Chapter 1

Question 1

Define economics

Answer 1

Economics is defined as the study of how individuals, businesses and institutions make social choices to optimise their level of satisfaction under conditions of scarcity

Question 2

What are economic choices based on?

Answer 2

Economic choices are based on a list of wants ranked according to priority.

Question 3

What is scarcity?

Answer 3

Scarcity is limited goods and services, as well as time. Scarcity gives rise to choice which gives rise to opportunity cost.

Question 4

Define opportunity cost

Answer 4

Opportunity cost of an activity is value of the next best alternative that must be forgone in order to undertake the activity

Question 5

What is utility?

Answer 5

Utility is pleasure, happiness or satisfaction from consuming a good or a service

Question 6

What is rational behaviour?

Answer 6

Economics assumes everyone has a rational perspective and therefore acts with rational behavior. Rational behavior simply means that people make decisions with some desired outcome in mind

Question 7

What is rational self-interest?

Answer 7

Rational self-interest is an assumption of economics. Meaning that decisions are not free from mistakes or unaffected by emotions and that the desire is to maximise our level of utility. Self-interest behavior is simply behavior designed to increase personal satisfaction

Question 8

What is a rational consumer and a rational producer?

Answer 8

A rational consumer is someone who maximises utility subject to a budget constraint. A rational producer seeks to maximise the profit of the firm.

Question 9

What is optimal behavior?

Answer 9

Optimal behavior consists of three elements: calculations, negotiation and expenditure. Rational consumers and rational producers behave at optimal behavior

Question 10

What does marginal mean?

Answer 10

Marginal means extra, additional or a change in.

Question 11

What is the decision to obtain marginal benefits associated with it?

Answer 11

The decision to obtain the marginal benefits associated with some specific option always includes the marginal cost of forgoing something else

Question 12

What are consumer’s aims?

Answer 12

Consumers aims are they want the greatest possible utility with unlimited wants/needs that are subject to the budget contrast

Question 13

What are producers aim?

Answer 13

Producers aim is to maxims profit with cost constraints and certain production techniques

Question 14

What is cetris paribus?

Answer 14

Cetris paribus other things equal assumption, it is the assumption that factors other than those being considered do not change. It assumes all variables except those under immediate consideration are held constant for a particular analysis

Question 15

Define microeconomics

Answer 15

Microeconomics is concerned with individual units such as a person, a household, a firm or an industry

Question 16

Define macroeconomics

Answer 16

Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates (government, households, and business sectors)

Question 17

What is macro-economics objective?

Answer 17

Marco-economics uses aggregates which is a collection of specific economic units treated as if they were one unit. Macroeconomics seeks to obtain an overview or general outline, of the structure of the economy and the relationships of its major aggregates.

Question 18

What is the micro-economics objective?

Answer 18

Micro-economics observes the details of an economic unit or very small segment of the economy

Question 19

What is the difference between positive and normative economics?

Answer 19

Positive economics focuses on facts and cause-and-effect relationships. Normative economics focuses on opinion

Question 20

What is positive economics?

Answer 20

Positive economics includes description, theory development and theory testing (theoretical economics)

Question 21

What is normative economics?

Answer 21

Normative economics incorporates value judgement about what the economy should be like or what particular policy action should be recommended to achieve a desirable goal (policy economics)

Question 22

What is the economising problem?

Answer 22

Economising problem is the need to make choices because economic wants exceed economic means

Question 23

What is a budget line?

Answer 23

A budget line is a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income

Question 24

What is the difference between attainable and unattainable on a graph?

Answer 24

All combinations on or inside the budget line are attainable. In contrast all combinations beyond the budget line are unattainable.

Question 25

What does an increase and an decrease in income do to the budget line on a graph?

Answer 25

An increase in income shifts the budget line to the right, and a decrease in money income shifts it to the left

Question 26

What are the factors of production and their rewards?

Answer 26

• Land includes natural resources used in the production process (rent)
• Labor consists of the physical and mental talent used to produce a good or service (salary)
• Capital includes all manufactured aids used in producing consumer goods and services (interest)
• Entrepreneurship bring the factors together in order to produce a product (profit)

Question 27

What is the difference between consumer goods and capital goods?

Answer 27

Consumers good directly satisfy wants while capital goods do so indirectly by the production of consumer good

Question 28

What are the functions that an entrepreneur performs?

Answer 28

• Takes the initiative in combining the resources of land, labour and capital to produce a good or service
• Makes the strategic business decisions
• Is an innovator and commercialises new products, new production techniques or even form new business organisation
• Is a risk bearer

Question 29

What are the production possibilities model’s main assumptions?

Answer 29

• Operating at full employment- the economy is employing all its available resources
• Fixed resources - quantity and quality of the factors of production are fixed
• Fixed technology - the state of technology is constant
• Two goods the economy is producing only two goods: Consumer goods, Capital goods

Question 30

What is the production possibilities curve?

Answer 30

The production possibilities curve displays different combinations of goods and services that society can produce in a fully employed economy assuming a fixed availability of supplies of resources and constant technology

Question 31

Why should you use a production possibility model?

Answer 31

The production possibility model helps us find the optimal allocation of resources. Production possibilities models are related to how limited your factor of production is.

Question 32

What is a product production boundary?

Answer 32

The plotted graph boundary of a production possibilities curve is called a product production frontier or boundary as it’s the limit reached by the resources

Question 33

What are the points lying inside the production possibility curve?

Answer 33

Points lying inside the curve reflect less output and therefore are not as desirable as points on the curve. Points inside the attainability of the PPF indicate unemployed resources or insufficient use of available technology

Question 34

What will cause a production possibility boundary to shift to the right?

Answer 34

• When an increase in the quantity or quality of resources occurs the production possibilities curve shifts outward and to the right, this shift represents growth of economic capacity
• Advances in technology will also result in an outed shift in the PPC.

Question 35

What is the law of increasing opportunity cost?

Answer 35

Law of increasing opportunity cost states that as the production of a particular good increase, the opportunity cost of producing an additional unit increases

Question 36

What is the economic rationale law?

Answer 36

The economic rationale for the law of increase opportunity cost is that economic resources are better at producing one type of good than at producing others

Question 37

What leads to an increasing opportunity cost?

Answer 37

Economic growth leads to the law of increasing opportunity cost. Economic growth means an increase in the production possibilities

Question 38

When should economic activity be expanded?

Answer 38

Any economic activity should be expanded as long as marginal benefit exceeds marginal cost and should be reduced if marginal cost exceeds marginal benefit.

Question 39

What is the optimal amount of economic activity?

Answer 39

The optimal amount of the activity occurs where MB=MC

Question 40

What will cause the production possibility curve to swivel to the right?

Answer 40

If a change in the resources or an improvement in the technology will only effect an improvement in production of one good the PPC will swivel to the right