Microeconomics LS1-4

Question 1

What is an economy?

Answer 1

All the goods and services produced in an area

Question 2

What is the difference between a good and a service?

Answer 2

Good= tangible (can touch)
Service= intangible (cannot touch)

Question 3

What are the factors of production and define them.

Answer 3

Capital= things which are used to make goods and services 
Enterprise= willingness of people in business to take risks to make a profit 
Land= refers to the natural resources such as oil, forests and land itself 
Labour= all of the work done by humans in production

Question 4

How would an economy increase labour?

Answer 4

By increasing birth rate (providing incentives) and attracting immigration

Question 5

How would an economy increase its PPF curve?

Answer 5

Increase in economic growth, firstly by increasing labour and capital.

Question 6

What is the economic problem?

Answer 6

How to use the available scarce resources to satisfy people’s infinite needs and wants as effectively as possible

Question 7

What are economic agents and who are they

Answer 7

• Groups that participate in the economy
• Producers = create goods and services
• Consumer (individuals and firms) = buy goods and services
• Government= sets rules that other economic agents must follow, and also produces some goods and services ( roads, health care)

Question 8

What are economic models?

Answer 8

What economists produce to predict the impact of economic change, ceteris paribus

Question 9

Why is it difficult for economists to run experiments?

Answer 9

• economy is always changing

- cannot control the external variables (economy)

Question 10

What do economists rely on instead of experiments?

Answer 10

Data and assumptions

Question 11

What does ceteris paribus mean?

Answer 11

Assuming other variables remain constant

Question 12

Why is ceteris paribus necessary for economic analysis?

Answer 12

• to isolate how one factor affects the economy

- to make assumptions and predictions otherwise the other factors can overcomplicate an assumption

Question 13

Define opportunity cost

Answer 13

The value of the next best alternative forgone as a result of the decision

Question 14

How do consumers use opportunity cost?

Answer 14

Use it to decide what to spend their income on

Question 15

How do producers use opportunity cost?

Answer 15

Use it to decide what and how to produce goods and services

Question 16

How to governments use opportunity cost?

Answer 16

Use it to decide what policies to choose

Question 17

What is the empirical model?

Answer 17

A model that uses data and evidence from the real world

Question 18

What affects the PPF?

Answer 18

• factors of production

- quality of factors of production

Question 19

What does PPF stand for?

Answer 19

Production possibility frontier

Question 20

What does a PPF do?

Answer 20

Shows the maximum potential output of a combination of two goods or services an economy can achieve when all its resources are being employed fully and efficiently, given the current level of technology.

Question 21

How are the factors of production and the size of economy related?

Answer 21

More factors of production = larger economy and vice Versa

Question 22

What is economic growth?

Answer 22

An increase in the production of goods and services in an economy

Question 23

What is negative economic growth?

Answer 23

A decrease in the production of goods and services in an economy

Question 24

What are the causes of economic growth?

Answer 24

• increase in the quantity of the factors of production
• improvement in the quality of the factors of production
• a combination of the two

Question 25

How can economic growth be shown on a PPF?

Answer 25

Outward shift in the PPF

Question 26

How can negative economic growth be shown on a PPF?

Answer 26

Inward shift in the PPF

Question 27

What are some reasons for negative economic growth?

Answer 27

- natural disasters - political war - inefficient use of resources and labour - reduction in the level of skills in the workforce - underutilisation/ unemployed resources

Question 28

Define consumer goods

Answer 28

Goods which do not produce other goods. Use by people to satisfy their wants and needs.

Question 29

Define capital goods

Answer 29

Goods which are used to produce other goods and services

Question 30

How does an increase in capital goods affect the productive potential of an economy?

Answer 30

Increase in capital goods = long term increase in productive potential of economy

Question 31

Define positive economic statements

Answer 31

Economic stat,ents that can be proven true or false with statistics (objective)

Question 32

Define normative economic statements

Answer 32

Economic statements that express opinions and cannot be proven true or false (subjective)

Question 33

Words that indicate an economic statement is normative

Answer 33

Fair, unfair, should, ought, better, worse

Question 34

What is positive analysis

Answer 34

Data that allows you to state the facts and input stats

Question 35

What do governments do in decision making?

Answer 35

- make value judgements on economic issues | - use positive analysis to help them make decisions

Question 36

What is a value judgement

Answer 36

A view of the rightness or wrongness of something, based on a personal view.

Question 37

Define specialisation

Answer 37

a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency

Question 38

When does specialisation occur?

Answer 38

When an individual, firm, region or countries concentrates on the production of a limited range of goods and services

Question 39

Why does specialisation allow individuals to become more skilled

Answer 39

- Productivity and efficiency increase - quality increases - takes them less time to do something they know how to do

Question 40

Define division of labour

Answer 40

The specialization of labour in specific tasks, intended to increase productivity.

Question 41

What are the two methods of trading?

Answer 41

Barter and money

Question 42

What are the 5 functions of money and definitions

Answer 42

- medium of exchange : something commonly accepted in exchange for goods and services - measure of value: the price of a good reveals its value - store of value: value is maintained and can be kept for a long time - method of deferred payment: allows debt to be created - unit of account: something that circulates and provides a standardised means of evaluating the relative price of goods and services

Question 43

What Is the difference between bartering and using money?

Answer 43

Bartering is The practice of exchanging one good or service for another without using money, whereas using money refers to a transaction

Question 44

Formula for unit cost

Answer 44

Unit cost= total production costs in period / total output in period

Question 45

Define constraints

Answer 45

Limits to what we can afford to consume

Question 46

Define factor incomes

Answer 46

the rewards to factors of production.