Chapter 1: Introduction to Economics

Question 1

Definition of economics

Answer 1

Study of the use of scarce resources to satisfy unlimited human wants

Question 2

Three types of resources

Answer 2

Land, labour and capital

Question 3

What is an opportunity cost

Answer 3

“Choice implies cost” : choosing to spend on one thing means giving up something else

Question 4

Where is an unattainable combination located in a graph?

Answer 4

At the right of the line

Question 5

What does it mean when a point is inside the budget line (not on it)

Answer 5

Not all of the resources are used

Question 6

What best represents the opportunity cost in a graph?

Answer 6

The slope of the budget line

Question 7

What is a production possibility boundary (+ 3 things it represents). Also, what shows these three things in the graph?

Answer 7

Curve illustrating scarcity, choice and opportunity cost.

Scarcity : there are unattainable combinations
Choice : the need to choose a point along the curve ; can’t have everything
Opportunity cost : the negative slope

Question 8

Why is the curve not linear in a production possibility boundary?

Answer 8

At first, we don’t need to give up a lot of X to create a little bit of Y. But the more Y we create, especially at the end, the more of X we have to give up (negative slop increases progressively)

Question 9

What are the four key economic problems

Answer 9

1. What is produced and how?
2. What is consumed and by whom?
3. Why are some resources sometimes idle?
4. Is productive capacity growing?

Question 10

How can the growth of productive capacity be represented?

Answer 10

By an outward shift of the entire production possibility boundary.

Question 11

Who defined the complexity of modern economics?

Answer 11

Adam Smith

Question 12

What are the two main aspects of modern economics?

Answer 12

1. It’s self-organizing
2. It is efficient: maximizing the production of goods and services while minimizing the use of resources

Question 13

How are the decisions made in a free-market economy (2)

Answer 13

1. Maximizing : profit and utility
2. Marginality

Question 14

What are the four different types of economies?

Answer 14

1. Traditional economy
2. Command economy
3. Free-market economy
4. Mixed economy

Question 15

4 aspects of market economy

Answer 15

1. Private ownership of resources is predominant
2. economic decisions are made in a decentralized manner
3. prices and quantities are determined by supply and demand
4. It is mixed with some government interventions

Question 16

3 aspects of planned economy

Answer 16

1. The government controls the resources
2. Economic activities are conducted according to government plans
3. These plans can coexist with markets, although markets are heavily controlled (ex. prices)

Question 17

What are the main problems with a planned economy?

Answer 17

1. Information
2. Incentives

Another phenomenon : chronic shortage

Question 18

Modern mixed economy : government interventions

Answer 18

Governments play an important role in protecting property right and enforcing contracts.

Question 19

What do governments mainly intervene for? (4)

Answer 19

1. Correct market failures
2. Provide public goods
3. Offset the effects of externalities
4. Income redistribution