Micro part 1

Question 1

What is economic good?

Answer 1

1. a good that requires scarce resources to make, thus production has an opportunity cost.
2. They are scarce so have value, thus consumers will pay for them

Question 2

What is free good?

Answer 2

1. has no opportunity cost since it doesn’t require scarce resources to make

Question 3

What is positive statement?

Answer 3

1. Positive statement – capable of being verified/argued against through the use of facts.
2. Can be proven to be true or false using evidence.
3. They are objective

Question 4

What is Normative statement?

Answer 4

1. It is based on value judgements, subjective and based more on opinion than actual fact as they can’t be refuted/verified.
2. Influence economic decision as can take different conclusions based on same statistics,
3. for example the rate of inflation can give rise to different conclusions

Question 5

What is the basic economic problem

Answer 5

1. Consumers have unlimited wants yet there are limited resources – scarcity (shortage of resources in relation to the quantity of human wants)
2. Forces economic agents to make a choice when allocating scarce resources between competing uses
3. Every choice has a range of alternatives and a rational economic agent will choose the best one, but then all the other choices will have to be given up.
4. The value of the next best alternative forgone when making an economic decision (opp. cost)

Question 6

Define needs

Answer 6

1. Needs – the minimum that is necessary to survive as a human being

Question 7

Define wants

Answer 7

1. Wants – desires for the consumption of goods and services, above our needs

Question 8

What are the four factors of production

Answer 8

1. Land
2. Labour
3. Capital
4. Enterprise

Question 9

Explain the land factor of production and the reward of it

Answer 9

1. The land itself including the natural resources on, above and below the ground, in the sea
2. Rent

Question 10

Explain the labour factor of production and the reward of it

Answer 10

1. Workforce of the economy, the human capital

2. Wages

Question 11

Explain the capital factor of production and the reward of it

Answer 11

1. Man-made goods used to produce other goods e.g. machinery

2. Interest

Question 12

Explain the Enterprise factor of production and the reward of it

Answer 12

1. The risk bearing aspect in order to seek out profitability opportunities. Organises other economic resources
2. Profit

Question 13

What are the three Economic agents

Answer 13

1. Governments
2. Firms
3. Households

Question 14

Explain the economic agent- governments

Answer 14

1. assumed to act on behalf of consumers and maximise the welfare of society.
2. They can intervene in economies to different extents, in order to decide how consumers/firms interact.
3. Can also produce g/s

Question 15

Explain the economic agent- Firms

Answer 15

1. assumed to aim to maximise profits (reward for taking risks and making investments).
2. Some may have different objectives like maximising social welfare.
3. They combine factors of production to produce g/s. 4. Decide what to produce and how much to sell for

Question 16

Explain the economic agent- Households

Answer 16

1. provide the factors of production for firms.
2. Make decisions on how to spend their limited resources, assumed to maximise their utility.
3. Decide what to buy and how much to buy it for

Question 17

What are Non-renewable resources

Answer 17

1. if we use them today then they cannot be replaced on a human timescale e.g. coal.
2. Choices have to be made for where these scarce resources are best used

Question 18

What are Renewable resources

Answer 18

1. can be used and replaced e.g. solar power.

2. Only stay renewable when the rate of consumption is less than rate of replenishment

Question 19

What is a Sustainable resource

Answer 19

1. are a type of renewable resource. Can be economically exploited and will not run out over time

Question 20

What is a market economy

Answer 20

1. Market economy is where all resources are privately owned and all resources are allocated by the market forces of supply and demand.
2. Economic decisions are made by firms and consumers, and there is no gov. intervention

Question 21

What is the motivator, allocator and regulator of a market economy

Answer 21

1. Motivator: self interest
2. Allocator: price determines who has access to g/s
3. Regulator: perfect competition

Question 22

What are the 3 advantages of a market economy

Answer 22

1. Achieve allocative efficiency.
2. There is an incentive of profit and wanting to profit maximise.
3. Can result in higher levels of worker efficiency

Question 23

Describe how a market economy allows allocative efficiency to be achieved

Answer 23

1. Because resources are allocated through demand and supply, so output is determined by where supply meets demand.
2. This means all consumers willing and able to consume the g/s at the market price are able to.
3. Producer/consumer surplus are maximised (firms maximise profits, consumers maximise utility)

Question 24

Describe how a market economy can lead to firms maximising profits and any problems from this

Answer 24

1. Means firms are technically efficient to make the best use of scarce resources to maximise profits.
2. May reinvest profits for innovation leading to profit maximisation.
3. Innovate because firms are in competition, which raises quality of g/s and choice, so consumers have higher utility from consumption and firms from profit.
4. but could give rise to monopolies if they can manipulate the market e.g. through advertising.
5. Fewer firms mean less innovation as less profit motive.

Question 25

Explain how a producer/consumer surplus are maximised in a market economy

Answer 25

1. as more there is more incentive to work hard, since more goods available and want to be able to afford these.
2. Can increase growth
3. but can lead to inequality when not everyone has access to these goods

Question 26

What are the 2 disadvantages of a market economy

Answer 26

1. Can miss markets, especially public goods.

2. Overconsumption of demerit goods.

Question 27

Describe how a market economy can cause markets to be missed

Answer 27

1. Because some goods being non-rival and non-excludable.
2. Means no consumer can be prevented from consuming good once its produced and one’s consumption does not affect another’s consumption.
3. Means once good is produced then no consumer is willing to pay for that good.
4. Means producers have no incentive to produce good as it is not profitable.
5. Means public goods may not be provided for, leading to allocative inefficiency

Question 28

Describe how a market economy can lead to an overconsumption of demerit goods

Answer 28

1. Consumers may not act rationally to maximise utility or have perfect information.
2. Occurs when they discount private costs if only experienced in future or are underestimated.
3. Means demand with perfect info is higher, so output is greater than what is socially desirable.
4. Same happens for underprovision of merit goods.
5. Means gov. may allocate resources allocatively efficiently, via state provision.
6. this increased choice can mean more volatility for firms as consumer preferences change quickly

Question 29

What are 3 Roles of government in a market economy

Answer 29

1. Step in when merit goods are underprovided
2. Price can be manipulated by gov. policy e.g. subsidy so more resources are allocated here, but if demand is still low then can’t completely control provision
3. Correct market failure e.g. regulate monopolies
   Increase equality by redistributing income