Intro to economics

Question 1

What is a market?

Answer 1

Anywhere where consumers and producers meet

Question 2

What is the invisible hand?

Answer 2

Market forces of supply and demand

Question 3

Which way does the demand curve slope?

Answer 3

Downwards

Question 4

Why does the demand curve slope downwards?

Answer 4

• Substitution effect : As the price of the product decreases, it becomes more attractive compared to other similar products, meaning consumers are more likely to switch and increasing the quantity demanded
• Income effect : When the price of a product falls, purchasing power increases, allowing consumers top purchase more of the good or service, leading to an increases in QD
• Law of diminishing marginal utility : As consumption increases, the marginal utility from each additional unit decreases

Question 5

What is a normative and positive statement?

Answer 5

Normative - Subjective statements that contain a value judgement e.g “Fossil fuels should be taxed higher than renewables”
Positive - Objective statements that can be tested using facts and evidence e.g “A reduction in income would increase the people shopping in pound shops”

Question 6

What is the basic economic problem?

Answer 6

How can the available scarce resources be used to satisfy peoples unlimited needs and wants as effectively as possible

Question 7

What does a PPF show?

Answer 7

Shows the maximum amount of 2 goods or services an economy can produce

Question 8

Draw a PPF, what does a point on the curve, inside the curve, and outside the curve show?

Answer 8

On the point shows a productively efficient point as all resources are being used as efficiently as possible to produce the max possible output

Inside the curve shows a productively inefficient point, meaning some FOP’s may be sat idle e.g capital. With the current level of resources, you could build more of either good without making fewer of the other

Outside the curve shows a point that isn’t achievable with the current level of resources in the economy, more resources or better use of resources (e.g improvements in labour or technology) would be needed

Question 9

What is opportunity cost?

Answer 9

The opportunity cost of a decision is the next best alternative that you give up in making a decision e.g if you build more houses, you give up the opportunity to build more vehicles

Question 10

What is a trade off?

Answer 10

When you have to choose between conflicting objectives because you can’t achieve all of your objectives at the same time

Question 11

What is market failure?

Answer 11

When markets result in undesirable outcomes

Question 12

Mixed economies, free markets and command economy

Answer 12

Mixed economy = Public sector and private sector, government intervenes in the free market
Free markets = Economies with no government intervention and purely private sector, invisible hand
Command economy = Economies with purely public sectors

Question 13

What is a rational individual assumed to have?

Answer 13

Total self control to maximise their utility

Question 14

Economic objectives of different economic agents?

Answer 14

Producers - Maximise profit
Consumers - Maximise their utility (satisfaction)
Governments - Maximise the public interest

Question 15

What are the 4 factors of production?

Answer 15

Land, Labour, Capital and Enterprise

Question 16

Who are the economic agents?

Answer 16

Producers, Consumers, Government

Question 17

What are the fundamental questions of economics?

Answer 17

What to produce, who to produce it for, how to produce it

1) Goods and services that can make a profit
2) Firms produce goods that consumers are willing to pay for those goods
3) Firms want to produce goods in the most efficient way in order to maximise profit

Question 18

All points on a PPF are productively efficient but may not be allocatively efficient, why?

Answer 18

All points on a PPF are producing goods in the most efficient way, i.e all FOP’s are being fully utilised

However, the goods being produced may not match what consumers demand, meaning all points on a PPF may not be allocatively efficient

Question 19

What is opportunity cost? + provide an example

Answer 19

The next best alternative given up when making a choice.

E.g. On a PPF, moving from one point along the curve involves an opportunity cost - for example to produce more cars you have to produce less houses. So the opportunity cost is the -x houses.

Question 20

What is opportunity cost used for?

Answer 20

Producers - Profit foregone
Consumers - Where to spend their income
Governments - Lost value to society from the policies they chose not the implement

Question 21

What’s a market?

Answer 21

Anywhere where consumers and producers meet

Question 22

What is the concept of margin?

Answer 22

A change in a variable caused by an increase in one unit of another variable. e.g. The marginal cost of an ice cream is the additional cost of making one additional ice cream

Question 23

At what point to rational consumers choose to consume at?

Answer 23

Marginal utility = price

Essentially, the point at which rational consumers choose to consume at is the point at which the satisfaction they derive from consumption of a good is equal to the price they are willing to pay for it.

Question 24

What is the law of diminishing marginal utility and how does it explain the downward sloping demand curve?

Answer 24

For every additional good consumed, the marginal utility (satisfaction derived from consuming an additional good) diminishes.

So as price increases, rational consumers are less willing to pay the higher price and therefore demand less, explaining the downward sloping demand curve.

Question 25

Economic objectives of a producer?

Answer 25

Maximise Profit - To survive, pay dividends or to reinvest
Greater market share - Increase monopsony power, attract more employees with greater human capital
Ethical objectives - E.g. buying locally sourced materials to support the local economy

Question 26

Economic objectives of a consumer?

Answer 26

Maximise their utility
Maximise their income, consumers are also workers

Question 27

Economic objectives of a government?

Answer 27

• Maximise the public interest - balancing the resources of an economy with a populations needs and wants i.e. the governments macroeconomic objectives

Question 28

What do behavioural economists look at?

Answer 28

They look at the social, psychological and emotional factors that affect decision making

Question 29

Why do behavioural economists believe consumers aren’t rational?

Answer 29

• Limited time to make decisions
• Not all info on a good is provided - e.g. asymmetric information
• Some may have a computational weakness - they may not be good at calculating the costs of alternatives

These are known as bounded rationality - therefore consumers satisfice (make a satisfactory decision) as opposed to making a decision that maximises utility

Question 30

What biases stop individuals from acting in a rational way?

Answer 30

• Rule of thumb
• Anchoring
• Availability bias
• Social norms
• Habitual behaviour
• Some people act altruistically

Question 31

How does the government use behavioural economics to develop policies?

Answer 31

• Default options
• Framing
• Nudging
• Restricted Choice
• Mandated Choices

Question 32

What is economic methodology?

Answer 32

Developing theories and creating economic models

Use simplifying assumptions to limit variable numbers

Test theories against relevant facts

Use economic models to make predictions

Question 33

What can economists not do that natural sciences can do + how do economists get around this?

Answer 33

Cannot conduct lab controlled experiments where only one variable is changed at a time

To fix this, economists use ceteris paribus, meaning all other things remain equal, e.g. when looking at the relationship between 2 factors, all other factors that could affect the result at kept constant, e.g. incomes

Question 34

What is economic activity?

Answer 34

The production of goods and services and the consumption of goods and services

Question 35

What are the 3 economic systems?

Answer 35

Command/Planned Economy
Mixed Economy
Free Market Economy