The Nature of Economics - Topic 1

Question 1

What is the economic problem?

Answer 1

The economic problem is that there are unlimited wants but limited resources to be able to satisfy those wants.

Question 2

What is scarcity?

Answer 2

Scarcity is a result of the economic problem as it means that the limited resources that we have aren’t enough to satisfy our unlimited wants.

Question 3

What does scarcity result in?

Answer 3

Scarcity means that the consumer/individual has to make a choice. The individual has to prioritise which wants are satisfied first, in the future or not at all. This prioritisation is normally seen in the form of ranking. The ranking depends on the degree of the utility perceived of the good or service. Some wants are satisfied, others unsatisfied.

Question 4

What is economics?

Answer 4

Economics is the study of the way we try to satisfy our material wants with the limited means available to us.

Question 5

What is the difference between allocation and distribution?

Answer 5

To write later.

Question 6

What is a want?

Answer 6

Wants are people's desires for goods and services. However they are not necessary for a human's basic function. Some characteristics that describe wants include:
Wants are unlimited
Wants are competitive
Wants vary between people
Some wants are recurring
Some wants are complementary

Question 7

What is a need?

Answer 7

A need is a requirement or essential items. E.g. water

Question 8

What is a good?

Answer 8

Goods are the end product of the production process. Goods are tangible objects such as cars and pencils.

Question 9

What is a service?

Answer 9

Service is a task performed for others by individuals or firms.
E.g. getting your hair cut, getting legal advice from a laywer

Question 10

What is the difference between an economic good and a free good?

Answer 10

Economic goods are scarce compared to people’s wants for them, and thus people are willing to sacrifice something to get economic goods (exchange money). In contrast, free goods are necessary or at least less desirable but they are so plentiful in supply that they have no money value. However, if a free good were to become restricted, then money value would be added to it.

Question 11

What is the difference between a consumer good and a capital good

Answer 11

Consumer goods are final products which satisfy wants directly (e.g. bread). Whereas capital goods are goods which have been produced to help in further production, in other words they help hasten the production of goods (e.g. ovens)

Note: An oven could be both a consumer and capital good depending on the use. If a person buys an oven just to be able to bake pizza or other foods at home it is a consumer good. However, if an oven is bought by a business to help make food faster, then it is a capital good.

Question 12

What is the difference between one-use goods and durable consumer goods?

Answer 12

One use goods can only be used one time, whereas durable consumer goods can be used multiple times before it is not functional anymore.

An example of one-use goods are matches/ An example of a durable good is a car.

Question 13

What are resources and the different characteristics they have?

Answer 13

Resources are assets necessary to produce goods or services to satisfy wants and needs. An economy with many resources can produce many goods and services. In order for a material to be considered a resource, it must have several characteristics:

It must be known - we must be able to know what it is and that it actually exists
It must be accessible - we must be able to access it
It must be capable of producing goods or services- it must be able to produce goods or services which will satisfy our wants
It must be relatively scarce - scarce compared to our wants

Question 14

What are the different factors of production/productive resources

Answer 14

Land, labour, capital, enterprise

Question 15

What is land and the return to land?

Answer 15

This resource covers all the natural resources. This includes mineral deposits, rivers, forests, climate etc. The quantity of land (as a resource) is restricted because we are born into a world full of limited land. However, unusable natural areas such as inaccessible jungles are not considered land because they are not a productive resource.

Rent is the return to land. This means that the owners of the land who allow it to be used in the production process receive a payment.

Question 16

What is labour, and some factors which influence the amount of labour available? What is the return to labour?

Answer 16

This resource describes the human effort used in producing goods and services. It includes physical, mental and natural skills. An example of this is the work of road builders. The amount of labour available to an economy depends on many factors, including:

Size of population
Retirement age
Migration policies
Amount of time workers are working

Wages is the return to labour. This refers to all the payments for personal effort in the production process.

