CH1: Introduction to Economics Flashcards
What is economics and why does it matter?
Economics is the social science that studies the choices individuals, businesses, and governments make to allocate scarce resources. It matters because scarcity forces trade-offs—decisions about how to best use limited time, money, and materials to satisfy unlimited wants.
What is scarcity, and how is it different from poverty?
Scarcity means resources are limited relative to wants—it affects everyone, including the wealthy. Poverty, in contrast, refers to the inability to meet basic needs. Scarcity is a universal economic condition; poverty is a social one.
What are needs vs wants in economic terms?
Needs are essential for survival (food, water, shelter); wants are non-essential desires (luxuries, entertainment). Economics helps societies decide how to prioritize resource allocation between the two.
What is opportunity cost, and why is it central to economic decision-making?
Opportunity cost is the value of the next best alternative foregone when a choice is made. It reflects the real cost of decisions, ensuring individuals and societies make efficient trade-offs.
Define the four factors of production and their rewards.
Land: Natural resources (e.g. oil, land) → Reward: Rent
Labour: Human effort → Reward: Wages
Capital: Man-made tools & machines → Reward: Interest
Entrepreneurship: Risk-taking, coordination → Reward: Profit
What is the production possibilities curve (PPC) and what does it show?
The PPC is a graph that shows all possible combinations of two goods an economy can produce using all resources efficiently. It illustrates scarcity (limits), choice (various points), and opportunity cost (trade-offs between goods).
Why is the PPC bowed outward?
Due to increasing opportunity cost. As more of one good is produced, increasingly larger amounts of the other must be sacrificed because resources are not equally efficient in all uses.
What do points on, inside, and outside the PPC indicate?
On: Efficient production
Inside: Inefficiency (underutilization of resources)
Outside: Unattainable with current resources and technology
How can the PPC shift outward and what does that represent?
Outward shift = Economic growth, caused by more resources (e.g. labour, capital), improved technology, or better education/training.
Differentiate between microeconomics and macroeconomics.
Microeconomics: Individual decision-making (e.g., households, firms) and market dynamics.
Macroeconomics: Economy-wide phenomena like inflation, unemployment, GDP, and policy.
What is the circular flow of economic activity?
A model showing interactions between households (supply factors, demand goods) and firms (supply goods, demand factors). It illustrates how money, goods, and services flow in the economy.
What does the concept of trade-offs imply in economics?
Choosing one option means sacrificing another. Every choice involves a cost—highlighted by the PPC and the concept of opportunity cost.
How does economic growth impact the PPC and society?
Growth shifts the PPC outward, allowing more goods to be produced and increasing the standard of living over time.
Explain with an example how opportunity cost applies in daily decisions.
If you choose to study instead of going to a party, the opportunity cost is the enjoyment/social time you gave up. If a factory makes trucks instead of cars, the cars forgone are the opportunity cost.
Why can’t societies produce unlimited goods and services?
Because of finite resources (labour, capital, land). This fundamental constraint leads to the need for prioritization and efficient decision-making—core to the study of economics.
What role do incentives play in economic behaviour?
Incentives influence choices by altering perceived benefits or costs. E.g., tax breaks can encourage investment; higher prices may reduce consumption.
What is the significance of the PPC in understanding efficiency?
It identifies when an economy is fully utilizing its resources (on the curve), underperforming (inside the curve), or pursuing growth (shifting the curve outward).
Can a society avoid opportunity costs? Why or why not?
No. Since resources are limited, every decision implies sacrificing alternatives. Opportunity cost is unavoidable and inherent in all economic activity.
How is economic efficiency defined?
Achieving maximum output from limited inputs, or producing goods and services at the lowest possible cost without waste.
What causes inefficiency in an economy?
Factors like unemployment, poor resource allocation, outdated technology, or political instability can prevent an economy from operating on its PPC.
What does the national-level Production Possibilities Frontier (PPF) illustrate?
It shows the trade-offs and opportunity costs a country faces when allocating scarce resources between two goods. Points on the curve reflect efficiency; a point inside the curve indicates inefficiency; a point outside is unattainable with current resources.
