Microeconomics 1.1

Question 1

What is the definition of economics?

Answer 1

Economics is the social science that studies the choices that individuals, businesses, governments and societies make as they cope with scarcity.

Question 2

What is an economic model?

Answer 2

An economic model is a simplified description of reality used by economists to help them understand real life scenarios.

Question 3

How is economics a social science?

Answer 3

Economics is a social science as it studies human behaviour and human behaviour cannot be reduced to scientific law.

Question 4

What are assumptions in economics?

Answer 4

Economists use the logical device called ceteris paribus or ‘all other things being equal’ to assume.

Question 5

What is the difference between microeconomics and macroeconomics?

Answer 5

Microeconomics focuses on individuals and businesses whereas macroeconomics focuses on the national and global economy.

Question 6

What does the government want?

Answer 6

Government wants to maximise welfare of citizens.

Question 7

What do consumers want?

Answer 7

Consumers want to maximise their satisfaction.

Question 8

What do producers want?

Answer 8

Producers want to maximise profits.

Question 9

What are positive statements?

Answer 9

Statements of facts that can be tested as they are not influenced by the opinion or prejudice of people.

Question 10

What are normative statements?

Answer 10

Statements of opinions that can’t be tested as they are subjective and carry value judgments.

Question 11

What is the ‘economic problem’?

Answer 11

The ‘economic problem’ occurs when there are finite resources available to supply infinite or unlimited wants.

Question 12

What is opportunity cost?

Answer 12

Opportunity cost can be defined as the benefit lost or the alternative forgone when making a choice.

Question 13

What are factors of production?

Answer 13

Factors of production are the inputs available to supply goods and services in an economy.

Question 14

What are the factors of production?

Answer 14

Land, Labour, Enterprise, Capital.

Question 15

What are the rewards of the factor of production?

Answer 15

Land - rental income to owners of land; Labour - Wages and salaries from employment; Capital - Return on investment (R.O.I); Entrepreneurs - Profit.

Question 16

What is the definition of renewable resources?

Answer 16

Resources that can be replenished.

Question 17

What is the definition of non-renewable resources?

Answer 17

Resources are in finite supply and therefore will run out.

Question 18

What is the definition of sustainable resources?

Answer 18

Resources that are being used for economic activities in such a manner they will not run out.

Question 19

What is the definition of free goods?

Answer 19

Free goods do not use up any factor inputs when supplied, they have zero opportunity cost.

Question 20

What is the definition of production possibility frontiers?

Answer 20

A PPF shows alternative combinations of two goods or services attainable when all resources are fully and efficiently employed.

Question 21

What does the PPF illustrate the problem of?

Answer 21

The PPF illustrates the problem of choosing how to use scarce resources when producing goods and services.

Question 22

What does it mean if a point is inside the curve in a PPF?

Answer 22

If a point is inside the curve it is inefficient as not all resources are being used.

Question 23

What does it mean if a point is outside the curve in a PPF?

Answer 23

If a point is outside the curve these are not enough resources to produce this level of output - unobtainable.

Question 24

When does economic shrinkage occur and how does this relate to a PPF?

Answer 24

Economic shrinkage occurs when there is a reduction in an economy’s production capacity, causing the PPF to shift inwards and to the left.

Question 25

What are possible causes of an inward shift in a PPF?

Answer 25

Natural disasters, Civil unrest, Emigration, Ageing population.

Question 26

What are possible causes of an outward shift in a PPF?

Answer 26

Higher productivity/ efficiency of factor inputs, Better management of factor inputs, Increase in the stock of capital labour supply, Discovery/ extraction of new resources.

Question 27

What is the definition of specialisation?

Answer 27

Specialisation occurs when economic units concentrate on producing specific goods or services.

Question 28

What is the Division of Labour?

Answer 28

The division of labour occurs when production is broken down into many separate tasks within an organisation.

