Unit 1: Basic Economic Problem and Resource Allocation

Question 1

Explain Opportunity Cost

Answer 1

opportunity cost is the cost in terms of the next best alternative given up. It arises due to scarcity which leads to making choices about how resources are to be used.

Question 2

Describe the 4 factors of Production

Answer 2

1) Land: natural resources in the economy (land,rivers, forests)
Reward: income

2) Labor: human resources available in the economy
Reward: wages

3) capital: man-made aid to productions (eg: machines) these help produce more output from land & labor.
Reward: rate of return

4)Enterprise: organizes production of other Factors of Production.
Willing to take risks, promotes output and efficiency.
Reward: Profit

Question 3

Ceteris Paribus

Answer 3

a situation where other things remain equal. Besides a change in that single thing, all other things remain constant.

Question 4

Difference b/w POSITIVE and NORMATIVE statements

Answer 4

Positive Statement: Based on actual evidence, no judgements involved.
Normative Statement: subjective about what must happen, involves judgements & analysis

Question 5

Specialization definition

Answer 5

the process by which individuals, firms and economy focus on producing goods and services where they have comparative advantage over others.

ALSO LINKED DIRECTLY TOWARDS UNIT 4, ABSOLUTE & COMPARATIVE ADVANTAGE.

Question 6

Division of Labor Definition

Answer 6

Manufacturing process split into a sequence of individual tasks to allow workers to specialize

Question 7

Pros and Cons of Division of Labor

Answer 7

PROS:

• time saving
• skills increase & improve
• quality improves
• increased productivity leads to increased output

CONS:

• dependancy on others (if one fails to complete task, affect others)
• dissatisfaction among workers,
• boredom & error
• loss of skills
• unemployment

Question 8

MARKET ECONOMY

Answer 8

decisions taken through market forces

NO GOVT. INTERVENTION and Govt. doesnt influence the decisions of the market.

Question 9

Market Mechanism

Answer 9

demand and supply decides the price and quantity and how resources are allocated in the market.
economies become more efficient.

Question 10

PROS OF MARKET ECONOMY

Answer 10

PROS:

• profit incentive for firms leads to efficiency
• consumer sovereignty
• freedom from govt.
• quick response to changes in consumer preference

CONS:

• information failure
• lack of public goods because no profit incentive
• merit goods under-consumed
• demerit goods over-consumed
• market power abused (monopoly)
• too many consumer goods
• inflation possibility

Question 11

CONS OF MARKET ECONOMY

Answer 11

CONS:

• information failure
• lack of public goods because no profit incentive
• merit goods under-consumed
• demerit goods over-consumed
• market power abused (monopoly)
• too many consumer goods
• inflation possibility

Question 12

Planned Economy

Answer 12

resource allocation in economy decided by govt. bodies.

All decisions taken to welfare of economy & increase living standards

Question 13

PROS OF PLANNED ECONOMY

Answer 13

• public goods provided
• merit goods encouraged
• demerit goods discouraged
• full Cost Benefit Analysis (checking whether the cost is worth for the benefit it does for the economy)
• Full employment
• vulnerable groups protected

Question 14

CONS OF PLANNED ECONOMY

Answer 14

• no profit incentive, low production
• low competition, leads to low efficiency
• lack of consumer sovereignty, economy unresponsive to changes in consumer demand.
• too many capital goods

Question 15

MIXED ECONOMY

Answer 15

both market forces & govt. decide on resource allocation.

Mixed economy tries to gain advantage of both mixed & planned economies, and avoid disadvantage.