General Concepts of Economics

Question 1

Trade Offs

Answer 1

Making a decision requires trading off one goal against another. Choosing one option has a consequence of that another option will be forgone or jeopardized.
A trade off that society often faces is between efficiency and equity.

Question 2

Efficiency

Answer 2

Efficiency is the property of society getting the most it can from its scarce resources.

Question 3

Equity

Answer 3

Property of distributing economic prosperity fairly amongst society.

Question 4

Opportunity Cost

Answer 4

Opportunity cost of an item is the best alternative that someone gives up to get another item.

All about the next best thing that you are getting.

Question 5

Marginal Change

Answer 5

used to describe a small increment adjustment to an existing plan of action.

Question 6

Incentives

Answer 6

Is something that induces a person to act. Rational people make decisions by comparing costs and benefits, they respond to incentives.

Question 7

Invisible Hand

Answer 7

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.

Question 8

Market Failure

Answer 8

Market failure refers to a situation where the market on its own fails to allocate resources efficiently.

Question 9

Short Term Trade Off Between Inflation and Unemployment

Answer 9

trade off between inflation and unemployment is called the Phillips Curve. This trade off is said to arise because some prices are slow to adjust.

Question 10

Production Possibilities Frontier

Answer 10

A graph that shows the various combinations of output that the economy can possible produce given the available factors of production and the available production technology.

An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available.

Demonstrates a trade off as once an efficient point is reached then the only way of producing more of one good is to produce less of the other.

Question 11

Normative Statements

Answer 11

Normative Statements are claims that attempt to prescribe the world how it should be.

Question 12

Positive Statements

Answer 12

Claims to attempt to describe the world as it is.

Question 13

Absolute Advantage

Answer 13

The ability to produce a good using fewer inputs than another producer

Question 14

Comparative Advantage

Answer 14

The ability to produce a good at a lower opportunity cost than another producer.

Although it is possible for one person to have an absolute advantage in both goods, it is impossible for the same person to have a comparative advantage in both goods. This is due to the opportunity cost of one good is the inverse of the opportunity cost of the other.

Question 15

What is economics

Answer 15

How societies react to scarcity and solve economic questions
Study of markets (demand and supply)
Choices/rational decision making
Allocation of scarce resources
The distribution of incomes and wealth across competing groups and nations
The organization of society – it is a foundation discipline for all areas of commerce.

Question 16

Positive vs Normative Statements

Answer 16

Positive statements:
What is can be tested
Normative statements: What should be involves value judgements

Question 17

Sunk Cost

Answer 17

Sunk cost – a cost already incurred and cannot be recovered

Question 18

Gains from Trade

Answer 18

Individuals, firms, countries gain from voluntary exchange of goods and services; Mutually beneficial to all.
Gains from interdependence
Restrictions to trade (in general) are welfare reducing