What does a movement along the PPF imply?
A reallocation of resources between two goods, showing opportunity cost. E.g., producing more cotton means producing less wine.
What happens when the PPF shifts outward?
It indicates economic growth due to improved technology or increased resources, allowing more production of both goods.
What can cause the PPF to shift inward?
A decline in resources or technology, reducing the economy’s capacity to produce goods.
What does a negative slope on the PPF represent?
Opportunity cost — producing more of one good requires sacrificing some of the other due to scarcity.
What is the difference between goods and services?
Goods are tangible items (e.g., food); services are intangible (e.g., education) exchanged for value.
What are the four unique features of services?
Intangibility, inconsistency, inseparability, and non-storability.
What are consumer goods?
Goods bought by individuals for personal use, satisfying direct human wants.
What are capital goods?
Goods used to produce other goods (e.g., machinery), enabling future production and growth.
List and define the types of consumer goods.
Non-durable (used once), semi-durable (limited reuse), durable (long-term use).
What are final goods vs intermediate goods?
Final goods are consumed by end users; intermediate goods are used to make final goods.
Define private goods and public goods.
Private goods are exclusive (e.g., a sandwich); public goods are non-rival and non-excludable (e.g., streetlights).
Differentiate economic goods from free goods.
Economic goods are scarce with opportunity cost; free goods are abundant and costless (e.g., air).
What are homogeneous and heterogeneous goods?
Homogeneous goods are identical (e.g., wheat); heterogeneous goods vary (e.g., smartphones).
How does technological improvement affect the PPF?
It can rotate or shift the curve outward, increasing output in affected sectors.
What does a rotation in the PPF indicate?
A sector-specific tech improvement — pivot at one axis shows growth in the opposite sector.
What happens when both sectors improve or resources increase?
The entire PPF shifts outward, showing economic growth.
Why is economics considered a social science?
It studies human behavior under scarcity using empirical methods, despite limited experimentation.
What scientific methods does economics use?
Observation, reasoning, data analysis, modeling, and assumptions to study markets and behavior.
What role do assumptions play in economic models?
They simplify complexity to allow predictions, like assuming rational consumers.
Why study expectations and business cycles in economics?
To manage behavior and avoid emotional extremes during booms and busts.
What is the significance of intermediate goods in GDP?
They are excluded to avoid double counting; only final goods are included.
What distinguishes capital goods from consumer durables?
Capital goods are used in production; consumer durables are for personal use.
Why is it important to classify goods correctly in economics?
It influences policy, income calculations, and resource allocation.
Summarize the link between scarcity, opportunity cost, and the PPF.
Scarcity forces choices; every choice has a cost; the PPF shows trade-offs between goods.
What is the difference between positive and normative economics?
Positive economics deals with objective facts that can be tested or proven (e.g., ‘A rise in taxes reduces consumption’). Normative economics involves subjective opinions or value judgments (e.g., ‘The government should reduce taxes’). Normative statements cannot be fact-checked or proven.
Give an example of a positive economic statement.
‘An increase in the minimum wage will reduce employment for low-skilled workers.’ Testable through data and empirical analysis.
Give an example of a normative economic statement.
‘The government should provide free healthcare to all citizens.’ Based on values; not testable or provable by scientific methods.
What is the main focus of microeconomics?
Microeconomics focuses on individual decision-makers such as consumers, firms, and industries. It examines specific markets, pricing, demand and supply, and resource allocation at a small scale.
What are examples of microeconomic topics?
A firm’s pricing strategy; Consumer choice theory; Supply and demand for petrol; Cost structures of a manufacturing business.
What is the main focus of macroeconomics?
Macroeconomics analyzes the economy as a whole. It deals with aggregate variables like GDP, inflation, unemployment, national income, and government fiscal/monetary policy.
How do micro and macroeconomics relate to each other?
Micro-level decisions (e.g., consumer spending) aggregate to influence macroeconomic outcomes (e.g., national consumption). Conversely, macro factors like inflation or interest rates influence individual and firm behavior. The two are interdependent—micro builds up to macro.
