Economics Notest Topics 1 and 2

Question 1

What is the basic economic problem?

Answer 1

Unlimited wants and needs but limited resources to fulfill them.

Question 2

What is opportunity cost?

Answer 2

Cost of the next best alternative that is foregone when making a choice.

Question 3

Define economics.

Answer 3

Allocation of resources in an economy.

Question 4

What is microeconomics?

Answer 4

Economics at an individual/consumer level.

Question 5

What is macroeconomics?

Answer 5

Economics at a national level.

Question 6

What is positive economics?

Answer 6

Testing and developing economic theory; subjects are testable ‘what is’ and ‘what should be’.

Question 7

What is normative economics?

Answer 7

Economic opinions rather than facts; cannot be tested.

Question 8

What are economic models?

Answer 8

Simplified version of economic reality showing the relationship between certain economic variables.

Question 9

What does the Production Possibility Frontier (PPF) show?

Answer 9

All combinations of goods and services that can be produced by an economy.

Question 10

What are the assumptions of the PPF?

Answer 10

• Resources fixed
• Technology fixed
• Only comparing 2 goods

Question 11

Define market economy.

Answer 11

Economy that solves economic problems in a net worth of separate but interconnected markets.

Question 12

What are the key components of a market?

Answer 12

• Sellers
• Buyers
• Commodity
• Voluntary exchange
• Price (dependent on strength of demand and supply)

Question 13

What is a factor market?

Answer 13

Deals in buying and selling of factors of production (F.O.P).

Question 14

What are the key factors of a factor market?

Answer 14

• Property rights and private ownership
• Economic freedom
• Self-interest
• Competition
• Limited role of government
• Moral hazard

Question 15

List the factors of production.

Answer 15

• Land
• Labour
• Capital
• Enterprise

Question 16

What is a free good?

Answer 16

Goods that aren’t scarce and are available without limit, e.g., air.

Question 17

Define economic good.

Answer 17

A good that is scarce and has opportunity cost.

Question 18

What does Ceteris Paribus mean?

Answer 18

Assuming all things are equal.

Question 19

Define demand.

Answer 19

Quantity of a good/service that consumers are willing and able to buy at each price at a particular point in time.

Question 20

What is the Law of Demand?

Answer 20

As demand increases, price increases and vice-versa.

Question 21

What is the substitution effect?

Answer 21

When a product becomes expensive, consumers substitute it with a cheaper good.

Question 22

What is the income effect?

Answer 22

When a product is more expensive, it takes a larger portion of a consumer’s income, leading to less spending on other goods.

Question 23

What is a market demand curve?

Answer 23

Curve obtained from the horizontal summation of individual demand curves.

Question 24

What does a movement along the demand curve indicate?

Answer 24

Changes in the price of the good.

Question 25

Define expansion in demand.

Answer 25

Decrease in price and increase in demand.

Question 26

What is contraction of demand?

Answer 26

Increase in price and decrease in demand.

Question 27

What is a shift in the demand curve?

Answer 27

Quantity demanded of the good changes at every price due to non-price factors.

Question 28

List non-price factors affecting demand (TEPID).

Answer 28

* Taste and preferences * Expectations of consumers * Price of related goods * Level of disposable income * Demographic factors

Question 29

What are substitutes in demand?

Answer 29

If the price of a substitute increases, demand for the good increases.

Question 30

What are complements in demand?

Answer 30

If the price of a complementary good increases, demand for the good decreases.

Question 31

Define supply.

Answer 31

Amount of goods and services that producers are willing and able to sell at each price point.

Question 32

What is the Law of Supply?

Answer 32

At higher prices, suppliers are willing to produce more.

Question 33

What is a market supply curve?

Answer 33

Horizontal summation of individual supply curves.

Question 34

What does movement along the supply curve indicate?

Answer 34

Changes due to price changes.

Question 35

Define expansion in supply.

Answer 35

Increase in price leading to increased supply.

Question 36

What is contraction in supply?

Answer 36

Decrease in price leading to decreased supply.

Question 37

What is a shift in the supply curve?

Answer 37

Quantity supplied changes at every price due to non-price factors.

Question 38

List factors causing shifts in supply.

Answer 38

* Expectations of producers * Technology * Price of other goods * Input prices * Government regulation

Question 39

What is market equilibrium?

Answer 39

State where quantity demanded is equal to quantity supplied.

Question 40

Define equilibrium price.

Answer 40

Price that clears the market, where quantity demanded equals quantity supplied.

Question 41

What is the price mechanism?

Answer 41

Process by which forces of demand and supply interact to determine price.

Question 42

Who proposed the concept of the Invisible Hand?

Answer 42

Adam Smith.

Question 43

True or False: Consumers bid among themselves for limited goods, causing prices to increase in a shortage.

Answer 43

True.