week 1

Question 1

What is economics?

Answer 1

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different groups.

Question 2

What are needs

Answer 2

the basic necessities that a person must have in order to survive

Question 3

what are wants

Answer 3

the desire that people have

Question 4

What is microeconomics

Answer 4

the study of individual buyers and sellers in specific markets: How individuals make decisions to buy and to sell given their preferences and costs (price) of the good and interact with others in society

Question 5

What is macroeconomics

Answer 5

the study of overall factors, conditions and systems.

Question 6

What is the meaning of opportunity cost

Answer 6

The potential benefits that an individual, investor or business misses out on when choosing an alternative over another

Question 7

What are rational choices

Answer 7

when you weigh up the costs and benefits of a choice to maximise the surplus of benefits over costs. This is a rational choice

Question 8

what are marginal costs

Answer 8

The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity

Question 9

what is the marginal benefit

Answer 9

The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity

Question 10

What is aggregate demand

Answer 10

Total spending on goods and services made in the economy. It consists of four elements: consumer spending (C) investment (I) government (G) and expenditure on exports (X) less any expenditure on foreign goods and services (M):
AD=C + I + G + (X-M)

Question 11

what is aggregate supply

Answer 11

The total amount that firms plan to supply at any given level of prices

Question 12

What are macroeconomic issues

Answer 12

-cyclical fluctuations in the economy
-recessions
-unemployment
-inflation
-balance of trade deficits

Question 13

What is demand-side policy

Answer 13

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

Example: If there is a recession, the government might try and boost the level of spending or reduce interest rate. If consumers respond by purchasing more then this clearly will have an effect on businesses. This is an macroeconomic policy effects firms in many ways as businesses must know the macroeconomic environment and the effects of government policy as they will need to have stock to be ready for the upsurge in consumer demand.

Question 14

what is the supply-side theory?

Answer 14

Government policy that attempts to alter the level of aggregate supply directly.
Example: the government may introduce tax incentives for firms to invest, or for people to work harder. it may introduce new training schemes or build new motorways. These policies will affect firms costs and hence profitability of production.

Question 15

draw and label the circular flow of income

Answer 15

Question 16

what would happen if the function changed from y = 4 + 2x to y = 6 + 2x

Answer 16

shift upwards

Question 17

What is the graph function

Answer 17

S = 0.2Y

Question 18

what is the graph function

Answer 18

C = 20 + 5Q + Q*2
(remember if it is a sloped curve then it means it squares at the end.

Question 19

What is a perfectly competitive market

Answer 19

this is a theoretical market in which there are no monopolies. There are no restrictions to entering the market, the goods are identical and there is a substantial number of buyers and sellers.

Question 20

What is scarcity

Answer 20

the excess of human wants over what can actually be produced to fulfil wants

Question 21

what are factors of production

Answer 21

The inputs into production of goods and services : labour, capital and raw materials and land

Question 22

what is labour

Answer 22

all forms of human input, both physical and mental into current production

Question 23

Land (and raw materials)

Answer 23

inputs into production that are provided by nature e.g. unimproved land and mineral deposits in the ground

Question 24

what is capital

Answer 24

all inputs into production that have themselves been produced e.g. factories, machines and tool

Question 25

What are the micro economic choices that need to be made due to scarcity

Answer 25

1. What goods and services are going to be produced and in what quantities?
2. How are things going to be produced, given that there is more than one way of producing the said goods?
3. From whom are things going to be produced? in other words, how is the nation’s income going to be distributed?

Question 26

What is a planned (command) economy

Answer 26

In a planned economy it is the role of the state to allocate resources. It will decide how much should be invested and in what industries. It may tell each industry and individual firms which goods to produce, how much to produce and how they should be producing.

Governments can achieve high rates of growth through its allocation of resources to investment and also avoid unemployment by dictating the allocation of labour. Goods and services such as education, policing and national defence would be provided and governments could take account of ‘bad things’, such as pollution, which is unlikely to happen in an economy where there is no government intervention
However incentives are limited as income is distributed relatively equally between individuals and would require high administrative costs to run efficiently (soviet union)

Question 27

What is a free market economy

Answer 27

in a free market economy, it the firms who decide what to produce and they will respond to consumer tastes. A shortage will push prices up and a surplus will push them down.

This is an advantage of free market as resources will be used more efficiently, as firms and consumers have an incentive to act in their own self-interest. This can help minimise the economic problem of scarcity.
However without government distribution and firms acting in there best interest it could result in some goods and service not being produced such as street lights or national defence. Unemployment could be high and society could be very unequal.

Question 28

What is a mixed economy

Answer 28

Most economies are mixed. Some goods/services are left entirely to the free market, where produces respond to signals from consumers when deciding what to produce and how much to charge. Other goods and services have some light-touch intervention, perhaps through regulation of price, quality or information - we often see this in utilities, such as energy or water. However a free market economy may not produce some goods and services at all and it is in these cases where there may be a larger role for the government to ensure an efficient allocation of resources, like the provision of healthcare.
However the government can also fail and result in these necessities not being allocated efficiently.

Question 29

What is the balance of trade

Answer 29

Exports of goods and services minus imports of goods and services. If exports exceed imports there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports, there is a ‘balance of trade deficit’ (a negative figure)

Question 30

If aggregate demand is too low relative to aggregate supply what happens

Answer 30

Unemployment and recession
This is where output in the economy declines for two consecutive quarters or more (growth becomes negative over that time)
This results in low level of consumer spending. Therefore firms will find themselves with unsold stock resulting in a cut down in production. This can then lead to unemployment as cutting back on production results in a smaller labour force.

Question 31

What happens if aggregate demand rises substantially

Answer 31

inflation - refers to a general rise in the level of prices throughout the economy. with a rise in demand firms respond by raising prices

Balance of trade deficits - the excess of imports over exports. If demand rises part of the demand will be spent on imports such as Japanese MP3 players and German cars. If inflation is also high home produced goods will become uncompetitive with foreign goods. Increasing our imports.

Question 32

What is a barter economy

Answer 32

An economy where people exchange goods and services directly with one another without any payment of money. Workers would be paid with bundles of goods

Question 33

What is a price taker

Answer 33

a person or firm with no power to be able to influence the market price. in competitive markets consumers are price takers

Question 34

How does a competitive market work

Answer 34

in a perfectly competitive market both producers and consumers are too numerous to have any control over prices. in this situation everyone is a price taker. However in competitive markets firms have some discretion over the prices they charge. this means they have some market power like ford.

Question 35

what is a free market

Answer 35

one which individual producers and consumers are free to make their own economic decisions.