The Price System and Economic Problem

Question 1

What does MC tell you?

Answer 1

How many cassettes you have to give up for one CD

Question 2

What does MB tell you?

Answer 2

How many cassettes you are willing to give up for each additional CD.

Question 3

MB = ? = ?

Answer 3

MB = value = willingness to pay

Question 4

What is the law of diminishing marginal benefit?

Answer 4

For each additional G+S, the value decreases at an increasing rate.

Question 5

When MB>MC you will…

Answer 5

Increase your activity

Question 6

When MB

Answer 6

Decrease your activity

Question 7

When MB=MC you will…

Answer 7

Stop, you have reached equilibrium

Question 8

What is a consumer’s goal?

Answer 8

To maximise satisfaction.

Question 9

What is it called when a consumer maximises satisfaction?

Answer 9

Consumer equilibrium

Question 10

What is a producer’s goal?

Answer 10

To maximise profit

Question 11

What is it called when a producer maximises profit?

Answer 11

Consumer equilibrium

Question 12

What is specialisation?

Answer 12

The tendency of the economic agents including countries to focus on the activities that require them to give up the smallest amount of other things

to concentrate on the activities in which opportunity costs are lowered

Question 13

How does specialisation increase productivity?

Answer 13

Specialisation allows resources to be allocated to their best use
Specialisation leads to learning by doing, hence a larger amount of output could be produced and therefore per unit cost will decrease

Question 14

How can countries decide on what to specialise in?

Answer 14

If they have absolute advantage

Question 15

What is absolute advantage?

Answer 15

A country will have absolute advantage in the production of a good if it more of that good than another country, with the same resources.

Question 16

Who can have absolute advantage and in what?

Answer 16

Individuals or nations can have absolute advantage in any or all goods?

Question 17

Why did David Ricardo say not to look at absolute advantage?

Answer 17

It is false information

Question 18

What did David Ricardo say we should use instead of absolute advantage?

Answer 18

Comparative advantage

Question 19

What is comparative advantage?

Answer 19

The ability of a country to produce a good at a lower opportunity cost than another country.

Question 20

What is the benefit of comparative advantage?

Answer 20

It allows you to automatically have comparative advantage in the production of one good, and straight away comparative disadvantage in the production of another. The other country is the exact opposite.

Question 21

How do you measure opportunity cost?

Answer 21

Give up/gain

Question 22

If the US could produce 30 cars or 40 computers, what is the opportunity cost of producing cars?

Answer 22

Give up/gain so 40/30 = 4/3 as you are giving up producing 40 computers in order to produce 30 cars

Question 23

How can there be comparative advantage?

Answer 23

Because of resource endowment.

Question 24

What is resource endowment?

Answer 24

The amount of land, labour, capital and entrepreneurship a country possesses and can exploit for manufacturing.

Question 25

What does dynamic comparative advantage result from?

Answer 25

Learning by doing

Question 26

What is dynamic comparative advantage?

Answer 26

People or nations can become more productive by simply repeatedly producing that good - learning by doing

Question 27

What needs to exist to allow individuals and countries to gain from specialisation?

Answer 27

Institutions that allow them to engage in trade.

Question 28

What are the two key social institutions for organising trade?

Answer 28

Property rights | Markets

Question 29

What are property rights?

Answer 29

Social arrangements that govern the ownership, use and disposal of resources, goods and services.

Question 30

What are the three types of property rights?

Answer 30

Real property Financial property Intellectual property

Question 31

What is real property?

Answer 31

Land and buildings

Question 32

What is financial property?

Answer 32

Stocks, bonds, money

Question 33

What is intellectual property?

Answer 33

Inventions, products of creative efforts

Question 34

Why should we protect property rights?

Answer 34

They are an incentive for research and development

Question 35

What is a market?

Answer 35

Any arrangement that allows buyers and sellers to get information and do business with each other.

Question 36

What do producers do when they have too much inventory and not enough demand? Why?

Answer 36

They bid down the price because storage is expensive so they want to get rid of the goods.

Question 37

Demand = ? = ?

Answer 37

Demand = supply = equilibrium price

Question 38

When demand > supply, what do consumers do?

Answer 38

Bid up the price

Question 39

What will always ensure price equilibrium?

Answer 39

The invisible hand

Question 40

When will the invisible hand not ensure price equilibrium?

Answer 40

When there is market failure

Question 41

Money Price =

Answer 41

Px

Question 42

Relative price =

Answer 42

the ratio of two money prices | Px/Py

Question 43

Relative price = ? = ?

Answer 43

Relative price = opportunity cost = marginal cost

Question 44

What does a circular flow diagram show?

Answer 44

The interactions between firms, households, goods and service market and factor of production market

Question 45

How do households and firms interact through the G+S market in the circular flow diagram?

Answer 45

Households buy the output of goods and services that firms produce. Households pay firms for the goods and services they consume, in expenditure.

Question 46

How do households and firms interact through the factor of production market in the circular flow diagram?

Answer 46

Households provide firms with land, labour, capital and entrepreneurship whilst firms give them rent, wages, interest and profit in return

Question 47

What is it called when the output of one firm is the input of another?

Answer 47

Intermediate goods

Question 48

What is it called when the output of one household is the input of another?

Answer 48

Household production

Question 49

What is the double counting problem?

Answer 49

When one firms outputs is another firms inputs, the price should not be counted twice when calculating GDP.

Question 50

How can you avoid the double counting problem?

Answer 50

Value added. It is the final output - input

Question 51

What is money?

Answer 51

Anything that is widely excepted as a medium of exchange.

Question 52

What was the system before money?

Answer 52

A bartering system

Question 53

What's wrong with a bartering system? What is this called?

Answer 53

Finding someone that has what you want and want what you have is very difficult, this is called the double coincidence of want.

Question 54

What do we have to do in order to protect future generations?

Answer 54

Save

Question 55

Saving =

Answer 55

Investment

Question 56

how do governments encourage saving?

Answer 56

By giving you tax breaks if you save

Question 57

If the government encourages saving, this must mean they want everyone to save, right?

Answer 57

No! This is the fallacy of composition. If everyone saved there would be no spending

Question 58

What happens if the interest rate is too high/low?

Answer 58

Too high, bid down | Too low, bid up

Question 59

Interest rate is...

Answer 59

A reward for saving, a cost for borrowing and the opportunity cost for spending.