Introduction

Question 1

Production

Answer 1

The transformation of input into output by firms in order to earn profit (or meet some other objective)

Question 2

Consumption

Answer 2

The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.

Question 3

Factors of production (or resources)

Answer 3

The input into the production of goods and services: labour, land and raw materials, and capital.

Question 4

Labour

Answer 4

All forms of human input both physical and mental, into current production

Question 5

Land (and raw materials)

Answer 5

Inputs into production that are provided by nature

Question 6

Capital

Answer 6

All inputs into production that have themselfes been produced: e.g. factories, machines and tools

Question 7

Scarcity

Answer 7

The exccess of human wants over what can acctually be produced to fullfil these wants

Question 8

What is the central economic problem?

Answer 8

Scarcity

Question 9

Why is it impossible to provide everybody what they want?

Answer 9

Because there is a limited supply of factors of production

Question 10

Potential demands exceed…

Answer 10

potential supplies

Question 11

Macroeconomics

Answer 11

The branch of economics that studies economic aggregates (grand totals): e.g. the overall level of prices, output and employment in the economy

Question 12

Aggregate demand

Answer 12

The total level of spending in the economy

Question 13

Aggregate supply

Answer 13

The total amount of output in the economy

Question 14

Microeconomics

Answer 14

The branch of economics that studies individual units: e.g. households, firms and industries. It studies the interrelationship between these units in determining the pattern of production and distribution of goods and services

Question 15

Rate of inflation

Answer 15

The percentage increase in the level of prices over a 12-month period

Question 16

Balance of trade

Answer 16

Exports of goods and services minus imports of goods and services. If it’s a positive number, there is a ‘balance of trade surplus’; otherwise, there is a ‘balance of trade deficit’.

Question 17

Recession

Answer 17

A period where national output falls for two quarters or more

Question 18

Unemployment

Answer 18

The number of people who are actively looking for work but are currently without a job.

Question 19

Demand-side policy

Answer 19

Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices

Question 20

Supply-side policy

Answer 20

Government policy that attempts to alter the level of aggregate supply directly

Question 21

Opportunity cost

Answer 21

The cost of any activity measured in terms of the best alternate forgone

Question 22

Rational choices

Answer 22

Choices that involve weighing up the benefit of any activity against its opportunity cost

Question 23

Transmission mechanism

Answer 23

The process by which a change in a policy instrument (such as ineterest rates or taxation) affects economic outcomes (such as inflation or unemployment)

Question 24

Fiscal policy

Answer 24

Changes made to government spending and/or taxation in order to affect total spending and thereby the level of economic activity

Question 25

Marginal costs

Answer 25

The additional costs of doing a little bit more( or 1unit more if a unit can be measured) of an activity

Question 26

The subject of economics is usually divided into…

Answer 26

two main branches, macroeconomics and microeconomics

Question 27

Macroeconomics deals with…

Answer 27

aggregates’ such as the overall levels of unemployment, output, growth and prices in the economy

Question 28

Microeconomics deals with…

Answer 28

The activities of individual units within the economy: firms, industries, consumers, workers, etc. Because resources are scarce, people have to make choices. Society has to choose by some means or other what goods and services to produce, how to produce them and for whom to produce them. Microeconomics studies their choices.

Question 29

Marginal benefits

Answer 29

The additional benefits of doing a little bit more( or 1unit more if a unit can be measured) of an activity

Question 30

Rational choices involve:

Answer 30

weighting up the marginal benefits of each activity against its marginal opportunity costs. If the marginal benefits exceed the marginal costs, it is rational to choose to do more of that activity

Question 31

Economic model

Answer 31

The representation of the relationship between two or more variables. A model is a simplification of reallity designed to explain just part of a complex process of econonomic relationships.

Question 32

Ceteris paribus

Answer 32

Latin for ‘other things being equal’. This assumption has to be made when constructing and using models

Question 33

Production possibility curve

Answer 33

A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed

Question 34

Increasing opportunity costs

Answer 34

When additional production of one good involves ever-increasing sacrifices of another

Question 35

Market

Answer 35

The interaction between buyers and sellers

Question 36

Investment

Answer 36

The production of items that are not for immediate consumption

Question 37

Barter Economy

Answer 37

An economy where people exchange goods and services directly with one another without any payment of money. Workers would be paid with bundles of goods

Question 38

Centrally planned or command economy

Answer 38

An economy where all economic decisions are taken by central authorities

Question 39

Free-market economy

Answer 39

An economy where all economic decisions are taken by individual households and firms, with no government intervention

Question 40

Mixed economy

Answer 40

An economy where all economic decisions are made partly by the government and partly through the market

Question 41

Mixed market economy

Answer 41

A market economy where there is some government intervention

Question 42

Input- output analysis

Answer 42

This involves dividing the economy to sectors in where each sector is a user of inputs and a supplier of outputs to other sectors. The technique examines how these inputs and outputs can be matched to the total recources available in the economy

Question 43

Price mechanism

Answer 43

The system in the market economy whereby price changes that occur in response to changes in demand and supply have the effect of making demand equal to supply

Question 44

Equilibrium price

Answer 44

The price where the quantity demanded equals the quantity supplied: the price where there is no shortage or surplus

Question 45

Equilibrium

Answer 45

A position of balance. A position from which there is no inherent tendency to move away

Question 46

Perfect competition

Answer 46

A situation where the consumers and producers of a product are price takers

Question 47

Price taker

Answer 47

A person in a firm with no power to be able to influence the market price

Question 48

Allocative role

Answer 48

Interventions by government to affect the allocation of resources in consumtion and/or production

Question 49

Distributive role

Answer 49

Interventions by government to affect the distribution of resources such as the distribution of incomes

Question 50

Regulatory role

Answer 50

Interventions by government to regulate economic activity through legally enforcable rules or actions

Question 51

Macroeconomic role

Answer 51

Interventions by government either to stabilize the economy in the short-term or to promote long-term economic growth

Question 52

The economic systems of different countries vary according to

Answer 52

to the extent to which they rely on the market or the government to allocate resources.

Question 53

At the one extreme, in a command economy, the state makes

Answer 53

all the economic decisions. It plans how many resources to allocate for present consumption and how many for investment for future output. It plans the output of each industry, the methods of production it will use and the amount of resources it will be allocated. It plans the distribution of output between consumers.

Question 54

A command economy has

Answer 54

has the advantage of being able to address directly various national economic goals, such as rapid growth and the avoidance of unemployment and inequality. A command economy, however, is likely to be inefficient: a large bureaucracy will be needed to collect and process information; prices and the choice of production methods are likely to be arbitrary; incentives may be inappropriate; shortages and surpluses may result.

Question 55

At the other extreme is the

Answer 55

free-market economy. In this economy, decisions are made by the interaction of demand and supply. Price changes act as the mechanism whereby demand and supply are balanced. If there is a shortage of a product, its price will rise until the shortage is eliminated. If there is a surplus, its price will fall until that is eliminated.

Question 56

Perfect markets are markets where

Answer 56

where both producers and consumers are price takers.

Question 57

A mixed market economy is a

Answer 57

is a predominantly market-based economic system with some government intervention. We can identify four broad roles for government intervention: allocative, distributive, regulatory and macroeconomic.