The Nature of Economics

Question 1

What is economics?

Answer 1

Economics is the study of the production, distribution and exchange of goods and services in order to address the economic problem

Question 2

What is the economic problem/ the problem of scarcity?

Answer 2

Our wants are unlimited. Resources are limited (finite). We are forced to make choices between wants.

Question 3

What are wants?

Answer 3

Material desires of individuals or the community. They provide utility and may be classified as a need.

Question 4

What are individual wants?

Answer 4

The desires of each person. The ability to satisfy them depends on income.

Question 5

What are collective wants?

Answer 5

Wants of the whole community, provided by the government. (Eg. parks, libraries)

Question 6

What are recurrent wants?

Answer 6

Wants that must be continually satisfied.

Question 7

What are complimentary wants?

Answer 7

A want that follows the satisfaction of another (car and petrol)

Question 8

What are some factors affecting wants?

Answer 8

Age, income, technology, fashion

Question 9

What are the four key economic issues?

Answer 9

What to produce?
How much to produce?
How to produce?
How to distribute production?

Question 10

What is opportunity cost?

Answer 10

The cost of the alternative foregone in a choice. Represents the alternate use of resources.

Question 11

What is a production possibility frontier?

Answer 11

A graph that shows the various combinations of two alternative products that can be produced, given current technology and a fixed quantity of resources, when they are used to full capacity.

Question 12

What is the effect of new technology on a PPF?

Answer 12

It causes a pivot, relating to the specific good with improved production technology.

Question 13

What is the effect of new resources on a PPF?

Answer 13

It causes an outward shift of the entire curve. (Can be caused by increased population)

Question 14

What does the straight curve on a PPF indicate?

Answer 14

That the economy can substitute between the production of two goods at a constant rate, and that it is possible to shift all resources between the production of the two goods. Marginal rate of substitution is 1:1.

Question 15

Distinguish between consumer and capital goods.

Answer 15

Consumer goods are produced for the immediate satisfaction of wants, whereas capital goods are used for the production of other goods.

Question 16

Describe the basic future implications of choosing between consumer and capital goods.

Answer 16

Choosing consumer goods will satisfy short term wants and improve standard of living, but will stagnate long term economic growth. Investing in capital goods will increase long term productive capacity.

Question 17

Provide example of the future implications of economic decisions.

Answer 17

For an individual, choosing between a holiday, or a home deposit will impact future financial security.

For a business, increasing success is dependent on assessing which business areas will provide the most gains in the long term (eg. investing in communications)

For the government, deciding between short term areas including health and social welfare, or long-term growth areas, being infrastructure, education.

Question 18

Identify the factors that influence an individual’s economic decisions

Answer 18

Age, income, expectations, family circumstances, personality.

Question 19

Identify the factors that influence a business’s economic decisions

Answer 19

Maximising profits, target market, minimise production costs, ethical factors, industrial relations, supply, quality

Question 20

Identify the factors that influence governments’ economic decisions

Answer 20

Desired economic outcomes, re-elections

Question 21

What are merit goods?

Answer 21

Goods and services not produced in sufficient quantity by the private sector because individuals do not place sufficient value on them.