Theme 1 economics

• What is the basic economic problem?

  Infinite wants and finite resources
• Why do choices need to be made in economics?

  Resources are scarce in relation to wants
• What is opportunity cost?

  Value of the next best alternative foregone
• What are the factors of production?

  Resources used in the production process
• What does 'land' refer to in economics?

  Natural physical resources
• What does 'labour' refer to in economics?

  Human input
• What does 'capital' refer to in economics?

  Man-made resources, e.g., machinery
• What is 'enterprise/entrepreneurship' in economics?

  Ability to organize and take risks
• What are the rewards to factors of production?

  • Land = rent
  • Labour = wages
  • Capital = interest
  • Enterprise = profit
• What is microeconomics?

  Study of individuals and firms in the market
• What is macroeconomics?

  Considers the economy as a whole
• What is the difference between a need and a want?

  A need is essential for survival
• What do rational economic agents aim to maximize?

  Total utility for consumers
• What do workers aim to maximize?

  Wages and benefits from work
• What do producers aim to maximize?

  Profit
• What does the government aim to maximize?

  Social welfare
• What are the types of goods in economics?

  • Capital goods
  • Consumer goods
• What happens at point A on a PPF?

  Some resources are unemployed
• What does point E on a PPF represent?

  Unattainable with current resources
• What causes an outward shift in the PPF?

  Increase in quantity of factors of production
• What causes an inward shift in the PPF?

  Decrease in quantity of factors of production
• Why are PPFs usually curved?

  Due to the Law of Diminishing Returns
• What does the Law of Diminishing Returns state?

  Marginal output diminishes as resources are allocated
• What is geographical immobility of labour?

  Labour not fully mobile due to regional factors
• What is occupational immobility of labour?

  Labour cannot easily change jobs or skills
• What is a negative externality?

  A third party cost from production or consumption
• What are the disadvantages of specialization and division of labour?

  • Higher staff turnover
  • Dependency on specific tasks
  • Structural unemployment
  • Lack of variety
• What is a negative production externality?

  A cost from production with no compensation
• What is the role of money in an economy?

  Facilitates transactions and avoids barter
• What are the characteristics of money?

  • Acceptable to all
  • Portable
  • Durable
  • Easily divisible
  • Uncounterfeitable
  • Scarce in supply
• What is a negative consumption externality?

  A cost from consumption with no compensation
• What is factor mobility?

  Factors of production can easily change use
• What is specialisation in economics?

  Concentration on producing limited goods/services
• What is the division of labour?

  Tasks divided among workers for production
• What are the important externality terms?

  • Social benefit = private benefit + external benefit
  • Social cost = private cost + external cost
  • MPC = marginal private cost
  • MSC = marginal social cost
  • MPB = marginal private benefit
  • MSB = marginal social benefit

  
• What did Adam Smith argue about specialization?

  It leads to increased productivity and growth
• When is allocative efficiency achieved in a perfect market?

  When P = MC
• What are the advantages of a free market economy?

  • Resources can be bought and sold
  • Consumer sovereignty
  • Freedom of choice
  • Profit motive incentivizes
  • Incentives for innovation and investment
• What is the social optimum condition when externalities exist?

  When MSC = MSB
• What are the disadvantages of a free market economy?

  Income inequality and market failure