Question 17

What is capital? What is the return to capital?

Answer 17

Capital is defined as the ‘produced means of production’. Any productive resources which result from previous productive effort are capital. An example of this resource is machinery and factory buildings. Capital increases the productivity of other resources which will be beneficial for the future. Capital also makes it possible to satisfy more wants in the future. However, savings are required for the creation of capital.

Interest is the return to capital. This is because saving institutions pay interest to encourage saving. However, they also charge interest to borrowers when they borrow saved funds to buy resources to create capital goods.

Question 18

What is the production process?

Answer 18

It is the process of combining various material and immaterial inputs to make something capable of consumption (goods and services).

Question 19

What is an example of the economic problem in everyday life?

Answer 19

A teenage student deciding to go to a party or study for an exam the next day.

The government having to pick from a variety of different sectors to invest money into. E.g. Education and mining.

Question 20

What is enterprise?

Answer 20

Enterprise is the contribution made to production by an entrepreneur.

Profit is the return to enterprise. For the entrepreneur’s contribution to production, the entrepreneur receives profit. Profit in this case is the ‘reward’ given to the entrepreneur for having the initiative to go into business and take the risk.

Note: A enterprise might be worth more depending on the value that was brought to society by inventing the good or service.

Question 21

Who is an entrepreneur?

Answer 21

An entrepreneur is a person who takes responsibility for organising the other FOPs, makes decisions, takes initiative in implementing new methods or in producing new goods, bears the risk that these moves can be unsuccessful.

Question 22

What are the implications of choices?

Answer 22

By choosing the spend/invest money in the present, you are taking more money out of how much you would spend in the future. Normally choices are made to satisfy current wants without thinking about the future, however the choices we make now impact our future.

Question 23

What is the implication of choice on a consumer?

Answer 23

Consumers have the option to spend a lot of their money now and not save any income for the future. However, they also have the choice to spend a bit of money now and be satisfied a bit and spend a bit of money in the future as well and be satisfied then. Thus, they have the choice of which to do and each one affects their budget later on down the track.

Question 24

What is the implication of choice on a business?

Answer 24

Firms face the opportunity cost of producing some goods and services and not others. Or whether or not to save their money to reinvest it to expand their business. Each option will lead to a different future for the business.

Question 25

What is the implication of choice on a government?

Answer 25

For governments, choices have to be made by local, state and federal governments in the present period about how resources are allocated to different competing uses. E.g. social security or education, health or defence

Question 26

What is the production possibility curve/production possibility frontier?

Answer 26

This is a diagram of a ‘modified picture of reality’, and thus needs some assumptions:
Our society produces only two goods
The state of technology remains unchanged
The quantity of resources remain unchanged
All resources are fully employed

The production possibility curve aims to show all the possible combinations of production at any given point in time. Society must choose which combination is most desirable. Opportunity cost can be visualised here as well

(Need to practice irl)

Question 27

In what cases can the production possibility curve move outwards?

Answer 27

In the case that there is an improvement in the technology of food production, and that there is a discovery of new resources.

Question 28

In what cases can the production possibility curve move inwards?

Answer 28

If some resources are unemployed or the labour force is not at it’s peak. An example which may result in this curve moving inwards is a natural disaster.

Question 29

Why might the graph curve instead of remaining straight?

Answer 29

This is because in order to increase the production of one good by 1 unit more, and more units of the other good has to be sacrificed because the resources are limited and they are not equally efficient in producing both goods. This is called marginal opportunity cost.

Question 30

How are economic growth and economic development linked?

Answer 30

Eco development helps eco growth because if the people are educated and healthy, then people are able to work and this will result in an increased production of goods and services which thus rises the GDP (results in economic growth).

Eco growth can help eco development because if there is a strong economic growth, the government receives more tax which allows them to use that money to improve elements of the economic development e.g. school (literacy rates, school retention ratees)

Question 31

What is economic growth?

