Unit 1.1: Understanding the Nature of Economics

Question 1

What is the wealth definition of economics?

Answer 1

1. Given by Adam Smith; Father of Economics
2. Economics is an enquiry into the nature and causes of wealth.
3. The objective of any country is to earn more and more wealth.

Question 2

What is the welfare definition of economics?

Answer 2

1. Given by Alfred Marshall
2. Economics is the study of mankind in the ordinary business of life.
3. It deals with how an individual earns and spends his wealth to get the material requisites of life.

Question 3

What is the scarcity definition of economics?

Answer 3

1. Given by Lionel Robbins
2. Economics is a science that studies the relationship between ends/wants and scarce means (resources) which have alternate uses

Question 4

What is the development definition of economics?

Answer 4

1. Given by Samuelson
2. Economics is a social science that studies how the society uses its scarce resources to produce goods and services to satisfy the unlimited wants of people and distributes the same along different people

Question 5

Although economics is a science why is it different when compared to the pure sciences of Chemistry, Physics and Biology?

Answer 5

1. We cannot do experiments in control labs or in controlled environments. This is because we deal with human behaviour which is subjective
2. The result of one experiment will not remain constant because results often depend on human responses which may vary.

Question 6

What is the Social Scientific Method?

Answer 6

1. Make observation in the world outside and select an economic question we want to answer.
2. Identify different variables
3. Make a hypothesis about how the variables are related to each other.
4. We make assumptions and one of the biggest assumption s in economics is Ceteris Paribus which means leaving all other things constant.
5. We then test the hypothesis and see If the results we get match our predictions.

Question 7

Explain the nine concepts of Economics?

Answer 7

The acronym used for the nince concepts of economics is WISE ChoICES.

1. Scarcity: Shortag of resources, wats are unlimited but the resources are limited and have alternate uses. Scarcity is he basic economic problem
2. Choice: If scarcity is there choices need to be made, therefore there is an opportunity cost
3. Interventions: To solve the problems in the economy the government intervenes by imposing different policies and rules.
4. Interdependence:
   I) primary, secondary, tertiary, quaternary
   ii) Households, Firms and the government.
5. Equity: Equity in reality means fairness whch is a normative statement because it is subjective. on the other hand equality means equal distribution of income and it is a positive economics terms as it can be verified
6. Efficiency: to reduce the wastage of the scrace resources, efficiency is an important concept. The 2 types of efficiencies are allocative efficiency(no wasting) and productive efficiency(minimum cost)
7. Sustainibility: it is meeitng demand of the present generation without compromising the needs of the future generation. Therefore inter and intra generational equality.
8. needs and wants are changing overtime
9. Well-being: the aim is to maximise the welfare.

Question 8

What are factors of production?

Answer 8

1. All inputs used to produce goods and services, are also known as factors of production.
2. there are four factors of production namely: land, capital, labour, enterprise.

Question 9

What is Land as a factor of production?

Answer 9

Land consists of all the free gifts of nature that is on soil, below soil and above soil.

Factor reward is Rent

Question 10

What is Labour as a Factor of production?

Answer 10

Labour consists of all the mental and physical efforts that people contribute to the production of goods and services.

Factor reward is Wages

Question 11

What is capital as a factor of production?

Answer 11

Physical capital is all the manmade goods which help in the further production of goods and services and are not completely used up

factor reward is interest.

Question 12

What is Entreprenuer/enterprise as a factor of production?

Answer 12

An entreprenuer is a person who arranges for all the remaining 3 factors of production and other secondary inputs. the person also undertakes risk with the main objective of maximising profits.

factor reward Is profits and an entrepreneur is the only factor that can get a negative factor reward (losses)

Question 13

What is the economic problem?

Answer 13

1. Shortage of supply of resources in relation to the demand, which further results in an economic problem also known as the central problem.
2. Economic problem is the problem of choice: choice of a manner in which limited resources with alternative uses are disposed off (used up) to satisfy the unlimited wants of the people.
3. Reasons we make a choice
   i. limited resources
   ii. the limited resources each have alternate uses
   iii. unlimited wants

Question 14

What are the three economic questions?

Answer 14

1. What to produce and in what quantity
2. how to produce
3. For whom to produce

Question 15

Explain the 1st economic question: what to produce and in what quantity?

Answer 15

1. Consumer good and/or capital goods
2. There are three types of goods and durable goods semidurable goods and nondurable goods.
3. Intermediate goods
4. Private v/s Public

Question 16

Define a consumer good?

Answer 16

Consumer goods are goods purchased by households which help in the direct satisfaction of the consumer’s wants.

while mentioning an example saying “purchased by a household is necessary”

Question 17

What are the three types of goods based on how long they last? define each one?

Answer 17

1. Durable Goods: these goods can be reused and can be used again and again for a long period of time. eg: Washing machine purchased by a household
2. Semi-durable goods: They are goods that normally last for about a year or slightly more. eg: Soes and clothes
3. Non-durable goods: They are used one time eg: food and drinks

Question 18

What are Intermediate goods explain botht the possible definitions?

