Introduction to Economics

Question 1

Explain the Social Nature of Economics

Answer 1

Economics is a social science because it deals with human society and behavior and does so through the scientific method.

Question 2

Distinguish between Micro and Macroeconomics

Answer 2

Microeconomics examines the behavior of individual decision-makers, whilst Macroeconomics examines the economy as a whole.

Question 3

What are the Concepts of Economics?

Answer 3

1) Scarcity
2) Choice
3) Interdependence
4) Equity
5) Economic well-being
6) Change
7) Sustainability
8) Efficiency
9) Intervention

Question 4

Explain the meaning of Scarcity

Answer 4

The economy is scarce because resources are limited and therefore unable to satisfy the unlimited human wants and needs.

Question 5

Identify the Factors of Production

Answer 5

1) Land
2) Labor
3) Capital
4) Entrepreneurship

Question 6

Explain the meaning of Opportunity Cost in relation to Choice and Free Goods

Answer 6

Opportunity cost represents the value of the next best alternative that is sacrificed to obtain something else. Free goods do not have opportunity cost as they are unlimited.

Question 7

Explain the difference between Free Goods and Economic Goods

Answer 7

Free goods are unlimited and do not have opportunity cost, economic goods are limited and have opportunity cost.

Question 8

What are the three economic questions?

Answer 8

1) What/how much to produce
2) How to produce
3) For whom to produce

Question 9

What methods can be used to answer the economic questions?

Answer 9

Either the market method (based on the forces of demand and supply) or the command method (based on market intervention).

Question 10

State three types of Economic Systems

Answer 10

1) Free-market economy
2) Planned (command) economy
3) Mixed economy

Question 11

Explain the relationship illustrated in the PPC model

Answer 11

The PPC model represents all the combinations of the maximum amounts of two goods that can be produced by an economy when there is full employment of resources and efficiency in production.

Question 12

Distinguish between increasing and constant Opportunity Cost in the PPC model

Answer 12

Increasing opportunity cost will be shown with a curved PPC model, constant opportunity cost will be shown as a straight line. When opportunity cost is constant it does not change as the production is equally suited for both goods.

Question 13

Explain the Circular flow of Income Model

Answer 13

The Circular Flow of Income Model shows that in any given time period the value of output produced is equal to the total income generated and equal to the expenditures.

Question 14

State the leakages of the Circular Flow of Income Model

Answer 14

1) Taxes
2) Savings
3) Imports

Question 15

State the injections of the Circular Flow of Income Model

Answer 15

1) Government expenditure
2) Investment
3) Exports

Question 16

Distinguish between a Closed Economy and an Open Economy

Answer 16

A closed economy does not have leakages and injections as the government, foreign countries, banks or the financial market are not included within the system. This is opposite to an open economy.

Question 17

Distinguish between Positive and Normative Economics

Answer 17

Positive economics describes, explains and predicts economic events. Normative economics is based on beliefs of what should happen.

Question 18

What is Ceteris Paribus?

Answer 18

Ceteris paribus translates to “other things equal” and assumes that all factors are constant or unchanging.

Question 19

Explain the role of Empirical Evidence and Refutation

Answer 19

Empirical evidence refers to real-world information, observations and data that we acquire through our experiences. Empirical evidence is used to test hypotheses; if a hypothesis cannot be refuted by empirical testing then it is not scientific.

Question 20

Explain the role of Value Judgements in Policy-Making

Answer 20

Value judgements in normative economics are important for policy-making as they identify the important economic problems and recommend policies to solve them.

Question 21

What is the difference between Equality and Equity?

Answer 21

Equity means fairness whilst equality means being the same.

Question 22

Explain the major Schools of Thought from the 18th Century to the Present

Answer 22

18th C: Adam Smith
19th C: classical (says + marx + utility)
20th C: Keynes + monetarist
21st C: behavioral

Question 23

Explain Adam Smith’s School of Thought

Answer 23

Adam Smith introduced the concept of the “invisible hand” which is based on the idea that self-interested behavior of decision-makers without government intervention will give rise to efficiency and competition. This is also known as a “laissez faire” economy.

Question 24

Explain the Classical Economics School of Thought

Answer 24

Classical economists believed in utilitarianism (an action is correct if it promotes the most happiness). This gave rise to the concepts of utility and Say’s Law (theory that claims the economy tends toward full employment without government intervention). Theories were also influenced by Marx (Communist Manifesto).

Question 25

Explain the Keynesian School of Thought

Answer 25

Introduced by economist Keynes, it argued that government intervention was essential in order to ensure that full employment will be achieved. This also gave emergence to macroeconomic policy.

Question 26

Explain Behavioral Economics School of Thought

Answer 26

Behavioral economics considers the field of psychology together with economics offering alternative ways of understanding consumer behavior. Furthermore it developed new models regarding sustainability within the economy.