judgement or opinions.

Question 10

Factors of production

Answer 10

The scarce resources (inputs) used to make things that people want or need (outputs). These factors are Capital, Land, Labour, Entrepreneurship

Question 11

Enterprise

Answer 11

Skills possessed by successful entrepreneurs: business know-how and the ability to organise productive activities. An entrepreneur is a person with enterprise that is willing to take risks and decisions necessary to organise scarce resources into firms to produce goods and services.

Question 12

Capital

Answer 12

Human-made resources including machinery, tools and factory buildings, used in the production of other goods and services.

Question 13

Land

Answer 13

All natural resources used to produce other goods and services

Question 14

Labour

Answer 14

Human effort used up in productive activities

Question 15

Free Market economy

Answer 15

An economy where goods and services are distributed solely based on market forces of demand and supply by consumers and producers. Associated with capitalist economy

Question 16

Mixed economy

Answer 16

An economy with elements of market system and planned economy. The economy functions based on the market system with some planning by the government to overcome market failures. Some resources are owned and controlled by private individuals and firms while others are owned and controlled by the government.

Question 17

Planned or Command economy

Answer 17

An economy where production and distribution of goods and services are planned by a central planner usually the government. Associated with communist economy.

Question 18

Production Possibility Curve (PPC)

Answer 18

The PPC shows all the possible combinations of two goods that an economy is able to produce with its existing resources and technology if they are fully and efficiently used.

Question 19

What are the 4 functions of money?

Answer 19

1. Medium of exchange
2. Measure of Value/Unit of Account
3. Store of value
4. Standard of deferred payment

Question 20

Bartering

Answer 20

The act of swapping items in exchange for other items through a process of bargaining and negotiation.

Question 21

Double coincidence of wants

Answer 21

A person that wants to trade an item through bartering must find another person that wants the item he is willing to give. Two people engaged in a trade must both want what the other person is offering.

Question 22

Cash

Answer 22

The most liquid form of money like notes and coins. These can be used immediately to buy goods and services.

Question 23

Bank deposits

Answer 23

Cash that people put into banks as savings.

Question 24

Cheques

Answer 24

An order to a bank to pay a stated sum from the drawer’s account, written on a specially printed form.

Question 25

Near money

Answer 25

Non-cash assets that are highly liquid and easily converted to cash. Near money can also be referred to as quasi-money or cash equivalents. Examples of near money assets include savings accounts, certificates of deposit (CDs), foreign currencies, and money market accounts

Question 26

Liquidity

Answer 26

Liquidity refers to the ease with which an asset can be converted into ready cash without affecting its market price.

Question 27

Free goods

Answer 27

Goods that we may need or want that are unlimited in supply.

Question 28

Economic goods

Answer 28

Goods produced to satisfy consumer needs or wants.

Question 29

Private goods

Answer 29

Goods and services that are produced by the private sector.

Question 30

Public goods

Answer 30

Goods and services that are not produced by the private sector due to the lack of a profit motive and has to be provided by the government. For example, street lighting, national defense.

Question 31

Merit goods

Answer 31

Goods and services that have positive externalities and are usually under-consumed in a market economy. For example, education, healthcare.

Question 32

Demerit goods

Answer 32

Goods and services that have negative externalities and are usually over-consumed in a market economy. For example, cigarettes, driving a car, gambling

Question 33

An increase in productive capacity

Answer 33

An outward shift in a PPC resulting from an increase in the quantity and/or quality of the resources available to an economy.

Question 34

A decrease in productive capacity

Answer 34

An inward shift in a PPC resulting from a decrease in the quantity and/or quality of the resources available to an economy.

Question 35

Inefficient allocation of resources

Answer 35

Occurs when factor resources are not fully or effectively used in an economy. Production will be at a point below the PPC. More output could be produced if existing resources were better utilised.