Chapter 1

Question 1

What is the basic economic problem defined as scarcity?

Answer 1

The basic economic problem where resources are limited but human wants are unlimited

Examples include oil, clean water, time, and labour.

Question 2

What must societies do because of scarcity?

Answer 2

Make choices about how to allocate resources efficiently

Question 3

What does opportunity cost refer to?

Answer 3

The next best alternative forgone when a choice is made

Question 4

Provide an example of opportunity cost.

Answer 4

Choosing to buy a phone instead of saving the money; the opportunity cost is the savings or something else you could have bought

Question 5

How does choice relate to economic decisions?

Answer 5

Every decision involves trade-offs

Question 6

What distinguishes positive economics from normative economics?

Answer 6

Positive economics is objective and fact-based, while normative economics is subjective and value-based

Question 7

Give an example of a positive economic statement.

Answer 7

An increase in income leads to more consumption

Question 8

Give an example of a normative economic statement.

Answer 8

The government should reduce inequality

Question 9

What is the purpose of models in economics?

Answer 9

To explain and predict economic behavior

Question 10

What does ‘ceteris paribus’ mean?

Answer 10

Latin for ‘all other things being equal’

Question 11

How do assumptions play a role in economic models?

Answer 11

Models are based on assumptions for clarity

Question 12

What are the four factors of production (FOP)?

Answer 12

• Land * Labour * Capital * Enterprise

Question 13

What is the reward for land as a factor of production?

Answer 13

Rent

Question 14

What is the reward for labour as a factor of production?

Answer 14

Wages

Question 15

What is the reward for capital as a factor of production?

Answer 15

Interest

Question 16

What is the reward for enterprise as a factor of production?

Answer 16

Profit

Question 17

What is a free market economy characterized by?

Answer 17

Allocation through price mechanism driven by supply and demand

Question 18

What is a merit of a free market economy?

Answer 18

Efficient, encourages innovation and competition

Question 19

What is a demerit of a free market economy?

Answer 19

Inequality, public goods underprovided, negative externalities

Question 20

What defines a command/planned economy?

Answer 20

Government owns and controls resources

Question 21

What is a merit of a command/planned economy?

Answer 21

Reduces inequality, focuses on welfare

Question 22

What is a demerit of a command/planned economy?

Answer 22

Inefficient, lacks incentives, poor resource use

Question 23

What is a mixed economy?

Answer 23

Combines features of both free market and command economies

Question 24

What does a Production Possibility Curve (PPC) show?

Answer 24

The maximum possible combinations of two goods or services that can be produced with available resources and technology

Question 25

What does any point on the PPC represent?

Answer 25

Full and efficient use of resources

Question 26

What do points inside the PPC indicate?

Answer 26

Unemployment or underused resources

Question 27

What do points outside the PPC represent?

Answer 27

Cannot be achieved with current resources

Question 28

What does moving along the PPC involve?

Answer 28

Giving up some of one good to produce more of another

Question 29

What is an example of the trade-off illustrated by the PPC?

Answer 29

Guns vs Butter: Producing more military goods means fewer consumer goods, and vice versa

Question 30

What are private goods characterized by?

Answer 30

* Excludable * Rivalrous

Question 31

What are public goods characterized by?

Answer 31

* Non-excludable * Non-rivalrous

Question 32

What is the free rider problem?

Answer 32

People can benefit from public goods without paying, leading to underprovision

Question 33

What are merit goods?

Answer 33

Provide more benefit to society than consumers realize and tend to be under-consumed if left to the free market

Question 34

Give an example of a merit good.

Answer 34

Education, healthcare

Question 35

What are demerit goods characterized by?

Answer 35

More harmful than consumers realize and tend to be over-consumed in free markets

Question 36

Give an example of a demerit good.

Answer 36

Alcohol, cigarettes

Question 38

What is the economic problem?

Answer 38

Limited resources vs. unlimited wants.

Question 39

Define free goods and give an example.

Answer 39

Unlimited goods with no opportunity cost, e.g., air.

Question 40

What are economic goods?

Answer 40

Scarce goods that have opportunity costs.

Question 41

List the types of choices in economics.

Answer 41

* Consumer choice * Producer choice * Government choice

Question 42

What does PPC stand for?

Answer 42

Production Possibility Curve.

Question 43

What happens to opportunity cost as you move along the PPC?

Answer 43

Opportunity cost increases due to resource specialization.

Question 44

What is empirical testing in economics?

Answer 44

Testing positive statements with data.

Question 45

Give an example of a normative debate in policy.

Answer 45

Should healthcare be free?

Question 46

What are value judgments based on?

Answer 46

Political, ethical, or personal beliefs.

Question 47

Outline the scientific approach to economics.

Answer 47

* Assumptions * Model * Predictions * Test against real-world data

Question 48

What is a limitation of economics as a science?

Answer 48

Human behavior is unpredictable.

Question 49

Define geographical mobility.

Answer 49

Ease of moving factors from one location to another.

Question 50

What is human capital?

Answer 50

Skills, knowledge, and experience possessed by workers.

Question 51

Differentiate between capital goods and consumer goods.

Answer 51

* Capital goods: Used to produce other goods (e.g., machines) * Consumer goods: Satisfy immediate wants (e.g., food)

Question 52

What is investment in economics?

Answer 52

Spending on capital goods to increase future productive capacity.

Question 53

What is the price mechanism in a market economy?

Answer 53

* Signalling * Incentives * Rationing

Question 54

What are examples of economies?

Answer 54

* Free market leaning: Singapore, USA * Command leaning: North Korea, Cuba * Mixed: UK, Germany, India

Question 55

What are market failures?

Answer 55

Situations where free markets do not allocate resources efficiently.

Question 56

What does the law of increasing opportunity cost imply?

Answer 56

Due to imperfect substitutability of resources.

Question 57

Differentiate between economic growth and economic development.

Answer 57

* Growth: Increase in real GDP (shift in PPC) * Development: Improvements in welfare, literacy, life expectancy

Question 58

What is the difference between short-run and long-run growth?

Answer 58

* Short-run: Using idle resources (move from inside PPC to curve) * Long-run: More resources/technology (shift PPC outward)

Question 59

What is specialization in relation to the PPC?

Answer 59

Leads to increased efficiency but dependence on other sectors/countries.

Question 60

Define private goods.

Answer 60

Firms supply these efficiently in markets.

Question 61

What is the free rider problem associated with public goods?

Answer 61

No incentive for firms to produce due to lack of profit.

Question 62

What are merit goods?

Answer 62

Goods that consumers underestimate the benefits of.

Question 63

Give an example of a demerit good.

Answer 63

Sugary drinks, junk food, drugs.

Question 64

What are positive externalities?

Answer 64

Benefits to third parties (e.g., education).

Question 65

What are negative externalities?

Answer 65

Costs to third parties (e.g., pollution).

Question 66

What leads to inefficient outcomes in markets?

Answer 66

Failure to account for social costs/benefits.