2) Economic Agents - MB

Question 1

Economic Agents:

what is a firm (business)?

Answer 1

an organisation that produces output (goods or services)

Question 2

Economic Agents:

what is a household (individual(s))?

Answer 2

a person or people that engage in economic activity as one or together

Question 3

Economic Agents:

what is a government?

Answer 3

the group of MPs with responsibility to develop and implement policy and laws

Question 4

Economic Agents:

what is rationality?

Answer 4

economic agents acting in their best interests

Question 5

Economic Agents:

what is utility?

Answer 5

the benefit derived from the consumption of a good or service

Question 6

Economic Agents:

what is incentive?

Answer 6

a thing that motivates or encourages someone to do something

Question 7

what are economic agents?

Answer 7

1) firm
2) households (individuals)
3) government

Question 8

Economic Agents:

who engages in economic activity?

Answer 8

consumers

Question 9

Economic Agents:

households make choices about…

Answer 9

spending; which goods and services demand

Question 10

Economic Agents:

how do households earn income, and why is income needed?

Answer 10

to earn income for spending, households make choices about supplying labour

Question 11

Economic Agents:

how do firms make output?

Answer 11

firms must buy machines, raw materials and labour

Question 12

Economic Agents:

what sort of choices do government make?

Answer 12

choices about taxes, regulation and spending

Question 13

Economic Agents:

what is the Circular Flow of Income?

Answer 13

• Households need goods and services from firms
• Firms need labour from households
• The Government taxes households
• Households gain benefits and healthcare and gain from government spending
• Government give funding to some firms (school), they also tax
• Firms benefit from government spending (roads, transport of goods, NHS)
• Government buys goods and services from firms

Question 14

Economic Agents:

How do firms maximize profits?

Answer 14

• Due to the price of mechanism and competition, households’ purchases act as a signal to firms, helping to INFORM PRODUCTION
• Competition incentivises firms to reduce prices to increase sales to households to maximise profits

Question 15

Economic Agents:

why are households incentivized to maximize satisfaction?

Answer 15

• because of limited resources, they are incentivised to consume products that most increase utility relative to their price
• opportunity cost means consumption of the next best alternative products is sacrificed

Question 16

Economic Agents:

why are households incentivized to consume more when prices fall?

Answer 16

this will increase utility

Question 17

Economic Agents:

what are the government’s objectives?

Answer 17

• primarily it raises revenue with taxes to spend on services for households while maximizing GDP growth at a sustainable rate.

Question 18

Economic Agents:

what are the government’s political objectives?

Answer 18

Politically, the government’s incentive is to maximize the lifespan of the government by achieving its objectives.

Question 19

Economic Agents:

how does competition link to an ineffective incentive?

Answer 19

• Less competition means that household may be forced to pay too high prices to firms, or be unable to afford products that, in a more competitive environment, they could afford.

Question 20

Economic Agents:

how can incentives be effective (2 points):

Answer 20

1) if rational, and seek to maximise utility, the incentive is more effective at ensuring resources are allocated in accordance with achieving their objective
2) if there is information, higher quality information, the more effective the incentive

Question 21

Economic Agents:

how are incentives ineffective? (3 points):

Answer 21

1) Agents may not be rational, not acting in accordance with its best interests
2) lack of information, hinder economic agents decisions that maximise utility, making them unable to effectively act in accordance with their incentives

3) Effectiveness depends on level of competition, less competition means households may be forced to pay too high prices to firms, or unable to afford products that, in a more competitive environment, they could afford