Chapter 1 - Introduction

Question 1

What is economics?

Answer 1

Economics is the study of efficient use of scarce human and property resources for the purpose of obtaining the maximum satisfaction of our material wants.

Question 2

What are the two fundamental facts of economics?

Answer 2

• Society has unlimited wants

* Economic resources are scarce

Question 3

What are the two key types of economic resources?

Answer 3

• Property resources

* Human resources

Question 4

What are the two types of property resources?

Answer 4

• Land - all natural resources

* Capital - all investment goods

Question 5

What are the two types of human resources?

Answer 5

• Labour - human physical and mental talents used to produce G&S
• Enterprise - one who innovates to combine land, capital and labour into the production of G&S

Question 6

In exchange for supplying resources the owners receive what?

Answer 6

• Rent for land
• Interest for capital
• Wages for labour
• Profit for entrepreneurial ability

Question 7

What are the five fundamental questions of economics?

Answer 7

• How much total output is to be produced?
• What combination of output is to be produced?
• How are these outputs to be produced?
• Who is to receive/consume the outputs?
• How can change be accommodated?

Question 8

The practice of economics combines what three elements?

Answer 8

• Describing or gathering the facts
• Developing principles or theories that make generalisations about economic behaviour
• Applying the insights gained from economic statistics and analysis in the form of policy prescription

Question 9

What are the two approaches taken by economists to develop economic theories?

Answer 9

• Induction - reasoning that proceeds from facts to generalisations
• Deduction - reasoning from assumptions to conclusions by a hypothesis

Question 10

What is economic theory?

Answer 10

Facts must be arranged, interpreted and generalised to derive appropriate economic theory.
Theories or principles are the end result of economic analysis. Meaningful statements drawn from facts.

Question 11

What is ‘ceteris paribus’? and what does it mean?

Answer 11

It is the ‘other things being equal’ assumption and is used:

• In analysis to signify that all variables other than the one being considered are held constant
• to focus attention on the relationship between chosen variables to minimise distracting influence of other variables

Question 12

What is macroeconomics?

Answer 12

concerned with behaviour of aggregates (collection of specific economic units as if they were one unit) in the economy

Question 13

What is microeconomics?

Answer 13

Concerned with the behaviour of specific units within the economy.

Question 14

The production possibilities curve is bowed out from the origin because of what?

Answer 14

Because of increasing opportunity cost

Question 15

Any point inside the production possibility frontier indicates what?

Answer 15

Resources are underemployed and more output could be produced with available resources.

Question 16

The scarcity problem persists why?

Answer 16

Because material wants exceed available productive resources

Question 17

The production possibilities curve illustrates the basic principle that?

Answer 17

If all resources of an economy are employed, and productive efficiency is achieved, more of one good can be produced only if less of another good is produced.

Question 18

Productive efficiency refers to what?

Answer 18

The use of the least-cost method of production.

Question 19

An ‘increase in efficiency’ suggests that an economy is what?

Answer 19

Is able to get more goods and services from a given amount of resources.

Question 20

Ceteris Paribas, what would cause an economy’s production curve to move to the left?

Answer 20

A reduction of the workforce. A recession or decrease in economic growth is shown by a leftward shift of the curve

Question 21

What are ‘factors of production’ also known as?

Answer 21

Economic resources

Question 22

The concept of economic efficiency is primarily concerned with what?

Answer 22

Obtaining the maximum output from available resources.

Question 23

What is opportunity cost?

Answer 23

The cost is the highest valued alternative foregone in the pursuit of an activity.

Question 24

What is a normative statement?

Answer 24

A statement based on values and can be proved neither right or wrong. It seeks to prescribe the way it should be.

Question 25

What is a positive statement?

Answer 25

It is a statement that seeks to explain the way it is.

Question 26

What does it mean by the statement that individuals operate on the basis of rational self-interest?

Answer 26

That they make decisions that provide them with the greatest benefits given their limited resources.

Question 27

What is marginal analysis?

Answer 27

It is where the incremental benefits available from any change to the status quo are compared with the incremental costs of making the change, suggesting that only those choices where marginal benefit exceeds marginal cost should be accepted

Question 28

Does ‘capital’ refer to money?

Answer 28

No capital refers to produced goods. Money produces nothing so is not an economic resource.

Question 29

Our ability to engage in valid economic reasoning faces a number of potential impediments, what are these?

Answer 29

• Bias & preconceptions we have
• Fallacy of composition
• Post-hoc fallacy
• Confusing correlation of economic variables or events with economic causation.

Question 30

What is positive economics?

Answer 30

It is based upon facts without value judgements

Question 31

What is normative economics

Answer 31

It is based upon subjective beliefs ‘what ought to be’.

Question 32

What is full employment?

Answer 32

All available resources are employed

Question 33

What is full production? and what occurs if it is not achieved?

Answer 33

Maximum goods and services are produced from fully employed resources of an economy. If not achieved underemployment will result.

Question 34

What are the two types of efficiency?

Answer 34

Allocative efficiency

Productive efficiency

Question 35

What is allocative efficiency?

Answer 35

Resources dedicated to goods and services most wanted by society - cds over records

Question 36

What is productive efficiency?

Answer 36

occurs when goods and services are produced using the lowest cost production methods.

Question 37

What are the two major forms of specialisation that can enhance efficiency?

Answer 37

• Division of labour - builds on existing differences in abilities and skills
• Geographic specialisation - builds on locational resource allocation