Terms

Question 1

Economics

Answer 1

a social science directed at the satisfaction of needs and wants through the allocation of scarce resources which have alternative uses

Question 2

Needs and wants

Answer 2

• things that are essential for human survival
• things we may desire

Question 3

Goods and services

Answer 3

• items that are tangible
• activities provided by other people
• the output of an economic system

Question 4

Scarcity

Answer 4

• Unlimited wants limited resources
• There exists only a finite amount of resources
• every product down to a pack of gum or a book of matches is scarce, since someone expended resources that could have been deployed elsewhere to produce it

Question 5

Opportunity cost

Answer 5

• the cost of giving up the next best alternative
• the alternate forgone

Question 6

Economic actors

Answer 6

the participants in economic activities in an economy

Question 7

positive and normative statements

Answer 7

• can establish hypotheses that can be empirically tested
• based on opinion or subjective values & includes a value judgement

Question 8

Utility

Answer 8

the benefit that is derived from consuming goods and services

Question 9

factors of production

Answer 9

the inputs to create goods and services

Question 10

production

Answer 10

a process, or set of processes, that converts inputs into output of goods

Question 11

Capital good / Producer good

Answer 11

a good which is used in the production of other goods and services

Question 12

Consumer good

Answer 12

a good which is consumed by individuals or households to satisfy their needs and wants

Question 13

Interest rates

Answer 13

• The cost of borrowing and the reward for saving

Question 14

Function of banks

Answer 14

A place for households and firms to
- Store money safely
- Borrow money safely
Provides a link between saver and borrower, allowing for better distribution of money, leading to more economic activity

Question 15

How banks make money

Answer 15

• Collecting interest on loans
• Buy and sell shares
• Buy and sell bonds (government debt)
• Can save money with the BoE and get paid interest

Question 16

How did Case, Karl, Fair, Ray (1997) define opportunity cost

Principles of Economics

Answer 16

the opportunity cost is what an agent is deprived of or renounces when making a choice

Question 17

How does Varian (2014) define marginal benefit

Answer 17

the amount utility or satisfaction that a consumer receives with an additional portion or unit of a good or service.

Question 18

Thinking at the margin in economics

Answer 18

Refers to the process of making decisions by considering the incremental or additional changes that result from a small, incremental change in a variable.
- This concept is fundamental to understanding how individuals, firms, and governments make choices and allocate resources.
- When thinking at the margin, individuals and decision-makers assess the costs and benefits of producing or consuming one more unit of a good or service. In other words, they evaluate the trade-offs of increasing or decreasing their current level of activity by a small amount.
- Helps to explain various economic concepts, such as consumer behavior, supply and demand, pricing decisions, and resource allocation.

Question 19

Marginal Benefit (MB)

Answer 19

This refers to the additional benefit gained from producing or consuming one more unit of a good or service. It’s the positive impact of the incremental change.
- the change in total private benefit from one extra unit
- an incremental increase in total benefits
- an incremental increase in total costs

Question 20

Marginal Cost (MC)

Answer 20

This represents the additional cost incurred from producing or consuming one more unit of a good or service. It’s the negative impact of the incremental change.
- the change in total private cost from one extra unit

Question 21

Comparing Marginal Benefit and Marginal Cost:

Answer 21

ional decision-making occurs when individuals or entities compare the marginal benefit with the marginal cost. If the marginal benefit is greater than or equal to the marginal cost, it is generally considered beneficial to pursue the additional unit of production or consumption. Conversely, if the marginal cost outweighs the marginal benefit, it might be preferable to reduce production or consumption.

Question 22

Optimal Decision-Making: MB & MC

Answer 22

To make efficient choices, individuals should continue producing or consuming units until the marginal benefit equals the marginal cost. At this point, they have maximized their overall satisfaction or utility.

Question 23

Example of optimal decision making

Answer 23

Consider a factory deciding whether to produce one more unit of a product. If the revenue generated from selling that additional unit is higher than the cost of producing it, then the decision would likely be to produce the extra unit. On the other hand, if the cost of production is greater than the potential revenue, it might not be a wise decision to produce that additional unit.