Micro

• 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 does opportunity cost represent?

  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' in economics?

  Ability to organize and take risks
• What is the reward for land in economics?

  Rent
• What is the reward for labour in economics?

  Wages
• What is the reward for capital in economics?

  Interest
• What is the reward for enterprise in economics?

  Profit
• What does microeconomics study?

  Behaviour of individuals and firms in the market
• What does macroeconomics consider?

  The economy as a whole
• What is the purpose of economic activity?

  To produce goods and services to meet needs
• What is a 'need' in economics?

  Something essential for survival
• What is a 'want' in economics?

  Something desired but not essential
• What do rational economic agents aim to maximize?

  Consumers: total utility; Workers: wages
• What is a negative production externality?

  A third party cost from production
• What is the relationship between capital goods and consumer goods in production?

  Opportunity cost increases as consumer goods are produced
• What is a negative consumption externality?

  A third party cost from consumption
• What does a production possibility frontier (PPF) show?

  Maximum output combinations of two goods
• What causes an outward shift in the PPF?

  Increase in quantity or quality of production factors
• What is the formula for social benefit?

  • Social benefit = private benefit + external benefit
• What causes an inward shift in the PPF?

  Decrease in quantity or quality of production factors
• What is the formula for social cost?

  • Social cost = private cost + external cost
• Why are PPFs usually curved?

  Due to the Law of Diminishing Returns
• What does MPC stand for?

  Marginal private cost
• What does point A on a PPF represent?

  Inefficient production with some resources unemployed
• What does MSC represent?

  Marginal social cost to society
• What does MPB stand for?

  Marginal private benefit
• What does MSB represent?

  Marginal social benefit to society
• When is allocative efficiency achieved in a perfect market?

  When P = MC
• What happens to opportunity cost as more consumer goods are produced?

  Opportunity cost increases
• When is social optimum achieved with externalities?

  When MSC = MSB
• What does a straight line PPF indicate?

  Resources are equally efficient at producing both goods
• What are policies to address negative externalities?

  • Banning/restricting output
  • Legislation/regulations
  • 'Nudge' policies
  • Indirect tax
  • Pollution permit trading schemes
• What is geographical immobility of labour?

  Labour not fully mobile due to regional factors
• What is the polluter pays principle?

  Polluters bear the costs of their actions
• What does it mean if MSC > MPC?

  Negative production externality exists