Chapter 1

Question 1

What is economics?

Answer 1

Economics is the study of the use of scarce resources to satisfy unlimited human wants as this definition assumes that humans always want more

Question 2

What is Microeconomics?

Answer 2

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

Question 3

What is Macroeconomics?

Answer 3

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

Question 4

What resources are called the factors of production by economists?

Answer 4

Land (natural endowments), Labour (mental and physical human effort) and Capitol (tools, machinery, equipment)

Labour (is also known as Human Capitol and Land is also known as Physical Capitol)

Question 5

What are factors of production used to do?

Answer 5

To produce goods and services

Question 6

What are Goods, Services, Production, and Consumption?

Answer 6

Goods are tangible (Investment Goods / Consumption Goods)

Services are tangible (eg Legal advice)

Consumption is the act of using them (We assume that consumption is something that people want to do)

Question 7

What is Scarcity and Choice?

Answer 7

Scarcity and Choice is the idea that, since existing resources are scarce, we must choose what goods and services we want over others.

Question 8

What is Opportunity Cost?

Answer 8

It is the idea of purchasing one thing at the cost of not purchasing another as making choices implies the existence of cost. Therefore, by purchasing one item over the other, one is increasing the value of the purchased item as it is given a higher value by way of not purchasing the other item due to a variety of different factors that does not just include the cost of the non-purchased item.

Question 9

What does Opportunity Cost depend on?

Answer 9

It depends on individual tastes, circumstances, etc.

Question 10

What is Budget Constraint?

Answer 10

Budget Constraint demonstrates the possible bundles of consumption given the available income and cost of the goods being purchased.

Question 11

What happens to the Budget Line when the budget increases?

Answer 11

The line shifts up and the slope does not change

Question 12

What needs to occur in order for the slope for the Budget Line to change?

Answer 12

The relative price of the good would have to change

Question 13

What happens to the Budget Line when the relative price of the good changes?

Answer 13

The Budget Line shifts to the left/in

Question 14

What happens to the Budget Line if the price of the good increases by 10% and the budget increases by 10%?

Answer 14

Nothing changes because both are increasing at the same rate

Question 15

What is the opportunity cost of consuming one more beer ($4) (if I spend all my income)?

Answer 15

2 pizzas ($2 each) (Opportunity Cost equation: Pb/Pp = 2 pizzas)

Question 16

What does a Production Possibilities Boundary (PPB) in a graph illustrate?

Answer 16

It illustrates scarcity (points found outside of the boundary which are unattainable), choice (points that are within and on the boundary which are all attainable) and opportunity cost (not demonstrated by points as it only demonstrates the cost of one item by way of not purchasing others eg: choosing point d at the cost of points a, b and c)

Question 17

Is the slope of the PPB positive or negative?

Answer 17

Negative

Question 18

What is demonstrated when the PPB is a straight line?

Answer 18

That the opportunity cost of each good is constant

Question 19

Consider an economy producing two​ goods, A and​ B, with a PPB that is concave to the origin. As the economy produces more of good A and less of good​ B, its opportunity cost of producing A _____.

Answer 19

Increases

Question 20

What happens when the Productive Capacity grows?

Answer 20

This economic growth makes the PPB shift up and right as it makes it possible to produce more of all products (Look at p. 16 of Chapter 1 for a visual)

Question 21

What are the Four Key Economic Problems?

Answer 21

What is produced and how
What is consumed and by whom
Why are resources sometimes idle
Is productive capacity growing

Question 22

What determines the production of what is produced within the economy?

Answer 22

Resource allocation determines the quantities of various goods that are produced

Question 23

What determines which goods are produced and which ones are not?

Answer 23

What people want and what people can produce

Question 24

What determines the distribution of a nation’s total output among its people?

Answer 24

It depends on the system, but most markets demonstrate that rich people get more

Question 25

Who gets a lot and who gets little, and why?

