Consumption and Production

Question 1

What is the purpose of economic activity

Answer 1

The production of goods and services to satisfy needs and wants to improve economic welfare using scarce resources

Question 2

Define Opportunity Cost

Answer 2

The next best alternative forgone when an economic decision is made

Question 3

What do PPB and PPF stand for and what do they mean

Answer 3

Production Possibility Boundary / Production Possibility Frontier
Indicates the maximum possible output that can be achieved given a fixed set of resources and technology in a particular time period

Question 4

List Factors that shift PPB to the right/outwards

Answer 4

Improvement in new technology

Introduction of new resources such as minerals

Increased supply of labour through increase in population and migration

Improvements in human capital through education and training

Encouraging entrepreneurship

Increased productivity

Question 5

List Factors that shift PPB to the left/inwards

Answer 5

Emigration

Disease

War

Natural Disaster

Question 6

Define Capital

Answer 6

Goods which make other goods

Question 7

Give all definitions of productive efficiency

Answer 7

Productive efficiency is achieved when it is not possible to make anyone better off without making someone else worse off, or you cannot produce more of one good without producing less of another

Productive efficiency is also producing at the lowest average cost

Question 8

Define Allocative Efficiency

Answer 8

Occurs when the available economic resources are used to produce the combination of goods and services that best math peoples tastes and preferences

Question 9

Define Consumer Surplus

Answer 9

A measure of the welfare that people gain from consuming goods and services

It is the difference between the total amount that consumers are willing and able to pay and how much they actually do pay

Question 10

Define Producer Surplus

Answer 10

A measure of the welfare that producers gain from producing goods and services

It is the difference between the price suppliers are willing and able to charge and how much they actually do charge

Question 11

Consumer Surplus rises most greatly when demand is…

Answer 11

Inelastic and Rises

Question 12

True or False: Price Elasticity of Demand affects Producer Surplus

Answer 12

False

Question 13

True or False: Price Elasticity of Supply affects Consumer Surplus

Answer 13

False

Question 14

Producer Surplus rises most greatly when supply is…

Answer 14

Inelastic and Rises

Question 15

Define Incidence of Tax

Answer 15

The ability of a firm/industry to pass on a tax to its consumers

Question 16

Incidence of tax is _____ when demand is price inelastic, explain why

Answer 16

Incidence of tax is high so firms will be able to pass along a low proportion of the tax to the consumer when price is inelastic as the goods is likely more of a necessity so consumers will be willing to pay more for it

Question 17

Incidence of tax is _____ when demand is price elastic, explain why

Answer 17

Incidence of tax is low so firms will be able to pass along a higher proportion of the tax to the consumer when price is elastic as the level of responsiveness of consumers to a change in price is high so firms won’t be able to raise prices