Economics

Question 1

Economics

Answer 1

The study of how scarce resources are allocated to fulfil the infinite wants of consumers; a study of rationing systems.

Question 2

Needs

Answer 2

The basic necessities that a person must have in order to survive. E.g. food, water, warmth, shelter, clothing.

Question 3

Wants

Answer 3

The desires that people have. E.g. bigger homes, iPhones, etc

Question 4

The Basic Economic Problem

Answer 4

There is a scarcity of resources to satisfy unlimited wants. There are finite resources and infinite wants. This means a choice must be made, which leads to an opportunity cost.

Question 5

Scarcity

Answer 5

The issue of there being limited resources to fulfil infinite wants.

Not enough resources to fulfil all the wants.

Question 6

Opportunity cost

Answer 6

• The real cost of the next best alternative that is forgone when a choice is made.
• ‘Next best alternative’ implies a scale of preference
• Usually measured in terms of goods, services, or monetary value given up (relative to the alternative course of action)

Question 7

Fundamental economic questions

Answer 7

• What to produce (emphasis on agriculture, manufacturing, housing, leisure?)
• How to produce (labour intensive, land intensive, capital intensive?)
• For whom to produce (even distribution? More for the rich? For those who work hard?).
• How much to produce

Question 8

Factors of production

Answer 8

Land, labour, capital, enterprise.

Question 9

Land

Answer 9

• Natural resources: available for production
• Renewable resources: those that replenish
• Non-renewable resources: cannot be replaced

Question 10

Labour

Answer 10

Physical and mental effort of people used in production.

Question 11

Capital

Answer 11

All non-natural (manufactured) resources that are used in the creation and production of other products.

Question 12

Enterprise/entrepreneurship

Answer 12

Refers to the management, organisation, and planning of the other three factors of production.

Question 13

Interdependence of factors of production

Question 14

Free goods

Answer 14

• Does not incur any opportunity costs in its production or when consumed
• Not relatively scarce (not limited in supply)
• Will not have a price

Question 15

Economic goods

Answer 15

• Has an opportunity cost (goods that use resources which could have been put to use producing something else)
• Uses scarce resources
• Will have a price

Question 16

Economic Thinkers

Answer 16

Adam Smith, John Maynard Keynes, David Ricardo, Karl Marx

Question 17

Schools of Economic Thought

Answer 17

Classical, Keynesian, supply side, moneterism.

Question 18

Who brought classical economics into the mainstream?

Answer 18

Scottish economist Adam Smith.

Question 19

Key pillars of classical economics

Answer 19

• No government intervention in the marketplace
• The market will sort it out
• Free trade

Question 20

Adam Smith

Who was he and what was his first idea?

Answer 20

• 18th century Scottish economist and philosopher
• First idea: 1766 “wealth of nations”

Question 21

Key ideas from Adam Smith

Answer 21

• Philosophy of free markets
• Assembly line production methods
• Gross domestic product (GDP)

Question 22

Philosophy of free markets

Answer 22

• Freedom to produce and exchange goods
  -> Minimizing role of government interventions and taxation in the free markets (he did see the government as responsible for the education and defence sectors of the country)
• Idea of “invisible hand”: forces of supply and demand, every person helps to create the best outcome for all
• Opening markets for domestic and foreign competition

Question 23

Assembly line production methods

Answer 23

Evolution from land-based wealth to wealth created by assembly-line production: division of labour resulting in specialization produces prosperity

Question 24

Gross Domestic Product

Answer 24

• Believed countries should be evaluated based on their** levels of production and commerce**
• Bars for creating the GDP matrix for measuring a nations’ prosperity

Question 25

Adam Smith - historal link

Answer 25

- Britain had just started **entering Industrial revolution**: encourage division of labour to specialize and increase productivity - Previous system of Monarch: **Rejected the idea of government intervention** in the market place

Question 26

Rise of Classical Economics

Answer 26

- Coincided with the **industrial revolution ** - Many fundamental economic theories such as **supply & demand** were a product of classical economics.

Question 27

Classical Economics is the opposite of...

Answer 27

Classical economics is the opposite of “command and control” systems and became associated with freedom.

Question 28

The Invisible Hand

Answer 28

* A metaphor for the unseen forces that move the free market economy * Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. * Part of laissez-faire, meaning "let do/let go," approach to the market.

Question 29

According to classical economics, what causes the natural movement of prices and the flow of trade?

Answer 29

The constant interplay of individual pressures on market supply and demand.

Question 30

Classical Economics -- key idea | The market will find its eqillibrium...

Answer 30

The market will find its equilibrium without government or other interventions forcing it into unnatural patterns. -> This is why classical economists argued that there was no need for the government to intervene in markets.

Question 31

Classical economists

Answer 31

* Adam Smith * David Ricardo * Karl Marx * Robert Malthus * John Stuart Mill

Question 32

Microeconomics

Answer 32

The study of the economic behavior of individuals and companies.

Question 33

Macroeconomics

Answer 33

The study of the behavior of the economy as a whole.

Question 34

Main idea of Keynesian Economics

Answer 34

The assertion that the aggregate demand created by households, businesses and the government and NOT the dynamics of free markets is the most important driving force in an economy.

Question 35

Keynesian economics details | Free markets have no...

Answer 35

* The idea that free markets have **no self-balancing mechanisms** that lead to full employment. * Government's intervention in the economy through public policies that aim to achieve full employment and price stability. * The idea the macroeconomy can be in **disequilibrium** (recession) for a considerable time. * Advocates **higher government spending** to help **recover** from a recession.

Question 36

Key Characteristics of Free Market (Market) Economies

Answer 36

* Private properties * Freedom of choice * Motive of self-interest * Competition * System of markets and prices * Limited government control

Question 37

# 1. Free Market Economy Description

Answer 37

All the economic decisions are made by individuals and private firms, without any government intervention or regulation.

Question 38

Strengths of free market economies

Answer 38

* Strong incentive (businesses and individuals have a strong incentive to work hard to increase their wealth) * Resources are allocated efficiently (due to the invisible hand)

Question 39

Weaknesses of free market economies

Answer 39

- Income inequality - Those who own the most productive resources or have valuable skills earn more than others - Monopolies - Can restrict output, raise prices and prevent competition - Externalities - Market decisions don’t always reflect the full cost or benefit of activities like pollution to society, resulting in negative externalities. - Fossil fuel dependence - Social inequality * Business cycle fluctuations

Question 40

Planned economy description

Answer 40

An economic system in which the government controls and regulates production, distribution, prices, etc.

Question 41

Planned economy strengths

Answer 41

- Equality/equity - This type of economy can relatively easily redistribute wealth among its citizens, thereby reducing inequity - Social security - The government can act in the best interests of the people, rather than trying to make a profit like businesses do

Question 42

Planned economy weaknesses

Answer 42

- Suppresses consumer innovation - Leans towards development in matters such as national security and defence, which pass less benefits to the citizens - Corruption/political influence - The government is more involved and has more influence, intentional or not - Government blindness/incompetence - The government, in the absence of the invisible hand, won’t know what to produce and how much therefore failing to meet the wants and needs of citizens may make a bad resource allocation decisions if it fails to accurately predict future economic conditions

Question 43

Planned economy characteristics

Answer 43

* Centralised decision making * State ownership * Lack of consumer choice