The Economy and Tools of Economic Analysis

Question 1

What is the biggest problem in the world economy?

Answer 1

Scarcity

Question 2

What are the causes of scarcity?

Answer 2

(1) Limited resources (e.g. land, labour and capital) which affects the Supply of Goods and Services produced in the economy
(2) Unlimited wants (general term to depict greed as human behaviour) and consumers’ demand (the small portion of unlimited wants)

Question 3

The economy should mitigate the problem by addressing what questions?

Answer 3

(1) Who are you producing the goods for?
(2) How many goods and services can be produced given the scarcity in resources for production?
(3) What goods and services should be produced?

Question 4

What’s the difference between wants and demand?

Answer 4

Wants: desire to have the goods but individual may not have the ability to pay
Demand: has the ability to pay

Question 5

What will happen in a market if the demand is more than the supply?

Answer 5

(1) There will be excess demand
(2) The price will increase to choke off excess demand as people will buy less and demand eventually becomes equal to supply

Question 6

What will happen in a market if the supply is more than the demand?

Answer 6

(1) There will be excess supply
(2) The price will decrease so as to stimulate demand as people will buy more and demand eventually becomes equal to supply

Question 7

What does economics analyse?

Answer 7

What, how and for whom society produces

Question 8

What is the key economic problem?

Answer 8

To reconcile the conflict between people’s virtually unlimited demands with society’s limited ability to produce goods and services to fulfil these demands

Question 9

What is a market?

Answer 9

A place whereby a buyer and seller meet to conduct a transaction

Question 10

What is an industrial country?

Answer 10

A country that engages in high level of production for their goods

Question 11

What are examples of industrial countries?

Answer 11

China, Vietnam and India

Question 12

How does the market resolve production and consumption decisions?

Answer 12

By adjustment in prices

Question 13

What is a command economy?

Answer 13

An economy where decisions on what, how and for whom are made in a central planning office (the government)

Question 14

1 example of a country with a command economy?

Answer 14

North Korea

Question 15

What is a free market economy?

Answer 15

An economy (1) without government intervention, (2) whereby suppliers and consumers make the decisions and (3) resources are allocated solely through markets efficiently with the help of an ‘invisible hand’ AKA price where individuals pursue their own self-interest

Question 16

What is positive economics?

Answer 16

A form of economics that studies how the economy realistically behaves based on evidence derived from sufficient research

Question 17

What is normative economics?

Answer 17

A form of economics that recommends what should be done based on assumptions

Question 18

What is an index number?

Answer 18

A number that expresses data relative to a given base value

Question 19

What is an index number used for?

Answer 19

To compare numbers without emphasizing the units of measurement as well as analyse important macroeconomics variables (e.g. inflation)

Question 20

What is the index number formula?

Answer 20

(Value at time t / Value in base year) x 100 = x%

Question 21

What is a Production Possibility Frontier (PPF)?

Answer 21

An analytical economics model used to show the maximum amount of x and y good that can be produced given the scarce resources

Question 22

Where is the PPF located?

Answer 22

In the line joining point A and B

Question 23

What does the PPF depict?

Answer 23

The trade-off or menu of choices for society when it comes to deciding what to produce

Question 24

How does the PPF line change?

Answer 24

According to the amount of resources used

Question 25

The more resources used…

Answer 25

The more curved the PPF will be

Question 26

Points outside the frontier are considered…

Answer 26

Unattainable due to the scarcity of resources

Question 27

Points within the frontier are considered…

Answer 27

Inefficient due to not being at the frontier where PPF shows the maximum output that proves efficiency

Question 28

Points on the frontier are considered…

Answer 28

Fully employed as the limited resource(s) given is being fully utilised

Question 29

Resource constraint implies…

Answer 29

That you can use less or equal resource

Question 30

What is the opportunity cost of a good?

Answer 30

The quantity of other goods sacrificed to make an additional unit of the good
Or, the showcasing of how many units of the other goods has to be given up in order to produce an additional unit of the good itself

Question 31

What is opportunity cost of X?

Answer 31

It shows the amount of good Y that has to be sacrificed in order to produce 1 more unit of X

Question 32

What is opportunity cost of Y?

Answer 32

It shows the amount of good X that has to be sacrificed in order to produce 1 more unit of Y

Question 33

What is the relationship between opportunity cost of X and opportunity cost of Y?

Answer 33

Inversely related

Question 34

What is efficiency?

Answer 34

An allocation of means of production that creates a combination of outputs where it is not possible to increase the output of one good without reducing the output of at least one other good

Question 35

How do you measure point efficiency?

Answer 35

By creating a first point and making a second point that is closer to X and observing what happens to the Y on the second point

Question 36

How do you know if the point is efficient?

Answer 36

The first point is efficient if the Y reduces as you move the point closer to X

Question 37

How do you know if the point is inefficient?

Answer 37

The first point is inefficient if the Y doesn’t reduce or produces even greater amount than before when you move the point closer to X

Question 38

What is productive efficiency?

Answer 38

An efficiency whereby production is unable to produce more of one tangible economic good without sacrificing production of another tangible economic good

Question 39

What is a tangible economic good?

Answer 39

Physical goods that can be touched, felt, moved around and counted

Question 40

What is allocative efficiency?

Answer 40

An efficiency where such tangible economic goods also includes intangible wellbeing of individuals (welfare)

Question 41

What type of efficient production is PPF?

Answer 41

Productive Efficiency

Question 42

What’s the allocative efficient allocation answer for point A in a PPF?

Answer 42

Unknown due to the intangible wellbeing of individuals not being given in the question

Question 43

What are the conditions for trading to take place?

Answer 43

1. Both economies have comparative advantage in producing at least one type of good
2. Both economies must either (1) be better off after trading, or (2) one of the economy is better off trading is at least as well off as before trading

Question 44

What are the ways to find international trading price?

Answer 44

1. ITP clearly stated in the question
2. Formula (seller’s opportunity cost of x <= ITP <= buyer’s opportunity cost of x)
3. Question states specific amount of x and y that each economy must consume in the end (final consumption bundle), use final consumption bundle to find ITP

Question 45

How do you check if an economy is better off after trading?

Answer 45

1. Intitial production
2. What comparative advantage does the economy have -> produce max output it has comparative advantage in
3. Insert ITP
4. Find trade output when they produce max comparative advantage good
5. Compare if higher output after trading or if produced on its own