Basic Principles

Question 1

Capital

Answer 1

Investment in goods that are used to produce other goods in the future. Fixed capital includes machinery, equipment, new technology, factories and buildings.

Question 2

Capital goods

Answer 2

Capital goods such as factories and machinery are useful for the goods and services they can help produce in the future.

Question 3

Ceteris paribus

Answer 3

Latin for ‘all other things being equal’.
Used to isolate the relationship between two variables, by assuming all other influencing factors are help constant - by assuming ceteris paribus.

Question 4

Costs

Answer 4

The expenses faced by firms when producing a good or service for a market. In the short run, firms will have fixed or variable costs.

Question 5

Equilibrium

Answer 5

A state of balance.

A situation where there is no tendency for change.

Question 6

Firm

Answer 6

An organisation that uses factors of production (resources) to create goods and services.

Question 7

Free goods

Answer 7

Free goods are not scarce and have no opportunity cost.

Question 8

Free market economy

Answer 8

A market where there is little or no government intervention and the forces of supply and demand set the prices and allocation of resources.

Question 9

Income

Answer 9

Income represents a flow of earnings from using factors of production to generate an output of goods and services.

Question 10

Land

Answer 10

Land is the natural resource available for production, which may contain natural resources such as oil, which can be extracted.

Question 11

Market failure

Answer 11

Occurs when freely functioning markets fail to deliver an efficient allocation of resources, leading to a loss of productive efficiency.

Question 12

Macroeconomics

Answer 12

Concerns the economy as a whole, for example the levels of output, inflation, employment, growth, imports and exports.

Question 13

Microeconomics

Answer 13

The study of economics at the level of the individual firm, industry or consumer.

Question 14

Normative statements

Answer 14

Express an opinion about what ought to be, they are subjective statements so carry value judgements.

Question 15

Opportunity cost

Answer 15

Measure the cost of any choice in terms of the next best alternative that might have been produced using those resources.

Question 16

Positive statements

Answer 16

Objective statements that can be tested or rejected by referring to the available evidence or data.

Question 17

Production possibility frontier (PPF)

Answer 17

A diagram showing the combinations of two or more goods and services that can be produced using all available factor resources efficiently. Also shows the principle of diminishing returns.

Question 18

Productive efficiency

Answer 18

This occurs when a business in a given market or industry reaches the lowest point of its average cost curve, as output is being produced at minimum cost per unit.

Question 19

Profits

Answer 19

When total revenue exceeds total cost.

Total profit = total revenue - total cost

Question 20

Scarcity

Answer 20

Scarce means limited, our resources of land, labour, capital and enterprise are finite. There is only a limited amount of resources available to produce the unlimited amount of goods and services.

Question 21

Trade

Answer 21

The exchange of goods or services, it improves consumer choice and total welfare.

Question 22

Production

Answer 22

Involves using up scarce resources, in most cases. From primary industries - manufacturing basic resources - to quaternary industries - service sector.

Question 23

Stakeholders

Answer 23

Groups who have an interest in the activity of a business/market. Different stakeholders have different objectives, and stakeholder conflict ensues.

• government
• firms
• consumers
• workers

Question 24

Externalities

Answer 24

Third party effects arising from production and consumption of goods and services in a market for which no appropriate compensation is paid

Question 25

Finite resources

Answer 25

There’s only a finite number of workers, machines, acres of land, and natural resources. Therefore we can’t produce an infinite amount of goods and services.

Question 26

Fixed costs

Answer 26

These costs relate to the fixed factors of production and do not vary directly with the output
E.g. Rent, depreciation of capital equipment due to age, marketing costs

Question 27

Incentives

Answer 27

Something that motivates a producer or consumer to follow a course of action or to change behaviour, like producers face profit incentives.
Government intervention, e.g. Subsidies and taxation, can change the incentives that consumers and producers face.

Question 28

Negative externalities

Answer 28

Occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid.

Question 29

Monopoly

Answer 29

A pure monopolist is a single seller of a product in a given market or industry. So the firm has 100% market share.
A monopolistic market relates to any firm with over 25% of the industries’ total sales.