Topic 1 - Introduction to Economics

Question 1

Explain what the economic problem is.

Answer 1

How to satisfy unlimited consumer demand with a limited supply of resources.

Question 2

What are the 4 basic questions which businesses must answer when producing G&S?

Answer 2

1) What to produce?
2) How much to produce?
3) How to produce?
4) How to distribute production?

Question 3

Explain what opportunity cost is and the formula used to calculate it.

Answer 3

Opportunity cost is satisfying the current wants and needs by giving up another want/need.
OC = Quantity Forgoe / Quantity Gained

Question 4

Briefly state what the Production Possibility Frontier is.
What does it represent?

Why isn’t it straight?

Answer 4

PPF is a graphical representation of Opportunity Cost and the possible combinations of producing 2 different G&S.
The graph is not straight since there is no perfect tradeoff when substituting DIFFERENT G&S.

Question 5

List the 3 factors that affect the PPF.

Briefly the effect of each and the outcome when each one either increases/decreases.

Answer 5

1) New Technology - ↑ will shift PPF outwards.
2) Resources - ↑ will shift outwards for the specified G/S. ↓ in supply will shift that quantity inwards.
3) Unemployment - Underutilised resources, inside the PPF.

Question 6

Determine the general opportunity costs with individuals, businesses and governments.

Answer 6

Individuals: Spending or saving (Short-term vs Long-term)
Businesses: Price, Quantity, Quality of resources.
Governments: Must satisfy different community wants vs Economic fluctuations (roads, schools vs recessions).

Question 7

List the 4 factors of production.

List the types of return on each one.

Answer 7

1) Land –> Rent
2) Labour –> Wage
3) Capital –> Interest
4) Entrepreneurship –> Profit

Question 8

Define Consumer goods

Answer 8

Items are produced for the immediate satisfaction of individual’s and community’s wants and needs.

Question 9

Define Capital goods

Answer 9

Items that are not consumed immediately but are used for the production of other goods.

Question 10

State the formula for calculating income.

Y | C | S

Answer 10

Income (Y) = Consumption (C) + Savings (S)

Question 11

List the 5 sectors which the Circular Flow of Income represents.

Answer 11

1) Households
2) Businesses
3) Overseas/International Trades
4) Financial institutions
5) Governments

Question 12

From the Circular Flow of Income;
The private sector consists of?
The public sector consist of?

Answer 12

Private: Individuals, businesses and financial institutions.
Public: Government

Question 13

Explain what leakages represent in the economy and the 3 factors it represents (S, T, M)

Answer 13

Leakages represent the outflow of liquid funds from the economy.
Represented through Savings, Imports and Taxation.

Question 14

Explain what Injections represent in the economy and the 3 factors it represents (I, G, X)

Answer 14

Injections represent the inflow of liquid funds into the economy.
Represented through Investment, Government Expenditure and Exports.

Question 15

What are the 3 main reasons government intervention occurs in a market economy?

Answer 15

1) Reallocate resources between community and country needs. (Roads vs Defence)
2) Redistribute income between low and high-income earners. (Taxation)
3) Stabilise the economy from fluctuations of the business cycle. (Boom, trough)

Question 16

How is economic growth measured?

Explain this measurement/formula.

Answer 16

Economic growth is measured by Gross Domestic Product (GDP).
Measures the total value of G&S produced by its nation ÷ Population.

Question 17

How is the quality of life measured?

Answer 17

Measured by the Human Development Index (HDI). Takes into account:
1) Income | 2) Life expectancy | 3) Educational levels

Question 18

Explain the difference between a ‘planned’ economy and a ‘market’ economy.

Answer 18

Planned: Supply and price of G&S are fully controlled by the Government.

Market: Economy characterised by private enterprises, consumer sovereignty and no government intervention.

Question 19

List the 4 ways how the Government intervenes for minority groups, students and income earners.

Answer 19

1) Minimum income/wage
2) Free education until Year 12
3) Progressive Tax System
4) Unemployment/disability benefits

Question 20

Explain the difference between Factor Markets and Goods Markets.

Answer 20

Factor Markets: Factors of production sold (land, labour, capital and enterprise).

Goods Market: Where final G&S are sold to consumers.

Question 21

State the % employment of each Primary, Secondary and Tertiary Industries.

Answer 21

Primary: 5%
Secondary: 15%
Tertiary: 85%

Question 22

Distinguish between a closed and open economy.

Answer 22

Closed Economy: No overseas sector - No internal trade.

Open Economy: Promotes international trade, allowing money to flow in easier.

Question 23

Distinguish between equilibrium and disequilibrium, regarding Leakages and Injections.

Answer 23

Equilibrium: Sum of all leakage are equal to the sum of all injections.

Disequilibrium: Sum of total leakages do not equal to the sum of total injections.