Chapter 1 - An introduction to microeconomics

Question 1

What are the 4 factors of production?

Answer 1

• Land (or natural) refers to all those resources that occur in nature
• Labour refers to the mental and physical effort by humans in the production process
• Capital refers to those resources that have been made by combining labour and natural resources to create a more sophisticated input in the production process
• Entrepreneurship refers to the skills of those individuals who combine resources to produce goods and services

Question 2

What are the three basic economic questions that an economy attempts to answer?

Answer 2

1. What goods and services will be produced and in what quantities?
2. How will the goods and services be produced?
3. For whom will these goods and services be produced?

Question 3

What is market capitalism?

Answer 3

A marketplace that allows buyers and sellers to interact and exchange goods and services. Resources are owned by private individuals. Prices give signals influencing buyer behaviour.

Question 4

What is planned socialism?​

Answer 4

Government is responsible for resource allocation.

Government answer three basic economic questions.

Socialism indicates that no one individual can excessively benefit from producing goods and services.

Question 5

What is planned capitalism?

Answer 5

Assets owned by private individuals.

Government directs what is produced.

Generally only employed by countries during war time (in order to produce goods and services for defence)

Question 6

What is market socialism?

Answer 6

Government owns most of the resources but markets determine what goods and service will be produced.

Question 7

What is microeconomics?

Answer 7

Microeconomics is the study of economic behaviour of individuals as consumers and producers.

Question 8

What is ​macroeconomics?

Answer 8

Macroeconomics is the study of an economy as a whole

Question 9

What is Scarcity?​

Answer 9

Scarcity is comparing the needs and wants of society with the resources available to meet those needs and wants

Question 10

What is Relative Scarcity?​

Answer 10

Resources are finite whereas needs and wants are infinite

Question 11

What is opportunity cost?​

Answer 11

Opportunity cost is the value of the next best alternative forgone when a choice is made.

Question 12

What is a PPF?

Answer 12

PPF (Production Possibility Frontier)

A PPF illustrates an economy’s opportunity cost and choices on how to allocate its scarce resources.

All points along the PPF curve represent efficient outcomes in the sense that maximum volume of output is produced from available resources.

Question 13

What is allocative efficiency?​

Answer 13

Allocative efficiency is the most efficient allocation of resources will be one that is able to maximise the needs and wants of society. When allocative efficiency occurs no resources are wasted and the highest collective satisfaction occurs.

Question 14

What is technical efficiency?

Answer 14

Technical (or productive) efficiency occurs when it is not possible to increase output without increasing inputs (resources).

Question 15

What is ​dynamic efficiency?

Answer 15

Dynamic efficiency refers to how quickly an economy can reallocate resources to achieve allocative efficiency.

Question 16

What is inter-temporal efficiency?

Answer 16

Inter-temporal efficiency it the need for balancing current and future consumption.

Question 17

What assumptions are made about the decisions of consumers?

Answer 17

• Rational: the average consumer is assumed to be rational. Thus, they will use their income to maximise satisfaction (this is reffered to as utility)
• Preferences: assumed that consumers have clear preferences between choices available. Satisfaction from a good or service is subjective.
• Budget Constraints: each consumer is assumed to have a limited income to devote to the consumption of goods and services.

Question 18

What is ​diminishing marginal utility?

Answer 18

The more of a good or service that is consumed per period, the smaller the increase in total utility that is generated from the last unit.

Question 19

Influences on consumer choice: Internal Influences

Answer 19

Internal Influences:

• Attitude towards products
• Perception of how they see themselves and their role in the world
• Existing set of knowledge
• Time available to make a decision

Question 20

Influences on consumer choice: External Influences

Answer 20

External Influences

• influences by their culture and sub-cultures
• knowledge of a product (reviews)
• purchase situation such as physical environment and reason for purchase
• advertising
• brand loyalty: where a customer may not reasonably consider a viable substitute, thereby making consumers less responsive to price changes.
• governments through incentives and taxes

Question 21

Decision-making by businesses

Answer 21

The factors that influence businesses behaviour may ultimately be determined by the impact these factors have on profit.

The profitability of a firm will be influenced by:

• The price of the product that they want to supply to market
• their costs of operating