Micro- introduction to markets

Question 1

what is ceteris paribus?

Answer 1

the assumption that everything else remains constant

Question 2

what are positive statements?

Answer 2

objective statements that can be proved

Question 3

what are normative statements?

Answer 3

opinions that contain value judgements

Question 4

what is the basic economic problem?

Answer 4

there are not enough resources on earth to satisfy humans’ unlimited wants and needs

Question 5

what are the three main economic agents?

Answer 5

• producers- choose what to make and price
• consumers- what to purchase and how much they’ll spend
• governments- decide how much they should get involved in the production and consumption process

Question 6

what is opportunity cost?

Answer 6

the benefit foregone/lost of not choosing the next best alternative- the next best alternative foregone

Question 7

what are some issues with opportunity cost?

Answer 7

• not all factors have alternatives
• some alternatives are unknown
• agents may lack info on alternatives

Question 8

what does a PPF show?

Answer 8

• it shows an economy at its maximum productive potential
• the PPF is curved because of the law of diminishing returns
• all points along the PPF line are productively efficient

Question 9

what happens to the PPF if there is economic growth?

Answer 9

it shifts outwards because the productive capacity of the economy has increased

Question 10

what are trade-offs on the PPF?

Answer 10

to produce more of one good, you must produce less of another

Question 11

what do points underneath the PPF mean?

Answer 11

that not all economic resources are being deployed

Question 12

what is allocative efficiency?

Answer 12

• when a specific combination of goods is efficient for society
• as this is a specific combination of goods, it refers to a point on the PPF, not the entire curve
• so not every point on the PPF is allocatively efficient

Question 13

what can cause the PPF to shift outwards?

Answer 13

• economic growth (increasing resources)

- improvements in technology

Question 14

what is division of labour?

Answer 14

dividing the workforce and allocating specific individuals to specific tasks. It allows firms to take advantage of economies of scale

Question 15

what are the advantages of specialisation?

Answer 15

• economies of scale- lowers the long run average cost for the firm
• reduces the cost of training workers because they only have to be trained for one job
• higher productivity/ increased labour productivity
• higher quality products

Question 16

what are the disadvantages of specialisation?

Answer 16

• specialised firms are often not flexible
• workers may struggle to adapt to a new role quickly if they are specialised
• workers may become bored reducing productivity
• countries may be less self-sufficient and struggle when trade suffers

Question 17

what are the main functions of money?

Answer 17

• store of value
• unit of account
• medium of exchange
• a standard of deferred payment

Question 18

what is a barter system?

Answer 18

where two people or countries swap goods

Question 19

what is a free market economy?

Answer 19

a market that allocates resources based on the price mechanism and the government imposes few or no restrictions or regulations

Question 20

what are the benefits of a free market economy?

Answer 20

• it is efficient- only the highest value products are in demand so firms are incentivised to produce as efficiently as they can
• it rewards entrepreneurship
• consumers have greater choice of products because of the increased levels of innovation

Question 21

what are the negatives of a free market economy?

Answer 21

• inequitable- what is fair in the free market may not necessarily be fair in reality
• missing markets- goods we need in society may not be produced if they cannot generate profit
• monopolies may arise

Question 22

what is a command economy?

Answer 22

when the government is in charge of resource allocation

Question 23

what are the benefits of a command economy?

Answer 23

• can correct the inequalities that exist in the free market
• could be a reduction in unemployment
• they can break up monopolies

Question 24

what are the negatives of a command economy?

Answer 24

• less efficient- govt is not a profit maximising entity. So the incentive for entrepreneurship and efficiency pushing activities is reduced
• asymmetric info- the govt may not actually know what is best
• choice restriction

Question 25

what is a mixed economy?

Answer 25

a mixture of the price mechanism and govt intervention. The govt forms the public sector and firms form the private sector