Unit 1- Markets in Action

Question 1

What are the basic economic problems?

Answer 1

Scarcity, choice and the allocation of resources.

Question 2

Define opportunity cost.

Answer 2

This is the next best alternative forgone when a choice is made.

Question 3

What is a positive statement?

Answer 3

A positive statement is a fact-based and testable statement.

Question 4

What is a normative statement?

Answer 4

A normative statement is an opinion bases statement that involves value judgements and uses words like should and can.

Question 5

What is the difference between positive and normative statements?

Answer 5

Positive statements are fact-based and testable while normative statements are opinion-based and involve value judgements.

Question 6

What are the main types of economies?

Answer 6

Free Market Economy
Mixed Economy
Planned Economy

Question 7

What is a free market economy?

Answer 7

A free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers.

Question 8

What is a planned economy?

Answer 8

This is an economy in which production, investment, prices, and incomes are determined centrally by the government.

Question 9

What is a mixed economy?

Answer 9

A mixed economy is an economic system that has both private businesses, and nationalized government services.

Question 10

What are the characteristics of a planned economy?

Answer 10

Government owns resources
Central planning for allocation
A lack of competition or profit motive.

Question 11

What are the characteristics of a free market economy?

Answer 11

Private ownership of resources
Price mechanism is the prime method of allocation
Minimal government intervention
High competition between firms.

Question 12

What are the characteristics of a mixed economy?

Answer 12

Co-existence of private and public sectors
Government intervention in certain industries
The use of the price mechanism alongside planning
Policies to address market failures.

Question 13

What is demand?

Answer 13

Demand is the willingness and ability of a consumer to buy goods and services at a specific price.

Question 14

Define Price Elasticity of Demand

Answer 14

PED measure the responsiveness of quantity demanded to a change in price.

Question 15

What is the formula for PED?

Answer 15

%ΔP

Question 16

Explain the factors that shift the demand curve.

Answer 16

Income
Population
Tastes and Preferences
Price of Substitutes and Complements
Future Expectations

Question 17

What is Supply?

Answer 17

This is the total amount of a specific good or service that is available to consumers.

Question 18

What factors cause shifts in the supply curve?

Answer 18

Changes in production costs
Technology
Taxes and Subsidies
Prices of Related Goods
Future Expectations
Weather Conditions
The Number of Producers in the Market

Question 19

What is Price Elasticity of Supply?

Answer 19

PES measures the responsiveness of quantity supplied to a change in price.

Question 20

How is PES calculated?

Answer 20

%ΔP

Question 21

What are the determinants of Price Elasticity of Supply?

Answer 21

Time Period
Availability of Spare Capacity
Level of Stocks
Mobility of Factors of Production
Length of the Production Process

Question 22

Define Market Failure

Answer 22

Market failure occurs when resources are not allocated efficiently.

Question 23

Give two examples of market failure.

Answer 23

Negative externalities such as pollution
Public goods such as national defense

Question 24

What are public goods?

Answer 24

A public good is a commodity or service that is provided without profit to all members of a society, either by the government or by a private individual or organization.

Question 25

What are private goods?

Answer 25

Public goods are items that yield positive benefits to people that is excludable.

Question 26

What is the difference between public goods and private goods?

Answer 26

Public goods are non-excludable and non-rivalrous and private goods are excludable and rivalrous.

Question 27

Explain the concept of externalities

Answer 27

Externalities are the spillover effects of production or consumption.

Question 28

Give examples of externalities

Answer 28

Positive externality: Education Negative externality: Air pollution.

Question 29

What is the price mechanism?

Answer 29

This is the system where the forces of demand and supply determine the prices of commodities and the changes therein.

Question 30

What are the main functions of the price mechanism?

Answer 30

These include allocating resources, signaling changes in supply and demand, and providing incentives to producers and consumers.

Question 31

What is producer surplus?

Answer 31

Producer surplus is the difference between what producers are willing to accept for a good and what they actually receive.

Question 32

How is producer surplus calculated?

Answer 32

It is calculated as the area above the supply curve and below the price level.

Question 33

What is consumer surplus?

Answer 33

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.

Question 34

How is consumer surplus calculated?

Answer 34

It is calculated as the are below the demand curve and above the price level.

Question 35

What is government intervention?

Answer 35

Government intervention involves actions like subsidies, taxes and regulations to correct market failures, reduce inequalities, or ensure resource allocation efficiency.

Question 36

What are government interventionist policies?

Answer 36

This is a policy perspective that favors government intervention in order to correct any market failures present and in the process increase the level of economic welfare in society.

Question 37

What are examples of government interventionist policies to correct market failures?

Answer 37

Taxation: Used to discourage negative externalities Subsidies: Provided to encourage positive externalities Regulations: Laws and rules to control negative behaviors Provision of public goods: Direct government funding for goods like defense and infrastructure. Tradable permits: Allow firms to trade pollution rights, encouraging efficient pollution reduction. Price controls: Setting price ceilings to make goods affordable or price floors to support producers. State provision of merit goods: Direct government provision of education and healthcare to increase consumption. Competition Policy: Preventing monopolies and encouraging competition through antitrust laws