Economics

• what is the definition of economics?

  economics is the study of how people allocate their limited resources to satisfy their unlimited wants. the study of the economic problem
• what is the economic problem?

  there is not enough resources to satisfy unlimited wants
• what are the three main questions of economics?

  what to produce, how to produce, for whom to produce?
• what are the types of resources?

  natural, human, capital
• what does microeconomics deal with?

  Individual economic units and their interactions. (economic problem from an individual or micro point of view)
• what does macroeconomics deal with?

  the economic problem from a society's point of view- performance of the whole economy, economic growth, inflation, employment, etc.
• what is the economic problem?

  resources are limited relative to society's unlimited wants.
• can the economic problem be solved?


  no, it can never ultimately be solved
• what is opportunity cost?

  defined as the value of the best alternative that you give up. includes the value of time
• what does the economic decision making process outline?

  the best way to allocate society's scarce resources
• what is the principle of decreasing marginal benefit?

  benefits decrease at a declining rate, as you consume more of something, the extra or additional benefit you get declines
• what is marginal analysis?

  it means calculating the marginal/additional benefit and comparing it with the marginal cost.
• what is ceteris paribus?

  all other things constant/remain the same
• what is an economic model?

  a simplified representation of economic reality showing the relationship between certain economic variables
• what are two reasons why economic models are important?

  enables economists to determine cause and effect, its useful because it has the ability to predict events accurately
• what is the production possibility frontier model? (PPF)

  an important economic model that allows economists to illustrate the economic problem and concept of opportunity cost. it shows all the combinations of goods and services that can be produced by an economy given the available resources and the level of technology.
• what are the three important assumptions of an economic model?

  resources are fixed, technology is fixed, economy produces just two goods?
• will the ppf always be a straight line?

  no, its rarely straight (usually bowed outwards)
• what is the law of increasing opportunity cost?

  the opportunity cost of increasing the production of one good in an economy with scarce resources normally increases
• what is economic growth?

  an increase in the capacity of an economy to produce goods and services. can occur as a result of an increase in the quantity or improvement in the quality of resources
• what is the ultimate economic objective?

  when economies produce more goods and services, it enables a higher standard of living
• what is a market economy?

  resources are privately owned and all decisions are made by the owners of resources acting in their own self interest
• what is command economy?

  resources are collectively owned and decisions are made by a planning authority
• what is a free market economy?

  most decisions are determined by the market forces of demand and supply, also known as the price mechanism or the invisible hand
• what is supply?

  supply is the amount of a good or service that producers are willing and able to sell at a particular price and at a particular point in time
• what does the law of supply state?

  as the price of a good or service rises, the quantity supplied will also rise
• what does any change in price result in on a supply curve?

  a movement along the line (not a shift)
• what are the non-price factors effecting supply?

  • technology
  • costs of production
  • price of other goods
  • number of sellers
  • expectations of producers
• what is the cost of production and where does it fit in into econ?

  fits into the non-price factors of supply.

  the price of resources such as labour, capital and raw materials
• what is technology? (non-price factor of supply)

  knowledge about techniques of production

  improvement in technology means that more output can be produced from the same quantity of resources- cost of production falls
• what is 'price of other goods' (non-price factor of supply)

  producer monitors movements in prices of goods that he is able of supplying so he can take advantage of profit opportunities

  e.g, a farmer may shift resources from wheat to wool if price for wool rises relative to wheat.
• what is the number of sellers? (non-price factor of supply)

  if new sellers enter, market supply will increase and curve will shift to right
• what is expectations of producers? (non-price factor of supply)

  suppliers expectations of the future conditions will affect supply

  if higher prices are expected in the future, firms will decrease their current supply in order to take advantage of future higher prices.
• what does a change in supply result in (in a supply curve), and how does it change?

  results in a new supply curve, is changed by non-price factors
• what does a change in qty supplied result in (in a supply curve), and how does it change?

  results in a movement along the curve, changed by price
• what does demand refer to?

  the actual buying intentions of a consumer
• what does the law of demand state?

  as the price of a good rises, people buy less of it, ceteris paribus (holding other factors constant)
• what are the income effect and the substitution effect?

  negative relationship between price and quantity demanded. they explain why the demand curve slopes down.
• what is the income effect (law of demand)?

  when the price of a good rises, consumers are not willing to buy as much of the good because their income or purchasing power has decreased. vice versa
• what is the substitution effect?

  when the price of one good rises, other goods become more attractive to buyers because they are relatively cheaper. increase in price= switch to cheaper substitutes.