Answer 25

Depends on productivity and income

Question 26

Should governments care about the distribution of consumption and if so, what tools do they have to alter it?

Answer 26

Yes, it depends on values. Depends on the given society we are observing

Question 27

Will the economy consume exactly the same goods that it produces

Answer 27

No, not if countries can trade

Question 28

Why are resources sometimes idle?

Answer 28

An economy is operating inside its production possibilities boundary if some resources are idle which usually occurs when there are shocks to the economy (pandemics such as COVID, Great Recession, etc)

Question 29

Should governments worry about idle resources?

Answer 29

Yes because, if they are idle, then that means there is a cause for this state which must be addressed in order for the economy to not be idle anymore. They do so by stepping in and doing things to stimulate the economy. Eg. Build the Empire state building to increase job opportunity and therefore increase income, send COVID checks in the mail so that people can use the money and spend it (make sure that those who receive the money do spend it)

Question 30

How can government policies affect the outcome of the four key economic problems?

Answer 30

They can correct market failures (when something happens within a given market that prevents it from working well) 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 31

What aspects describe the nature of market economies?

Answer 31

Self-Organizing and Efficiency

Question 32

What is a Self-Organizing market economy?

Answer 32

When individual consumers and producers act independently to pursue their own self-interests and the collective outcome of this behaviour is coordinated.

Question 33

What is Efficiency in the market economy?

Answer 33

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

Question 34

What are Incentives and Self-Interest?

Answer 34

Individuals generally pursue their own self-interest so individuals respond well to incentives (things that encourage individuals to purchase goods/encourages individuals to buy goods from them). Eg: Sellers usually want to sell more when prices are high and buyers usually want to buy more when prices are low. However, incentives and self-interest are not the only sources of motivation as other values also play an important role.

Question 35

Who are the three types of decision makers that operate any economy and what is their purpose?

Answer 35

Consumers - What to buy and how much
Producers - What to produce and for whom
Government - How to channel resources to productive use

Question 36

What two characteristics are displayed within the production process?

Answer 36

Specialization of labour - the specialization of individual workers in the production of particular goods and services.
Division of labour – is the breaking up of a production process into a series of specialized tasks.

Question 37

Why does money need to accompany trade?

Answer 37

Money eliminates the cumbersome system of barter by separating the transactions involved in the exchange of products.
Money greatly facilitates trade, which facilitates specialization.
This is because the barter system doesn’t allow specialization as the exchanging of goods does not always demand the same price. Trade through the bartering system demands that the goods exchanged change based on the wants of those you are exchanging with and those who are performing the exchange

Question 38

What is Globalization?

Answer 38

Globalization is used loosely to mean the increased importance of trade

Question 39

What are the two major causes of trade?

Answer 39

The rapid reduction of transportation costs
The revolution in information technology

Question 40

What challenges come with Globalization?

Answer 40

Human rights, environmental, production standards, etc.

Question 41

What are the three types of economic systems?

Answer 41

Traditional - slow change, tradition
Command - when everyone does what the government says they must do (eg. North Korea, planned economies)
Free-Market - Most countries, economies where people can do what they want

Question 42

What is the economy in practice?

Answer 42

It is a mixed economy as it combines significant elements of all three systems

Question 43

Why did most governments replace their systems of central planning with much freer markets?

Answer 43

Because most of these countries were unable to raise living standards to that of more free-market economies

Question 44

Why does economics need the other social sciences?

Answer 44

Because opening up the field to other views and perspective allows us to answer social questions with the economic lens

Question 45

What are the key government-provided institutions in market economies?

Answer 45

Private property and freedom of contract

Question 46

What are some things that the government does when it intervenes in the economy?

Answer 46

Correct market failures, provide public goods (military, public education) and offset the effects of externalities

Question 47

What are externalities?

Answer 47

They are an effect that is positive or negative of some economic entity or transaction that affects people who are not a part of the transaction