CH1 - Economics Issues and Concepts

Question 1

What is the definition of economics?

Answer 1

the study of the use of scarce resources to satisfy unlimited human wants

Question 2

What are three types of resources?

Answer 2

land - natural endowments
labour - mental + physical human effort, entrepreneurial capacity, managment skills
capital - tools, machinery, equipment

Question 3

What are factors of production?

Answer 3

resources used to produce goods and services, divided into basic categories of land, labour and capital

Question 4

What is tangible, and what is intangible?

Answer 4

Goods are tangible
Services are intangible

Question 5

What is opportunity cost?

Answer 5

Value of the next best alternative that is forgone when one alternative is chosen = hvor meget er det, du giver op, værd?

Question 6

Explain the assumption of scarcity in economics

Answer 6

• Scarce resources force a choice among competing alternatives
• Relative to our desires, existing resources are scarce
• Only enough resources to produce a fraction of goods/services we want
• Scarcity implies the need for choice, choice implies existence of choice
  -More of one thing = less of another

Question 7

What does a Production Possibility Boundary illustrate, and how is it reflected on a graph?

Answer 7

A production possibilities boundary illustrates three concepts: scarcity, choice, and opportunity cost
- Scarcity is indicated by the unattainable combinations outside the boundary
- Choice, by the need to choose among the alternative attainable points along the boundary
- Opportunity cost, by the negative slope of the boundary

The shape of the graph implies an increase in amount of consumption goods must be given up to achieve equal successive increases in production of investment goods

Question 8

What is microeconomics?

Answer 8

The study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system.

Question 9

What is macroeconomics?

Answer 9

study of the determination of economic aggregates such as total output, employment and growth

Question 10

Describe the 4 key economics problems

Answer 10

1. Allocation of scarce resources - what is produced and how?
2. Distribution - what is consumed and by whom?
3. Why are resources sometimes idle?
4. Is productive capacity growing?

Question 11

What effects does growth have on the PPB (production possibilites boundary)?

Answer 11

Growth shifts the PPB outwards, making it possible to produce more of all products

Question 12

How can the government affects the 4 key economic problems?

Answer 12

• correct market failures resulting from misallocation of resources
• address fairness of distribution of consumption across individuals
• provide solutions to reduce idleness of nation’s resources
• promote economic growth

Question 13

What is the definition of an economy?

Answer 13

system in which scarce resources—labour, land, and capital—are allocated among competing uses

Question 14

What kind of economy has the following definition?

when individual consumers and producers act independently to pursue their own self-interests, the collective outcome is coordinated

Answer 14

Self-organising market economy

Question 15

How are resources organised in market economy?

Answer 15

resources are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources.

Question 16

Economics is a tradeoff between what and what?

Answer 16

Equity and efficiency

Question 17

What theory did Adam Smith theorise?

Answer 17

‘The Invisible Hand’ - metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production and consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.

Question 18

Define ‘efficiency’

Answer 18

resources available to the nation are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources.

Question 19

Describe the role of incentives in economics

Answer 19

Individuals generally pursue their own self-interest, and they respond to incentives. Sellers usually want to sell more when prices are high and buyers usually want to buy more when prices are low.

Question 20

What are the 3 decisionmakers operating in an economy?

Answer 20

1. Consumers – what to buy and how much? earn income by selling labour
2. Producers – what to produce and for whom?
3. Government – how to channel resources to productive use?

Question 21

What is a fundamental assumption when it comes to decision-making in economics?

Answer 21

People are assumed be maximizers and thus to take decisions that are
- utility maximising (consumers)
- profit maximising (producers)

Question 22

What is a marginal decision

Answer 22

• need to weigh cost + benefits at the margin, then compare marginal cost to marginal benefit
• you buy the shirt only if you think marginal benefit exceeds marginal costs

Question 23

What is a synonym to marginal cost?

Answer 23

incremental cost

Question 24

What does marginal cost refer to?

Answer 24

It refers to the increase or decrease in the cost of producing one more unit or serving one more customer.

Question 25

What is a factor market?

Answer 25

A factor market is a resource for companies to buy what they need to produce their goods and services.

Question 26

Define distribution of income

Answer 26

how the nation’s total income is distributed among its citizen, and its largely determined by the price that each type of factor service receives in factor markets

Question 27

What are the two characteristics of production processes?

Answer 27

→ Specialization of labour – the specialization of individual workers in the production of particular goods and services. = will give comparative advantage, specializations leads to improvement

→ Division of labour – is the breaking up of a production process into a series of specialized tasks and specialization within the production process

Question 28

What is a market economy?

Answer 28

society in which ppl specialize in productive activities and meet most of their material wants through voluntary market transactions w other ppl

Question 29

What type of system is barter?

Answer 29

economic system in which goods and services are traded directly for other goods and services → time consuming + requires a double coincidence of wants

Question 30

What are two major causes for globalization?

Answer 30

The rapid reduction in transportation costs
The revolution in information technology

Question 31

What are the three pure types of economic systems?

Answer 31

Traditional, command, free-market

Question 32

What are the characteristics of a traditional economy?

Answer 32

• behaviour is based primarily on tradition, custom, habits
• little change in goods produced year to year
• techniques of production stay traditional except when occasional new inventions
• production allocated amongst members in long-standing trad way
• productive when static environment

Question 33

What is a synonym for a command economy?

Answer 33

Centrally planned economy

Question 34

What are the characteristics for a centrally planned economy?

Answer 34

• behav determined by central authority, making most nec dec on what/how to produce, who gets what and how much
• centralization of decision-making
• hard bc of unavailable and often not up to date data to rely on

Question 35

What is a mixed economy?

Answer 35

Every economy is a mixed economy, in the sense that it combines significant elements of all three systems. The degrees of mixity varies depending on the sector.

Question 36

What are the main characteristics of a market economy?

Answer 36

1. Ppl pursue their own self-interest
2. Ppl respond to incentives
3. Prices/quantities are determined in free-markets where would-be sellers compete to sell to would-be buyers
4. Activities are governed by institutions