Introduction to economics

Question 1

Define economics

Answer 1

The study of how societies use their scarce resources, which are needed to produce goods and services, to satisfy their unlimited needs and wants and distribute them among the different groups of the population.

Question 2

Define microeconomics

Answer 2

The area of economics that studies the behaviour of individual economic agents, such as households, firms, industries and the government, and how they make economic decisions.

Question 3

Define Macroeconomics

Answer 3

The area of economics that studies the economy as a whole, focusing on the ‘aggregates’ of the economy and on countries’ fundamental economic goals in relation to several main variables: economic growth, employment, price stability, external stability and income distribution.

Question 4

What are the 9 central concepts?

Answer 4

-Well being
-Interdependence
-Sustainability
-Equity
-CHOice
-Intervention
-Change
-Efficiency
-Scarcity
WISE CHOICES

Question 5

What causes the problem of choice?

Answer 5

Limited resources (SCARCITY)

Question 6

what are goods?

Answer 6

Physical objects (tangible things) like cars, bread or mobile phones.

Question 7

what are services?

Answer 7

Intangible such as haircuts, gardening services or motorcycle repairs.

Question 8

what are resources?

Answer 8

All the inputs used to produce goods and services. They include machines, workers, factories, materials that come from the land and the space needed for manufacturing or offices. They are also called factors of production.

Question 9

state and explain the 4 factors of production

Answer 9

1-Land
The land itself, everything that is under and above the land, and everything that is found in and under the sea. It refers to all natural resources, such as minerals, oil reserves, natural gas, forests, rivers and lakes.
2-Labour
The human factor needed for production. It includes the physical and mental effort that people contribute to the production of goods and services
3-capital
The physical capital stock used to produce goods and services. It includes all manufactured (human-made) resources, such as machines, factories, roads and tools. Physical capital is also referred to as capital goods or investment goods.
4-entrepreneurship
A special human skill possessed by some people, involving the ability to develop new businesses by organising the other three factors of production to produce goods and services. Entrepreneurs take the risks of success or failure of the business as profit is not guaranteed and investment may be lost.

Question 10

Define opportunity cost

Answer 10

Opportunity cost refers to the second best alternative. The opportunity cost of the government paying a subsidy to a profit-making firm is all the other uses for that money, such as health care or education.

Question 11

Define economic and free goods

Answer 11

Economics goods: Goods that are produced with scarce resources, and therefore have an opportunity cost and a price; for example, a computer or apples.

Free goods: Goods that are not produced with scarce resources, do not have an opportunity cost, and therefore do not have a price; for example, air, sunlight and rainwater.

Question 12

what are the three basic economic questions?

Answer 12

What to produce?
How to produce?
For whom to produce?

Question 13

Define the production possibility curve (PPC)

Answer 13

The curve that shows the maximum combination of goods a country can produce in a specific period of time, using all of its resources and the available technology in the most efficient way. It is also called the production possibility frontier.

Question 14

What is efficiency?

Answer 14

Efficiency refers to improved resource use. It is where a firm can produce the same good, but with fewer resources.

Question 15

Define actual growth

Answer 15

When an economy produces a greater amount of goods and services in one period of time than in a previous one.

Question 16

Describe the circular flow of income

Answer 16

A model that illustrates the interactions between economic agents in an economy. It shows how factors of production, goods and income flow between households, firms, government, the financial sector and the foreign sector.

Question 17

What are the assumptions of the close circular flow of income model?

Answer 17

The assumptions of the model are:

• Households own all the factors of production.
• Firms produce all goods and services.
• There is no government.
• There are no other countries to trade with (it is a closed economy).
• There are no banks or commercial institutions.

Households provide the factors of production: land, labour, capital and entrepreneurship. In exchange for their services, firms will pay for each of these factors of production in different ways:

For land, they will pay rent.
For labour, they will pay wages.
For capital, they will pay interest.
For entrepreneurship, they will pay dividends.

Question 18

What are the ssumptions of the open circular flow of income model?

Answer 18

Now the assumptions of this model are:

Households own the factors of production.
Firms produce goods and services.
Government collects taxes to provide public and merit goods to society.
There are foreign countries, that both produce goods and services that they export to other countries, and consume goods and services that they import from other countries.
There are financial institutions where households can save their income, and from which firms can take out loans to make investments and grow their businesses.

Question 19

Define leakages

Answer 19

The flows of money that leave the economy: savings, taxation and imports.

Question 20

Define injections

Answer 20

They enter the circular flow of income from outside. They are all the money received by domestic firms that does not come directly from domestic households.

Question 21

what does ceteris paribud mean?

Answer 21

The Latin expression for ‘everything else being equal’. It means that all other variables, except the one that you are studying, are assumed to be fixed or unchanged.

Question 22

Define positive and normative economics

Answer 22

Positive economics: Economics statements based on facts or evidence, free from subjectivity. They can be tested scientifically and proved or disproved.
Normative: Economic statements based on norms, and thus based on subjective evaluation. They cannot be proved or disproved scientifically.

Question 23

Who is Adam Smith?

Answer 23

Adam Smith (1723–1790) is considered the father of modern economics.

Question 24

What did Adam Smith do?

Answer 24

He was an advocate for the ‘free market’ and believed that if everyone followed their own best interest, with little government intervention in the economy, it would result in the most efficient outcome for all.
He also believed in the existence of an “invisible hand” ( reference to the tendency of free markets to regulate themselves by means of competition in the pursuit of self-interest.)