Topic 1 - Introduction To Microeconomics

Question 1

What are economic goods?

Answer 1

Have an opportunity cost
Are scarce
Takes time and resources to produce them, most/all goods under this category

Question 2

What are free goods?

Answer 2

0 opportunity cost
Can be produced in as much quantuty as needed with little-zero effort
Not normally regarded as scarce
(Air, by-products, intellectual ideas, water?)

Question 3

What is the economic problem?

Answer 3

Problem of scarcity
People have unlimited wants in face of limited resources
No country can meet all needs (necessities to sustain human life) and wants (would like to consume)

Question 4

What is a positive statement?

Answer 4

“What is” can be tested against facts, can be right or wrong

Question 5

What are normative statements?

Answer 5

“Should be” “ought to be” involves a value of judgement

Question 6

What are economic agents?

Answer 6

Responsible for making decisions, assume these decisions are rational, what are their objectives?
Objectives are set which set incentives that affect behaviour
There are 3 economic agents: households, firms, governments

Question 7

Households as an economic agent

Answer 7

Choices about expenditure, income needed so also decide where to supply labour (provide service)

Question 8

What are households’ objectives?

Answer 8

Maximise satisfaction from expenditure and income from working/ supplying labour

Question 9

Firms as an economic agent

Answer 9

Choice on what goods or services to produce
What technique to use
How much land?
Price to sell at?

Question 10

What are firms’ objectives?

Answer 10

Maximise profit

Question 11

Governments as economic agents

Answer 11

Choices on types of taxation, how to spend tax revenue, regulate markets, need to ensure stability and growth of market and the economy
Reach environmental targets
Make sure theres no excessive unemployment

Question 12

What are governments’ objectives?

Answer 12

Maximise welfare for society

Question 13

What are factors of production?

Answer 13

Resources used to produce goods and services

Human and physical resources

Question 14

Land as a factor of production

Answer 14

Input provided by nature, natural physical resources (raw materials) eg-farmland, water/rainfall in place depending on climate, renewable energy

Question 15

What is the reward for land?

Answer 15

Rental income

Question 16

Labour as a factor of production

Answer 16

Human resource, workers/employees and their productivity
Different skill levels, working in different ways (brain surgeon, web designers
Increase in size and quantity vital to achieve growth
May change immigration policies or increase retirement age to help with growth

Question 17

What is the reward for labour?

Answer 17

Wages/income/salary from giving up leisure time

Question 18

Capital as a factor of production

Answer 18

Man made things used to make something else, can be reused
(Plant and machinery, transport and equipment)
Working capital is components of things and new items of capital (newer versions of machinery to boost productivity)
Eg-infrastructure such as “cross rail” “high speed rail project”

Question 19

What is the reward for capital?

Answer 19

Interest (letting other firms use capital) from savings, dividends from shares.

Question 20

Entrepreneurship as a factor of production

Answer 20

Intellectual, organises other factors, take on risks, invest own money

Question 21

What is the reward for entrepreneurship?

Answer 21

Profit

Question 22

What is resource allocation?

Answer 22

Way in which society’s productive assets are deployed across their alternative uses
Determined by actions of economy

Question 23

What are incentives?

Answer 23

Change behaviour (motivates certain behaviour)
Eg- discounts, seatbelts
If incentives not given properly, resources are misallocated

Question 24

What are disincentives?

Answer 24

Discourages from taking certain actions

Eg- fines, taxes

Question 25

The free market as an economic system

Answer 25

No government intervention, determined by what producers and consumers seek, market forces of supply and demand allocate scarce resources Prices determined by "spending votes" Greatest purchasing power able to buy in economy

Question 26

Planned/command economy as an economic system

Answer 26

Governments allecate resources where they think they're greatly needed Determined by what governments prefer

Question 27

Mixed economy as an economic system

Answer 27

Market controlled by government and forces of supply and demand (most common) Government provides public and merit goods Determined by what both prefer

Question 28

Advantages of the free market

Answer 28

``` Firms are efficient Better use of scarce resources Increased output of economy Bureaucracy from government intervention avoided (decisions madeby governments rather than elected representatives) More personal freedom ```

Question 29

Disadvantages of the free market

Answer 29

Only benefits those with most wealth No social security for those on low income Monopolies could exploit markets by increasing prices Overconsumption of demerit goods Public goods not provided Merit goods underprovided

Question 30

Advantages of planned/command economy

Answer 30

Easier to coordinate resources Gov can compensate for market failure Inequality reduced, welfare maximised Abuse of monopoly power could be prevented

Question 31

Disadvantages of planned/command economy

Answer 31

Government failure = market failure May not be fully informed on what to produce May not meet consumer preferances Limits democracy and personal freedom

Question 32

Advantages of the mixed economy

Answer 32

Maximise welfare Prevent monopolies Free healthcare and education

Question 33

Disadvantages of the mixed economy

Answer 33

Long waiting lines, under resourced Government failure can effect markets Tax issues can arise Poverty levels can rise

Question 34

What is economic efficiency?

Answer 34

Where both allocative and productive efficiencies are achieved Society producing balance of goods consumers wish to consume at minimum cost (less waste)

Question 35

What is productive efficiency?

Answer 35

Production achieved at lowest possible average total cost Appropriate combination of inputs (costs) Producing max output possible from inputs (technical)

Question 36

What is allocative efficiency?

Answer 36

Right amount of right products and services produced where consumer satisfaction is maximised

Question 37

What is opportunity cost?

Answer 37

The value or benefits forgone of the next best alternative when a choice is made Forgo the benefits of the "thing lost"

Question 38

What is the production possibility curve? (PPC)

Answer 38

Shows max quantities of different combinations of output of 2 products, given the current resources and the state of technology

Question 39

What does the PPC look like?

Answer 39

Question 40

What does points A, B, C and D mean?

Answer 40

Question 41

What is trade off?

Answer 41

Calculation involved in deciding on whether to give up one good for another

Question 42

Exam style question | Using the ppc of cars and tvs, show the trade off from increasing production of cars from 400 to 600

Answer 42

Question 43

What is the law of diminishing returns?

Answer 43

Factors of production aren't mobile between all uses, they aren't good at everything Each return from the factors will diminish after a certain point

Question 44

What causes the ppc to shift outward (sometimes inwards) completely or just for one thing?

Answer 44

When resources aren't fixed anymore and there's technical advancements Increase in productive potential of economy means a shift to right Shift to left indicates productive capacity has decreased

Question 45

What are capital goods?

Answer 45

Something used to make something else (machines) | Used to increase the future capacity of the economy

Question 46

What are consumer goods?

Answer 46

For current use (tvs)

Question 47

Exam style question | Use a ppc to illustrate the difficult choices facing sub saharan africa when it comes to investment and consumption

Answer 47