Microeconomics- Week 1 / Chp 1

Question 1

What are the resources of an economy?

Answer 1

Land, Labour, capital and entrepreneurship

Question 2

What is land?

Answer 2

• This includes physical land and sea, and the minerals associated with them, such as coal and diamonds.
• This resource is generally difficult to increase in an economy unless there is a new discovery of a resource such as oil.
• Some of land’s resources are non-renewable.

Question 3

What is labour?

Answer 3

• This includes the number of people willing and able to work in an economy, and the skills that they have. - The size of the workforce will vary if there is immigration into a country or if there is a change in the school-leaving age or retirement age.

Question 4

What is Entrepreneurship?

Answer 4

• This refers to the ability of managers to think of new ideas, to manage people effectively, and to take risks.
• The political, legal, and economic environment in an economy can affect the willingness of people to innovate and the ease with which they can turn their ideas into reality successfully.

Question 4

What is capital?

Answer 4

• This involves the quantity and quality of capital equipment in an economy, such as machinery, offices, and transport.
• If businesses invest in capital goods, this will increase the capital stock of a country over time.

Question 5

How does the resources of an economy differ per country?

Answer 5

• The quantity and quality of these resources will vary between countries: for example, some countries have bigger populations than others or have more natural resources.
• The resources will also change over time—for example, a higher birth rate or more investment into technology increases the resources available.
• However, at any given moment, the amount and quality of resources in any region are fixed.
• This places a limit on what can be produced. With a given number of people, machines, resources, and ideas, there will be a limit to the output that can be produced.

Question 6

What is the basic economic question?

Answer 6

1. What is to be produced? - figuring out the combination of goods and services to produce
2. How to Produce? - Where do allocate employees across different sectors ?
3. For whom to produce? - Should items be distributed equally?

Question 7

What is opportunity cost?

Answer 7

Opportunity cost measures the sacrifice given up in the next best alternative.

Question 8

What is a planned (or command) economy?

Answer 8

• the government takes an overview of the economy and makes the key decisions rather than let these be made by individual consumers, employees, and businesses.

Question 9

What is a free market (economic system)?

Answer 9

• This means that the government does not intervene, and leaves all decisions to individuals and private firms to work out for themselves.

Question 10

How does the free market work?

Answer 10

-If there is a demand for a particular product and firms can produce it at a profit, then it will be produced, because businesses will want to supply it rather than because the government has told them that they must do so.
- If you want to work in a particular industry, you can do so, and your decision to work there will be linked to the rewards available rather than whether you have been told to by the government.
-If using more machinery seems to generate a high return, then firms will invest in equipment rather than use labour, because this makes financial sense.

Question 11

Advantages of free market?

Answer 11

-Not needing a central government to decide everything (which is extremely complex, and is often bureaucratic and inefficient); instead, decisions are made separately in many millions of individual markets by firms and their customers.
- Each firm pursues its own objectives and focuses purely on what it wants, as does each individual. Individuals and firms consider their own needs, not those of anyone else.

Question 12

Advantages for the free market not using a central body to make decisions?

Answer 12

• a free market can avoid the dangers of a very cumbersome central planning system that needs to gather huge amounts of data and send out millions of directives.
• A free market approach should also mean that what is produced is definitely in demand (because if it is not demanded, then firms will not produce it), whereas if a government is in control, then it may order certain things to be produced only to find that they are not actually required and that no one wants to buy them.

Question 13

How does a free market affect firms?

Answer 13

• there is an incentive for firms to be competitive, and to develop new services and new ways of doing things.
• Being more efficient and meeting customer needs more precisely can boost profits, which firms or individuals can keep for themselves.
• The potential benefits from innovating mean that there is likely to be greater choice for customers.

Question 14

How does a planned economy affect firms?

Answer 14

-In the planned economy, any gains in one industry are likely to go back to the government to be used elsewhere, so there is not the same incentive to be efficient because the firm or individual does not personally gain.
- Advocates of the free market therefore believe that the pursuit of profit by business and personal rewards by individuals encourages efficiency and innovation.

Question 15

One Disadvantages of a free market?

Answer 15

• potential failings and imperfections.
• For example, some goods or services may not be provided because they are not profitable, even if some people might think that they are things that should be provided (for example, however worthy they may be there may not be a huge demand for educational television programmes, the opera, museums, and libraries).

Question 16

second Disadvantages of a free market?

Answer 16

• Another problem in the free market is that products will only be available to individuals if they can afford them.
• If you do not have enough income you cannot consume products; in the case of services such as health and education, this may be felt to be unacceptable—some would argue these services must be provided regardless of whether someone can afford them.

Question 17

Third Disadvantages of a free market?

Answer 17

-The pursuit of profit may also lead to unsafe products being produced, labour being exploited, consumers being badly informed, and businesses engaging in corruption to win orders.
- For example, consumers may be misled as businesses chase sales and don’t care how these are achieved

Question 18

What happens if a free market is at risk for failing?

Answer 18

• The failings of the free market therefore mean that some intervention by a government is inevitable.
  -The real question is how much intervention there will be—that is, to what extent does a government take responsibility for allocating resources directly, and how much does it regulate the private provision of goods and services?

Question 19

Summary of Free Markets?

Answer 19

1. Resources allocated by market forces of supply and demand
2. Firms aim to maximize profits
3. Individuals make decisions to maximise their own welfare
4. Incentive to be efficient to make more profits because businesses keep these
5. Individuals purse own objectives and only need information on their options
6. Competition can encourage innovation

Question 20

Summary for planned economy.