Answer 31

Economic growth is typically measured by GDP and means an increase in the amount of goods and services produced per person over a period of time.

Question 32

What is Economic development?

Answer 32

Economic development is typically measured by the Human Development Index (HDI). Economic development is the social development in which well-being and quality of life of a nation increases, alongside economic growth.

Some wellbeing indicators which may be used to calculate economic development include literacy rates, school retention rates, life expectancy and more.

Question 33

Is it possible to have high economic growth with no economic development?

Answer 33

It is possible if corruption occurs, because although an economy may be experiencing a boom, a lot of the money goes to corrupt politicians and not ‘recycled’ back into the economy to help economic development.

Another situation is if a country has environmental problems as this may result in more pollution in the air which decreases the life expectancy and thus the economic development indicators go down.

Question 34

What are the similarities of both economic development and economic growth?

Answer 34

Both are economic indicators
Both measure economic progress
Both investigate how well the economy is developing

Question 35

Why might the whole PPF/PPC shift downwards?

Answer 35

This would normally happen if resources available to us, decreases. An example of this is a natural disaster reducing our access to resources.

Question 36

Why might the economy be performing inside the PPF/PPC?

Answer 36

If all the resources available aren’t all being utilised. An example of this is the Covid-19 pandemic causing disruptions in the labour, which makes the economy not able to produce as many goods as possible.

Question 37

What are FOPs?

Answer 37

Factors of production are the resources used to produce goods and services. These resources include:
Land
Labour
Enterprise
Capital

Question 38

Why do we need to make choices?

Answer 38

Choices are necessary as we have unlimited wants and limited resources to satisfy the wants and thus need to choose what to satisfy.

Question 39

What are the economic factors influencing why an individual might decide to study?

Answer 39

It will allow individuals to be rewarded with a higher income in the long run, but they forgo income for several years to get this.

Question 40

What is opportunity cost?

Answer 40

The value of the next-best decision alternative when a decision is made. In other words it is the good or service which is given up to obtain a good or service.

Question 41

What are the economic factors influencing why an individual might spend?

Answer 41

Some economic factors include the price of the G&S, the perceived utility of the G&S, as well as the budget of the individual which is affected by the income and unemployment rates of the country.

Question 42

What are the economic factors influencing why an individual might work?

Answer 42

By working, individuals are able to make an income, and thus able to support their lifestyle. Another influence as to whether or nor an individual wants to work are whether or not the tax rates are high, as well as whether or not they want to spend their time doing leisurely activities instead

Question 43

What are the economic factors influencing why an individual might vote and participate in the politcal process?

Answer 43

It may be influenced by the individual’s personal economic experiences. For example, if the government introduces a new policy regarding tax, individuals have the opportunity to express their satisfaction or dissatisfaction with the policy during the voting process

Question 44

What are the economic factors influencing why an individual might retire?

Answer 44

It may be affected by the fact that retiring makes them have to adjust to a lower income but in return they will have more leisure time. Another economic factor is whether or not they’ve worked enough during their working period to have enough super to help find their retirement

Question 45

What are the economic factors influencing why an individual might save?

Answer 45

The individual may decide to save when there is an economic downturn. This means that individuals are less confident with the economy and are fearful that they may lose their job, and thus they decide to save. Another factor which affects saving us if the interest rates for saving with a bank is increasing.

Question 46

What are the economic factors influencing why a business might price their products a certain way?

Answer 46

The business may decide to price their product at a higher price to be able to make more profit for every one sold. The business may decide to lower the price of their product if they are aiming to sell MORE products (and thus make a profit through selling more, e.g., wholesaling).

Question 47

What are the economic factors which might influence why a business use a resource a certain way?

Answer 47

The business may decide to do this to optimise quality and minimise the costs involved in the production of it., as a resource may be put to use in more optimal ways.

Question 48

What are the economic factors which might influence why a business might want to improve industrial relations?