Answer 18

1. They are goods which help in the further production of goods and services but are completely used up in the process eg: Raw material
2. They are resold in the year of purchase itself

Question 19

What is a private good?

Answer 19

Private goods are goods which is owned by individuals

Question 20

What is a pure public good? also explain what is a Quasi Public Good?

Answer 20

A pure public good has both the following characteristics:

1. Non-excludable: One cannot stop someone from using/consuming it.
2. Non-rivalrous: If one person uses or consumes it, the amount available for the others will not reduce.
3. A quasi public good is a good which has one of the qualities off a pure public good

Question 21

What is the problem wit public goods and why do private firms not produce these goods? Als explain what is done to tackle the problem?

Answer 21

1. This happens due to free-rider problem
2. This si where a person can reap the benefits of a good/service without even paying for it
3. Because fo this problem and the nature of public goods it becomes hard to charge anyone specifically for the good/service and so it is not profitable and thus the private firms are not interested.
4. To solve this the government is the one that spends on these goods using a portion of the money the revenue of the government that comes as a result of tax collection.

Question 22

What are the two ways good can be produced? List the ways and explain each method?

Answer 22

1. Labour-Intensive techniques: More use of labour in relaton to capital
2. Capital-Intensive techniques: More use of capital in relation to labour.

Question 23

For whomt o produce. Explain the two possible ways of distribution of Good, Services, Income and Resources.

Answer 23

1. Personal Distribution: means the distribution of national income among the different households which further leads to inequalities in distribution of income
2. Functional Dsistribution: means the distribution of national income among the 4 factors of production.

Question 24

What is tehe difference between micro and macro economics?

Answer 24

Microeconomics:

1. The micro level, called microeconomics, examines the behaviour of individual decision-making units in the economy.
2. The two main groups of decision- makers we study are consumers (or households) and firms (or businesses).
3. Microeconomics is concerned with how these decision-makers behave, how they make choices, what are the consequences of their decisions and how their interactions in markets determine prices.
4. deals with indivdual economic unit
5. Main problem is the allocation of resources

Macroeconomics:

1. The macro level, called macroeconomics, examines the economy as a whole to obtain a broad or overall picture of the economy.
2. Macroeconomics uses aggregates, which are wholes or collections of many individual units, such as the sum of consumer behaviours and the sum of firm behaviours, and total income and output of the entire economy, as well as total employment and the overall price level.

Question 25

What is an opportunity cost?

Answer 25

1. Opportunity cost is defined as the value of the next best alternative that is forgone (must be given up or sacrificed in order to obtain something else) 2. The concept of opportunity cost, or the value of the next best alternative that must be sacrificed to obtain something else, is central to the economic perspective of the world, and results from the scarcity that forces choices to be made

Question 26

What is free good and what is an economic good?

Answer 26

Free good: 1. A free good is a free gift 2. Available in Abundance 3. No price has to be paid 4. The opportunity cost is zero because no choice has to be made 5. Public goods and Common pool goods are NOT free goods Economic good: 1. Economic goods are those goods which are scarce in supply in relation to the demand 2. Due to this these goods fetch a price in the market 3. These goods use scrace resources 4. Opportunity cost is not zero 5. Public goods and common pool goods are economic goods because they are scarce

Question 27

What are common pool resources ( commom access resources)?

Answer 27

Common pool access resources are: 1. Non-excludable: 2. Rivalrous Refer to the definition of public goods for the meaning of excludability and rivalrous. Fishing: If someone else fishes it will reduce the number of fish i can catch thus making it rivalrous but since no one can stop me from fishing it is non-excludable.

Question 28

What is are the Characteristics of a Free Market Economic System?

Answer 28

1. Decision Making: Private individuals in the market 2. Resource Ownership: Private individuals in the market 3. Rationing: The term rationing can be defined as a method used to apportion or divide something up between its interested users. In economics, it refers to the method used to make resource allocation and output/income distribution decisions. The free market economic uses price rationing where the producers increase the prices so that people who cannot afford are rationed out of the market.

Question 29

What are the characteristics of a planned economic systems?

Answer 29

1. Decision making: with the public sector (government) 2. Resource ownership: with the public sector 3. Rationing: The term rationing can be defined as a method used to apportion or divide something up between its interested users. In economics, it refers to the method used to make resource allocation and output/income distribution decisions. A planned economic systems uses non-price rationing methods wherein the distribution does not depend on the price of the commodity. This is because the main aim of the government is welfare of the population.

Question 30

What is the definition of a Production Possibility Frontier/Curve?

Answer 30

A Production Possibility Curve is a locus of points wherein every single point on the PPC shows the maximum output that can be produced with the given resources and technology assuming that all resources are fully and efficiently utilised. A PPC is a graphical representation

Question 31

What are the assumptions that are made while modelling and PPC?

Answer 31

1. Resources are given and are constant 2. Technology is given and is constant 3. All resources are fully and efficiently utilised 4. ALL RESOURCES ARE NOT EQUALLY EFFICIENT IN THE PRODUCTION OF ALL GOODS AND SERVICES.

