Introduction to economics

Question 1

Basic economic problem

Answer 1

How best to allocate an economy’s scarce resources in order to satisfy the unlimited needs and wants of
individuals, firms and governments.

Question 2

Factors of Production

Answer 2

four categories of resources that are required to produce any good or services

Land (renewable and non-renewable resources)
Labour (human capital)
Capital (physical capital)
Enterprise

Question 3

Opportunity Cost

Answer 3

Next best alternative foregone when making an economic choice

Question 4

Rewards for the factors of production

Answer 4

reward for land = rent
reward for labour = wages
reward for capital = interest
reward for enterprise = profit

Question 5

Scarcity

Answer 5

finite resources of an economy relative to the unlimited needs and wants of individuals and societies

Question 6

Economic good

Answer 6

goods with opportunity costs

Question 7

The basic economic questions

Answer 7

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

Question 8

5 meanings of capital

Answer 8

physical capital 
human capital (skills and knowledge) 
natural capital
Financial capital 
Capital

Question 9

Resource allocation

Answer 9

assigning available resources to specific use

Question 10

Distribution of income

Answer 10

how much output each individual or group receives

Question 11

Private sector and Public sector

Answer 11

sector of the economy where private firms and individuals produce goods and services

sector of the economy where the government produces or supplies certain goods and services

Question 12

What are the three types of economic systems

Answer 12

Planned economy
Mixed economy
Free market economy

Question 13

Explain free market economy

Answer 13

relies on the market forces of demand and supply to allocate scarce resources in the economy ( price rationing system )

Minimal government intervention

Individuals and businesses resource ownership and decision making

Question 14

Explain Planned economy

Answer 14

communist or socialist economies that strive for economic equality

more gov intervention

gov resource ownership and decision making

planned rationing system

Question 15

Explain mixed economy

Answer 15

combination of planned and free market

some resources being owned and controlled by private individuals and firms while others are owned and controlled by the government in the public sector.

government intervenes in economic activity to correct perceived market imperfections and market failures

Question 16

Production possibility curve

Answer 16

maximum combination of two products that a country can produce, assuming that all resources are used efficiently at any moment of time

Question 17

Assumptions of the PPC model

Answer 17

Fixed production possibilities – The model assumes the economy only produces various combinations of two products (producer and consumer goods)

Scarcity - There is a limited and fixed amount of resources in the economy

Constant state of technology - The production techniques and technologies are assumed
to be held constant because the economy has only a certain level of technology at any
point in time

Efficiency – The model assumes that all resources are fully utilized in an efficient way

Question 18

What does a linear PPC model tell you and what is marginal rate of transformation

Answer 18

marginal rate of transformation is the same, showing a constant opportunity cost.

the gradient on the PPC showing opportunity cost between two products in question

Marginal rate of transformation - the number of units of one product that can be increased by reducing the quantity of another product

Question 19

Features of the PPC model

Answer 19

Opportunity cost 
Scarcity 
Choice 
Unemployment of resources 
Efficiency 

Economic growth

• improve education and training in workforce
• improvement in technology
• Increase in quality or qty of FOP
• Greater population growth and more skilled migrant workers

Question 20

Circular flow of income model

Answer 20

macroeconomic tool used to explain how economic activity and national income are determined