Topic 1- Introduction to economics (Basics)

Question 1

What is the economic problem?

Answer 1

Resources are scarce and cannot satisfy society’s infinite wants and needs.

Question 2

What are the four economic questions?

Answer 2

1) What to produce, 2) How much to produce, 3) How to produce, 4) How to distribute.

Question 3

What are the three types of economies?

Answer 3

Planned
Market
Mixed

Question 4

What is GDP

Answer 4

Gross Domestic Product—the total value of goods and services produced in an economy in a year.

Question 5

What is GDP growth?

Answer 5

The percentage increase in GDP from one year to the next.

Question 6

What is GDP per capita?

Answer 6

GDP divided by the population; it shows average income per person.

Question 7

What is AD?

Answer 7

Total spending on goods and services: AD = C + I + G + (X – M)

Question 8

What are leakages and injections in the circular flow?

Answer 8

Savings (S), Taxes (T), and Imports (M)

Investment (I), Government spending (G), and Exports (X)

Question 9

What happens if leakages > injections?

Answer 9

GDP will decrease; the economy contracts.

Question 10

What is opportunity cost?

Answer 10

The next best alternative foregone when a choice is made.

Question 11

What does the PPF show?

Answer 11

The maximum combinations of goods/services that can be produced with current resources.

Question 12

How can a PPF shift right?

Answer 12

By increasing efficiency or investing in capital, education, and infrastructure.

Question 13

What do individuals and firms aim to maximise?

Answer 13

Individuals: Utility
Firms: Profits

Question 14

What is the role of the government?

Answer 14

Maximise wellbeing through tax, spending, laws, and stabilising the economy.

Question 15

What are the factors of production and the return on each factor?

Answer 15

Land (rent), Labour (wages) , Capital (Interest) , and Enterprise (Profits)

Question 16

What is the price mechanism?

Answer 16

A situation when the forces of supply and demand interact to determine the price of goods and services

Question 17

Distinguish between fiscal and monetary policy?

Answer 17

Fiscal policy refers to changes to the governments budget where as Monetary Policy refers to changes to interest rates.

Question 18

An expansionary fiscal stance refers to?

Answer 18

A larger budget deficit or smaller budget surplus than the year before

Question 19

A contractionary fiscal stance refers to?

Answer 19

A smaller budget deficit or larger budget surplus than the year before

Question 20

Budget stances refer to

Answer 20

Expansionary
Neutral
Contractionary

Question 21

Budget Outcomes refer to

Answer 21

Surplus
Balanced
Deficit

Question 22

Expansionary Monetary policy refers to

Answer 22

Low interest rates to increase AD

Question 23

Contractionary Monetary Policy refers to

Answer 23

Higher interest rates to decrease AD

Question 24

How can the government increase efficiency to increase AS?

Answer 24

Improve education
Transport infrastructure
Maximise competition
Reduce ‘red tape’

Question 25

How can businesses increase efficiency to increase AS?

Answer 25

Train staff Use capital Produce in bulk (‘economies of scale’)

Question 26

Explain 'economies of scale'

Answer 26

As production increases, costs per unit decreases. Fixed costs gets spread across a greater number of production/output. Therefore, the expanded scale of production increases efficiency of the the production process by reducing costs per unit.