Answer 48

By improving industrial relations, the employees may be more motivated to work, which thus increases the productivity of the company and increases the output of goods and services

Question 49

What are the economic factors which might influence why a business might pick to produce a certain good or service over another?

Answer 49

The cause of this may be because a certain good is in high demand right now, and it would be more worth it to produce that good and receive more profit, as opposed to another good or service which may not necessarily be in high demand which means that the business won’t get as much profit as they want.

Question 50

Why might the government decide to increase the taxation rates ?

Answer 50

So that the government has more revenue to re-spend it into the different sectors.

Question 51

Why might the government prohibit a certain activity (in the case of markets)?

Answer 51

To make sure the market is running fairly. For example, if there is a situation in which business are meeting together to agree upon a price to set the goods at, this may be prohibited because it is not in the best interests of the consumers.

Question 52

Why might the government encourage certain economic activities by providing incentives?

Answer 52

If certain industries are able to grow in a period in which they aren’t meant to grow, that means that the government will receive more business tax and thus able to spend it to help promote the economy. Also, they may encourage companies to keep their employees through benefits like Job Keeper

Question 53

Why might the government prohibit a certain activity (in the case of smoking)?

Answer 53

To make sure the population is healthy so that they can work and contribute to the economy.

Question 54

What are the three different types of economies?

Answer 54

Market Economy/ Free Market / Capitalist Economy
Mixed economy
Command Economy / (Centrally) Planned Economy

Question 55

What are the four economic production questions (that aim to solve the eco. problem)?

Answer 55

How to produce?
How much to Produce?
What to Produce?
To whom to distribute production to?

Question 56

What is a market economy? Give an example of a market economy

Answer 56

A market economy is an economy which is technically owned by the citizens and businesses. In this economy there is limited government involvement. The four economic questions are answered by the consumers. In this case there is pure consumer sovereignty.

E.g. From citizens deciding that a certain good or service is more popular than another, it affects what the businesses produce to maximise profit.

Note: No economy is a pure market economy

Question 57

What is a Mixed Economy? Give an example of a mixed economy.

Answer 57

A Mixed Economy has a combination of government intervention and regulation as well as market forces. This means that the decisions concerning production and distribution are affected by market forces and government.

E.g. For selling tobacco, there is heavy government restriction on the sales of tobacco, but there is also a market force (demand) affecting how much of it is produced.

Note: Most economies are mixed economies

Question 58

What is a Centrally Planned Economy? Give an example of a centrally planned economy.

Answer 58

A Centrally planned economy (also known as a command economy) is an economy which is purely controlled by the government through government regulations and legislation. In other words, the government makes all the economic choices as to what to produce and how much to produce. Citizens will have little to no economic freedom.

E.g. A government may decide that they don’t want companies to produce laptops anymore, and instead focus their resources on the production of phones instead. The other businesses and consumers have no choice in this.

Note: No economy is purely centrally planned, not even countries such as North Korea

Question 59

What is the purpose of the different types of economies such as Centrally planned economy?

Answer 59

These different types of economies are created in order to respond to the four economic production questions, and a response to the economic problem

Question 60

What is consumer sovereignty?

Answer 60

Consumer sovereignty basically means that consumers answer the four eco production questions. Because they are free to choose how they spend their income, they can choose what goods and services will be produced through choosing what wants they want to satisfy.

Question 61

What is competition?

Answer 61

Competition between companies basically means that because there are a large amount of buyers and sellers, sellers have to compete with each other to get most of the buyers to purchase their good or service and thus make a profit.

Question 62

Why is competition good?

Answer 62

Competition is good as it makes sure no one buyer or seller is too big to influence the market price to have an advantage. In addition to that, it promotes innovation and strategy amongst businesses.

Question 63

What is the price mechanism?

Answer 63

The process which the forces of supply and demand interact to determine market price at which G&S are sold and produced by businesses