Question 29

How does specialisation help to address the problem of scarcity?

Answer 29

There will be greater supply of goods and services to meet unlimited wants.

Question 30

How does specialisation increase output?

Answer 30

Economic units become more effective and efficient in what they produce due to a greater understanding of the requirements of production.

Question 31

Why is the division of labour an attractive idea?

Answer 31

Division of labour can raise output per person as people become proficient through constant repetition of a task.

Question 32

What are the disadvantages of specialisation and division of labour?

Answer 32

Unrewarding, monotonous work requires little skill and can lower motivation.

Question 33

What are the four functions of money?

Answer 33

A medium of exchange, A store of value, A unit of account, A standard of deferred payment.

Question 34

How is money a medium of exchange?

Answer 34

Money enables goods and services to be exchanged, transaction to be settled and debt to be paid.

Question 35

How is money a store of value?

Answer 35

Money acts as a store of value over time - can be kept for future use.

Question 36

How is money a unit of account?

Answer 36

Allows us to measure the value of goods and services in units.

Question 37

How does money act as a standard of deferred payment?

Answer 37

Allows us to pay for goods and services provided now at a later date.

Question 38

What is the issue with bartering?

Answer 38

Lack of double coincidence of wants.

Question 39

Who decides what is produced?

Answer 39

What is produced is determined by consumers (demand).

Question 40

Who decides how to produce a product?

Answer 40

How to produce is determined by producers (supply).

Question 41

Who decides for whom to produce a product?

Answer 41

For whom to produce is determined by personal wealth and income

Question 42

What is an economic system?

Answer 42

An economic system is a network of organisations used by a society to resolve the basic problem of what, how much and for whom to produce.

Question 43

What are the types of economic systems?

Answer 43

The free market economy, The mixed economy, The command economy.

Question 44

How does a free market economy solve the basic economic problem?

Answer 44

Through market forces - the forces of supply and demand work together to determine what price and quantity of goods and services are supplied.

Question 45

How will free market stakeholders act?

Answer 45

Consumers will act to maximise their personal welfare; Producers will act to maximise their profits.

Question 46

What are the characteristics of a free market economy?

Answer 46

Private sector ownership, Free enterprise, Limited government intervention.

Question 47

What are the advantages of a free market economy?

Answer 47

Competitive market, Consumer choice, Rewards entrepreneurship.

Question 48

What are the disadvantages of a free market economy?

Answer 48

Inequalities in wealth, Little regulation, Provision of demerit goods.

Question 49

What is a demerit good?

Answer 49

A demerit good is one that is deemed to be bad for society but is over provided by the market.

Question 50

What are externalities?

Answer 50

Externalities are the costs and benefits to a third party created by economic agents when undertaking their activities.

Question 51

What is a merit good?

Answer 51

A merit good is one that is deemed to be good for society but is under provided by the market.

Question 52

Who is Adam Smith?

Answer 52

18th century philosopher and pioneer of political economy.

Question 53

What was Adam Smith’s belief on the 'Invisible Hand'?

Answer 53

Believed in free market economies; Individuals seeking to maximise personal gains will lead to efficient allocation of resources.

Question 54

What did Friedrich Hayek believe?

Answer 54

Argued that the more control the state had the more individuals lose their freedom.

Question 55

What happens in a planned/command economy?

Answer 55

The government/state owns the scarce resources and allocates resources according to its own view of people’s wants.

Question 56

What are the characteristics of a command economy?

Answer 56

Rationing and planning takes place; State decides what, how and for whom to produce.

Question 57

How are resources allocated in a mixed economy?

Answer 57

Resources are allocated by a combination of both the market mechanism and the government.

Question 58

What are the advantages of a mixed economy?

Answer 58

Reduce negative externalities, Provide public goods, Control demerit goods.

Question 59

What is the role of government in a mixed economy?

Answer 59

Provide public goods, Control demerits, encourage merit goods.