Basic Macroeconomics

Question 1

Economics is divided into 2 subfields

Answer 1

• Macroeconomics
• Microeconomics

Question 2

– study of the economy as a whole. Includes inflation
unemployment and economic growth

Answer 2

• Macroeconomics

Question 3

– study of how households and firms make decisions and how
they interact in markets

Answer 3

• Microeconomics

Question 4

study of scarce resources

Answer 4

Economics

Question 5

Importance of Microeconomics

Answer 5

• Understanding the behavior of firms and households is
  crucial in forming a robust and functional economic
  policies
• As economic managers we should learn to use economic
  policies as incentives for good behavior

Question 6

Terminologies

Answer 6

• Market
• Households
• Firms

Question 7

– a place where households and firms interact where they buy
and sell goods

Answer 7

• Market

Question 8

– buy goods and consume goods and services
– own and sell factors of production
– maximize utility

Answer 8

• Households

Question 9

– produce and sell goods and services
– hire and use factors of production
– maximize profits

Answer 9

• Firms

Question 10

The Economist is like a Scientist

Answer 10

• We mostly use theory and observation since conducting
  experiments in economics is often impractical
• As a substitute for laboratory experiments, we economists
  pay close attention to the natural experiments offered by
  history
• We also make assumptions to simplify the world’s
  complexities and to make it easier to understand
• Economic models unlike other scientific models in the
  field of biology are often in the form of graphs and
  equations

Question 11

• We mostly use ________ and __________ since conducting
  experiments in economics is often impractical
• As a substitute for laboratory experiments, we economists
  pay close attention to the _____________ offered by
  history

Answer 11

The Economist is like a Scientist

theory and observation
natural experiments

Question 12

• We also make __________ to simplify the world’s
  complexities and to make it easier to understand
• Economic models unlike other scientific models in the
  field of biology are often in the form of _______ and
  __________

Answer 12

assumptions
graphs and equations

Question 13

Circular flow of Model

Answer 13

1. Markets for Goods and Services
2. Households
3. Markets for Factors of Production
4. Firms

Question 14

• Firms sell
• Households buy

Answer 14

Markets for Goods and Services

Question 15

• Buy and consume goods and services
• Own and sell factors of production

Answer 15

Households

Question 16

• Households sell
• Firms buy

Answer 16

Markets for Factors of Production

Question 17

• Produce and sell goods and services
• Hire and use factors of production

Answer 17

Firms

Question 18

The circular flow model

Answer 18

(RED) Markets for Goods and Services —-> Goods and services bought —-> Households —–> Labor, land, and capital —-> Markets for Factors of production —–> Factors of production —-> Firms —–> Goods and services sold —-> Markets for Goods and Services

(GREEN) Markets for Goods and Services <——– Spending <———Households <——Income <——Markets for Factors of Production <—— Wages, rent, and profit <—–Firms <——– Revenue <—— Markets for Goods and Services

(RED) = Flow of inputs and outputs
(GREEN) = Flow of dollars

Question 19

4 factors of production

Answer 19

• Land
• Labor
• Capital
• Entrepreneurship

Question 20

• any natural resource used to produce goods and
  services

Answer 20

Land

Question 21

• effort that people contribute to the production of
  goods and services

Answer 21

Labor

Question 22

• machinery, tools and buildings humans use to
  produce goods and services

Answer 22

Capital

Question 23

• the ability to combine the factors of
  production to make profit

Answer 23

Entrepreneurship

Question 24

In economics we don’t see money as _________ rather as ____________.

Answer 24

capital
measurement

Question 25

It is a graft that shows the combinations of output that the economy can possibly produce given the available factors of production and the available technology

Answer 25

Production Possibilities Frontier (PPF) Curve

Question 26

is the study of efficient allocation of scarce resources,

Answer 26

Economics

Question 27

shows the optimal combination of goods that can be produced, given the resources available.

Answer 27

Production Possibilities Frontier (PPF) Curve

Question 28

It also shows the Trade off that occurs when resources are maximized

Answer 28

Production Possibilities Frontier (PPF) Curve

Question 29

4 Factors of production applied

Answer 29

* Land * Labor * Capital * Entrepreneurship

Question 30

- Plant/ Factory where the manufacture of cars and computers would take place

Answer 30

* Land

Question 31

- Workers engaged in the manufacture of goods

Answer 31

* Labor

Question 32

- Machineries/ tools used in building cars and computers

Answer 32

* Capital

Question 33

- The businessmen engaged in the business of production of these goods

Answer 33

* Entrepreneurship

Question 34

Application of concept of trade off

Answer 34

* When resources are maxmized, to increase production of one good, we’ll have to sacrifice production of the other * For example, in our graph, if we increase our production of cars from 600 to 700, we will have to lessen our production of computers from 2,200 to 2,000 * The 200, decrease in production of computers is called the opportunity cost to increase the car production to 100

Question 35

Trade- off explained

Answer 35

* Since resources are scarce, people have to sacrifice something to get something in return * Opportunity cost is that whatever must be given up to obtain something in return

Question 36

is that whatever must be given up to obtain something in return

Answer 36

Opportunity cost

Question 37

What happens during technological advancements

Answer 37

* expands society’s set of opportunities * more of both goods can be produced * Take for example a technological advancement in the computer industry