Question 32

What do the points on the PPC signify?

Answer 32

1. Point on the PPC: all points on the PPC shows the efficient and full utilisation of resources 2. Points inside the PPC: the points inside the shows the inefficient use of the available resources. Thus it means there is unemployment in the economy 3. Points outside the PPC: The points outside the PPC show a position which is not attainable with the available resources and technologies.

Question 33

In the real world, where in the PPC model do countries produce and what is the reason for the same?

Answer 33

An economy’s actual output, or the quantity of output actually produced, is always at a point inside the PPC, because in the real world all economies have some unemployment of resources and some inefficiency in production. The greater the unemployment or the inefficiency, the further away is the point of production from the PPC.

Question 34

The production possibilities model is very useful for illustrating the concepts of scarcity, choice and opportunity cost, explain how?

Answer 34

1. Because of scarcity, the economy cannot produce outside its PPC. With its fixed quantity and quality of resources and technology, the economy cannot move to any point outside the PPC. 2. A choice is needed to be made ,because of scarcity, about what particular combination of goods will be produced. Assuming it could achieve full employment and efficiency, it must decide at which particular point on the PPC it should produce. (In the real world, the choice would involve a point inside the PPC.) 3. An Opportunity cost is also here due to the choices made. If the economy were at any point on the curve, it would be impossible to increase the quantity produced of one good without decreasing the quantity produced of the other good. In other words, when an economy increases its production of one good, there must be a sacrifice of some quantity of the other good. This sacrifice is the opportunity costs

Question 35

What is the difference between actual growth and a growth in production possibilities?

Answer 35

Actual Growth 1. Actual growth involves a movement from one point inside the PPC to another point closer to the PPC 2. Actual growth is caused by reduction in unemployment and increases in efficiency in production. Growth in Production Possibilities 1. A Growth in Production Possibilities involving an outward shift of the PPC. 2. Growth in production possibilities is caused

Question 36

What is Marginal Opportunity Cost?

Answer 36

Marginal Opportunity Cost is the quantity of the second commodity which to be given up to produce one more unit (Marginal) of the first commodity .

Question 37

What is the difference between a PPC of increasing Marginal Opportunity Cost and a PPC showing constant Marginal Opportunity Cost? And what is the reason of the difference in the shape of the PPC.

Answer 37

Increasing MOC: 1. Because not all resources are equally efficient in the production of two goods and thus the opportunity cst increases as we forgo one unit of product B in order to gain one unit of product A 2 The shape of the PPC is downward sloping because the resources are limited and thus one product has to be forgone to increase production of another product. Constant MOC: 1. Because in very limited cases example a tailor making polyester and cotton T-shirts. In an ideal situation the opportunity cost of shifting from one good to another will remain constant thus making the gradient linear. 2. the curve is downward sloping due to the limited resources which have alternative uses.

Question 38

What are the reasons of a shift in the PPC?

Answer 38

1. Change in the Quantity of Resources 2. Change in the Quality of Resources 3. Change in the Technology

Question 39

What are the two possible ways the PPC can shift? Please give reasons for the same as well.

Answer 39

1. The shift can be parallel in nature: This happens when the change in the Quantity, Quality and Technology for both increase in a similar manner 2. The Shift can be non-parallel: This happens when the change in the three factors is different for both the goods respectively.

Question 40

What is the reason of a change in the point at which an economy processes?

Answer 40

1. One reason is a reduction in the unemployment as this way the economy will use its resources with a reduced wastage thus taking the economy closer to the PPC or theoretically on the PPC.

Question 41

What is a circular flow of income model?

Answer 41

A basic two sector circular flow of income shows that is any time period, which is usually one year, the value of output produced in an economy is exactly equal to the total income generated in producing that output which is exactly equal to the expenditure made to the purchase the output. A 2 sector circular flow of income has two sectors namely the household and the Firms.

Question 42

Give the flows that happens in a 2 sector model?

Answer 42

Real Flow: 1. the households provides factors of production to firms 2. the firms provide goods and services to the households Money Flows: 1. the firms pay the households the factor payments 2. the households make an expenditure on the goods and services

Question 43

What are the sectors in a 5 sector circular flow of income?

Answer 43

1. Households 2. Firms 3. Government Sector 4. Financial Systems 5. Foreign Sector

Question 44

What is a leakage in a circular flow of income? in the five sector model by what ways does the leakage happens?

Answer 44

A leakage happens when money comes out of the circular flow 1. Government: Taxes 2. Financial System: Saving 3. Foreign Sector: imports

Question 45

What is an injection in a circular flow of income? In the five sector model by what ways does the injection happens?

Answer 45

An injection happens when money comes into the circular flow of income 1. Government: Government Spending 2. Financial System: Loans 3. Foreign Sector: Exports

Question 46

Effect of size of injections and leakages from the circular flow of income model.

Answer 46

1. Leakage > Injections: In this case the size of the circular flow of income reduces 2. Leakage = Injections: This is taken the normal situations 3. Leakages < Injections: In this case the size of the circular flow of income increases