Answer 20

1. Resources allocated by government directives
2. Social objectives; i.e. government makes decisions of what to produce in terms of what is best for society
3. Government decides what is best for individuals in terms of where they work, what they do, and what they consume
4. Decisions made by central authority; no incentive for individuals or firms to try to be more efficient or to innovate
5. May be bureaucratic; there are huge amounts of information to gather and process, and millions of decisions to be made—all of which could lead to inefficiency
6. May lack competition in markets. Decisions made by central authority; no incentive for individuals or firms to try to be more efficient or to innovate

Question 21

What is a mixed economy?

Answer 21

• Some goods and services are provided by the government, such as education and the police force. - Other goods and services, such as mobile phones, laptops, and trainers, may be provided by private firms.
• However, whilst a mixed economy, in which the government steps in when the free market fails, may be the obvious solution by combining the best of the two systems

Question 22

What is privatization

Answer 22

• This process of selling government assets to private individuals and organizations

Question 23

What is deregulation?

Answer 23

In other sectors, the government has not sold off organizations, but has removed restrictions to allow more firms to compete: this is called deregulation

Question 24

What is the issue with leaving financial markets unregulated?

Answer 24

Leaving financial markets unregulated, for example, seemed to have led to speculative high-risk borrowing, which later threatened the banking system and created a strong argument for more intervention.

Question 25

What is positive economics?

Answer 25

• Positive economics examines the different relationships between economic variables and provides an analysis of the variables that can actually be tested.
• For example, we may think that an increase in demand for a product will increase its price, that more government spending will lead to faster growth in the economy, or that lower income taxes provide more incentive to work.

Question 26

What is normative economics?

Answer 26

• Normative economics, by comparison, focuses on value judgements about what you think should happen.
• For example, you might think that the government should spend more money on the health service compared with defence, that it ought to divert resources away from the education sector towards biotechnology, or that it should cut inheritance taxes even if it has to cut spending as a result.

Question 27

What is microeconomics?

Answer 27

• Microeconomics focuses on the individual decisions of households and firms.
• It focuses on the demand and supply for goods and services within a particular market, such as the market for housing or labour.
• It helps to explain the price of a good, your decision whether to work in a particular industry, or the impact of an increase in the supply of a product.

Question 28

What is Macroeconomics?

Answer 28

• Macroeconomics analyses the economy as a whole (‘macro’ means big, whereas ‘micro’ means small).
• For example, rather than focus on the price level in one market (microeconomics), macroeconomics considers the general price level in the economy; rather than examine one individual’s decision whether to work, it considers the overall numbers employed in the economy.

Question 29

What are economic agents?

Answer 29

An economic agent is a person or entity that takes part in economic activity, such as buying, selling, or producing goods and services.

Question 30

What are three economic agents?

Answer 30

• Households who work as factors of production, earn income and spend this on goods and services
• Businesses that produce goods and services using factors of production
• Governments that regular consumer and business behaviour and intervene to achieve economic objectives

Question 31

What is Growth in an economy based off?

Answer 31

-Growth in the economy, for example, may mean more output is produced by businesses, more people are employed, consumers have more income to spend and the government earns more revenue from taxation.

Question 32

What is a good?

Answer 32

• Goods are physical products, such as televisions and washing machines. They are tangible—that is, you can see them and touch them.

Question 33

What are services?

Answer 33

Services, by comparison, are intangible—for example, education and banking are services.

Question 34

What are consumer goods?

Answer 34

• Consumer goods are goods and services that are consumed by the final user—for example, magazines and sandwiches are bought by, or given to, the person who is going to consume them.
• Capital goods are goods that are bought to use in the production process—that is, they are bought to produce other goods and services.
• A production line is used to make products, such as cans of soup, which are then sold to customers to be consumed.
• A fleet of lorries is bought to distribute products. Lorries and production lines are, therefore, capital goods.

Question 35

What is consumption in economics?

Answer 35

Consumption is defined as the use of goods and services by a household

Question 36

What is the private sector?

Answer 36

• The private sector is made up of organizations owned by individuals and firms.
  -they are privately owned by the public.
  -In the private sector, the owners can pursue their own interests
  -Businesses will seek to produce products where they can make the most profits; if the rewards are not high enough, they will shift resources elsewhere in search of better returns.

Question 37

What is public sector?

Answer 37

-Public sector organizations are run by the government
-These organizations may have social objectives as well as, or instead of, profit targets.
- The government may measure success in a much broader way than private businesses do: it may consider the effect on jobs, on happiness, on inequality, on the community, and on the environment.

Question 38

What is marginal cost?

Answer 38

Marginal cost is the change in total costs resulting from increasing output by one unit.

Question 39

What is real figure?

Answer 39

• A real figure takes account of inflation. If, for example, you receive a pay increase of 2 per cent, then in nominal terms, you are 2 per cent better off. - However, if the prices of items that you buy have generally increased by 2 per cent, then in real terms, you are in the same position in which you were originally; there has been no real increase.

Question 40

What are nominal values?

Answer 40

• Nominal values in economics are those given at the current wages and prices.
• The amount of money that you receive in your wage packet is a nominal sum.
• It shows how much you have been given, but does not reveal what you can actually buy with it.

Question 41

What is Human Capital as a factor of production?

Answer 41

Refers to the available skills/knowledge/education/health, humans have

Question 42

What is entrepreneurship as a factor of production?

Answer 42

Setting up business / willing to take a risk

Question 43

What is entrepreneurship as a factor of production?

Answer 43

Setting up business / willing to take a risk