Chapter 1

Question 1

Define Economics

Answer 1

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

Question 2

What are the factors of production?

Answer 2

These are resources used to produce goods and services. They are divided into the basic categories of land, labour and capital

Question 3

What is land?

Answer 3

Land includes all natural endowments such as arable land, forests, lakes, crude oil, minerals

Question 4

What is labour?

Answer 4

Labour includes all mental and physical human resources including entrepreneurial capacity and management skills

Question 5

What is capital?

Answer 5

Capital includes all manufactured aids to production, such as tools, machinery, and buildings

Question 6

Define Goods

Answer 6

Tangible products, such as cars or shoes

Question 7

Define Services

Answer 7

Intangible products, such as legal services and education

Question 8

Define Production

Answer 8

The act of making goods or services

Question 9

Define Consumption

Answer 9

The act of using goods or services to satisfy wants

Question 10

What is an economy?

Answer 10

An economy is a system in which scarce resources - land, labour, capital are allocated among competing uses

Question 11

What are the three types of economies?

Answer 11

traditional, command and free-market economies

Question 12

Define traditional economy

Answer 12

An economy in which behaviour is based mostly on tradition, custom, habit. e.g. young men follow their father’s occupation.

Question 13

Define command economy

Answer 13

An economy in which most economic decisions are made by a central planning authority.

Question 14

Define free market economy/market economy

Answer 14

An economy in which most economic decisions are made by private households and firms.

Question 15

Define mixed economy

Answer 15

An economy in which some economic decisions are made by firms and households and some by the government.

Question 16

Define opportunity cost

Answer 16

A value a person could have received but passed up in pursuit of another option.

Question 17

What is the production possibilities boundary?

Answer 17

A curve showing which alternative combinations of output can be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations.

Question 18

Define resource allocation

Answer 18

The allocation of an economy’s scarce resources among alternative uses.

Question 19

Define microeconomics

Answer 19

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

Question 20

Define macroeconomics

Answer 20

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

Question 21

Decision makers

Answer 21

• Incentives
• Rational self interest principle
• Maximization principle

Question 22

Decision makers

Answer 22

• Incentives
• Rational self interest principle
• Maximization principle

Question 23

Marginalisation principle

Answer 23

you only buy something if the marginal benefit exceeds the marginal cost.

Question 24

An economy based on​ free-market transactions is?

Answer 24

Self organizing

Question 25

What is the foundation of the economic order that Adam Smith developed?

Answer 25

Self interest and not benevolence is the foundation of the economic order.

Question 26

Self-interested buyers and sellers respond to?

Answer 26

Incentives

Question 27

Identify the types of decision makers in any economy

Answer 27

Producers, Consumers, Government

Question 28

Consumers are assumed to make decisions that will?

Answer 28

Maximize their utility

Question 29

Producers are assumed to make decisions that will?

Answer 29

Maximize their profits

Question 30

Consumers and producers are assumed to weigh the costs and benefits of their decisions…

Answer 30

at the margin

Question 31

for a​ consumer, the benefit of buying​ “one more” unit of a good must outweigh the ______ of buying that unit

Answer 31

marginal cost

Question 32

Define specialization of labour

Answer 32

The specialization of individual workers in the production of particular goods or services.

Question 33

Why is specialization of labour more efficient than universal self-sufficiency?

Answer 33

Individuals or countries can become more proficient and efficient at the activity.
Individuals or countries can focus on what they do relatively well while leaving everything else to be done by others.

Question 34

Consider the market for​ doctors’ services. In what way has this market taken advantage of the specialization of​ labour?

Answer 34

Existence of both general practitioners and specific specialists makes the​ doctors’ services more efficient and less​ time-consuming.

Question 35

Define barter

Answer 35

Used in early trading. Trading of goods directly for other goods. Double coincidence of wants.

Question 36

How is specialization related to trade?

Answer 36

Specialization refers to the tendency of countries to specialize in certain products which they trade for other goods, rather than producing all consumption goods on their own. Countries produce a surplus of the product they specialize in and trade it for a different surplus good of another country.

Question 37

Define globalization

Answer 37

Globalization is the growing interdependence of world economies through an increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and through the more widespread diffusion of technology

Question 38

What are the two major causes of globalization?

Answer 38

The rapid reduction in transportation costs and the revolution in information technology that have occurred in the past 50 years.

Question 39

How has the cost of moving products around the world decreased greatly over the last half of the 20th century?

Answer 39

Because of containerization and the increasing size of ships.

Question 40

What are the challenges of globalization?

Answer 40

Canadian firms relocate production facilities to LICs meaning domestic workers are laid off and must search for new jobs, get retrained.

The location of production facilities in these LICs have lower environmental rights or human rights records. This raises questions about the standards that should be followed by Canadian-owned firms in foreign lands.

Question 41

The allocation of different jobs to different people is referred to as the…

Answer 41

specialization of labour

Question 42

The specialization within the production process of a particular product is referred to as the…

Answer 42

division of labour

Question 43

When people specialize in their​ activities, it becomes necessary for them to ______ to obtain most of the things they need or want.

Answer 43

Trade.

Specialization must be accompanied by trade. People who produce only one thing must trade most of it with other people to obtain all the other things they want.

Question 44

Money greatly facilitates​ trade, which itself facilitates _____

Answer 44

specialization

Question 45

Why is trade facilitated by money?

Answer 45

because it eliminates the cumbersome system of barter.

Question 46

Why is barter cumbersome or inefficient?

Answer 46

Because the system requires a double coincidence of wants which is very laborious and time consuming as you have to find out the person who want each other’s goods

Question 47

Outline the great debate between command economies and free market economies

Answer 47

Adam Smith = stresses importance of efficiency of free market economies and allocation of resources

Karl Marx = stresses equity and distribution of income

Question 48

What is marginal thinking?

Answer 48

requires decision makers to evaluate whether the benefit of one more unit of something is greater than its cost.

Question 49

Markets are based on what?

Answer 49

based on voluntary transactions and free choice

Question 50

How can the government improve market outcomes?

Answer 50

Public policy may promote efficiency. Govt may alter market outcome to promote equity. If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided.