Module 1 - Economic Concepts

Question 1

Scarcity

Answer 1

Scarcity is the excess of human wants over what can be produced to fulfil those wants. Since resources are scarce, choices have to be made between different alternatives e.g. Consumers must choose which goods and services to consume, whilst firms must choose which goods and services to produce.

Question 2

Consumption

Answer 2

Consumption is the act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services

Question 3

Production

Answer 3

Production is the transformation of inputs into outputs by firms in order to earn profit (or meet some other objective)

Question 4

Factors of production

Answer 4

Factors of production (or resources) are the inputs into the production of goods and services: labour, land and raw materials, and capital

Question 5

Labour

Answer 5

All forms of human input, both physical and mental, into production

Question 6

Land and raw materials

Answer 6

Inputs into production that are provided by nature e.g. Unimproved land, oil, cotton

Question 7

Capital

Answer 7

All inputs into production that have themselves been produced e.g. Factories, machines, tools

Question 8

Macroeconomics

Answer 8

Macroeconomics is concerned with the economy as a whole and studies economic aggregates, such as national income, unemployment and the general level of prices

Question 9

Microeconomics

Answer 9

Microeconomics is concerned with individual parts of the economy (e.g. households, firms and industries) and the way they interact to determine the pattern of production and distribution of goods and services

Question 10

Aggregate demand

Answer 10

The total level of spending in the economy, by consumers, firms and the government

Question 11

Aggregate supply

Answer 11

The total amount of output (i.e. goods and services) in the economy

Question 12

Three categories of inputs, resources or factors of production

Answer 12

1. Labour
2. Land and raw materials
3. Capital

Question 13

Business economist studies:

Answer 13

1. Consumer behaviour
   How sensitive consumer demand is to various factors (price, advertising etc) and how the firm can try to persuade the consumer to buy its products
2. The role of the firm in production - what determines the type and quantities of goods produced, what production techniques and resources are used etc.

Question 14

Rate of economic growth

Answer 14

The rate of economic growth is the percentage increase in output over a 12-month period

Question 15

Recession

Answer 15

A recession is a period where national output falls, i.e. economic growth is negative. According to the official definition, a recession occurs if output declines for two or more consecutive quarters

Question 16

Unemployment

Answer 16

Unemployment arises when people are currently without a job, but are actively looking for work

Question 17

Inflation / Rate of Inflation

Answer 17

Inflation refers to a general rise in the level of prices throughout the economy.

The rate of inflation refers to a percentage increase in the level of prices over a 12 month period

Question 18

Macroeconomic objectives of governments

Answer 18

1. High and stable economic growth
2. Low unemployment
3. Low rates of inflation
4. The avoidance of balance of payments deficits and excessive exchange rate fluctuations
5. A stable financial system
6. The avoidance of excessively financially distressed sectors of the economy, including government

Question 19

Balance of trade

Answer 19

Exports of goods and services minus imports of goods and services.
If exports exceed imports there is a “balance of trades surplus”.
If imports exceed exports there is a “ balance of trade deficit”.

Question 20

Demand-side policy

Answer 20

Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices.

Demand-side policy seeks to influence the level of spending and hence aggregate demand. For example the government might try to boost spending by:

• cutting taxes
• increasing government spending
• reducing interest rates

Question 21

Supply-side policy

Answer 21

Government policy that attempts to alter the level of aggregate supply directly.

Supply-side policy seeks to influence the level of production directly and hence aggregate supply. For example, the government might:

• introduce tax incentives for investments or for people to work harder
• introduce new training schemes
• build new motorways

Question 22

Circular flow of income

Answer 22

The circular flow of income summarises how:

1. Firms pay income to households (in the form of wages, rent, profits and interest) in return for the use of factors of production owned by households.
2. Households spend their incomes on goods and services produced by the firms - this represents the incomes of the firms.

Question 23

Key allocation decisions faced by society

Answer 23

As resources are scarce, society needs to make three key choices or allocation decisions:

1. What goods and services will be produced and in what quantities?
2. How are the goods and services going to be produced, i.e. what resources and production methods are going to be used?
3. For whom are goods and services going to be produced, i.e. how is the total national income going to be distributed?

Question 24

Opportunity cost

Answer 24

The opportunity cost of an activity is the cost of the activity measured in terms of the best alternative forgone.

Question 25

Rational choice

Answer 25

A rational choice is one that involves weighting up the benefit of any activity against its opportunity cost.

Question 26

Rational decision making

Answer 26

Rational decision making involves weighting up the marginal benefit of an activity and the marginal cost.

Question 27

Marginal cost

Answer 27

The additional cost of producing one more unit of output.

For an individual, it is the additional cost of a little bit more of a particular activity.

Question 28

Marginal benefit

Answer 28

The additional benefit of producing one more unit of output.
For an individual, it is the additional benefit of a little bit more of a particular activity.

Question 29

10 economic choices a firm must make

Answer 29

1. How much to produce
2. What to charge for its output
3. What type of inputs to use
4. How many inputs to use
5. What production techniques to use
6. At what location to produce the output
7. Whether to invest in new capital
8. Whether to undertake research and development
9. How to respond to changes in competition
10. Whether to merge with or take over another firm

Question 30

Right firm choices will depend on 7 factors

Answer 30

1. Type of market in which the firm operates
2. Its predictions about future demand
3. Its degree of power in the market
4. The actions and reactions of competitors
5. The degree and type of government intervention
6. The current tax regime
7. The availability of finance