Multi-Step Processes

Question 1

What are the four key economic problems?

Answer 1

1. What is produced and how?
2. What is consumed and by whom?
3. Why are resources sometimes idle?
4. Is productive capacity growing?

Question 2

What is a self-organizing economy?

Answer 2

an economy based on the free market when no one is tasked with organizing the economy (invisible hand)

Question 3

Define efficiency

Answer 3

producing various goods and services, with the least possible amount of resources

Question 4

What is the main concept of self-interest and incentive?

Answer 4

individuals buy and sell based on what is best for their families

Question 5

Three types of decision makers

Answer 5

1. consumers: households that purchase goods and sell labour services
2. producers: Firms that purchase resources (including labour) and sell goods
3. government: purchase resources (including labour) and acquire revenue via tax. Also enforce laws

Question 6

Maximizing decisions
Households vs Firms

Answer 6

Households: maximize well-being and utility

Firms: maximize profits

Question 7

define Marginal Decision

Answer 7

We make decisions based on whether the marginal benefit outways the marginal cost

Question 8

Maximizing consumers and producers making marginal decisions means:

Answer 8

they decide whether they will be made better off by buying or selling a little more or a little less of any given product.

Question 9

describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention

Answer 9

free markets: households make maximizing decisions and firms use this as an incentive to purchase goods and services

tradition: humans tend to follow the footsteps of those before

government intervention: Equity. Key institutions are private property and freedom of contract, both of which must be maintained by active government policies.

Question 10

Three types of economies

Answer 10

Free Market: decentralized decisions, numerous decisions by producers and consumers “make it work” (invisible hand)

Tradition: people entering the economy in familiar ways such as the ways of their parents, or the system they’re born into.

Command: Economic decisions made by central authority (communism)

Question 11

Economic analysis develops models or frameworks towards
explanations by specifying:

Answer 11

1. Decision-makers’ motives, e.g. consumer preferences, producer objectives, bureaucrats’ fears, politicians’ social motivations.
2. The physical relations underlying environments where decisions are made, e.g. production relations, consumers’ income-earning skills.
3. Causal links (if … then) to be tested, e.g. increased government expenditures will create jobs, a higher payroll tax will lower employment, consumers behave like lemmings