Economics Test

Chapter 1

1. Definition of Scarcity: Unlimited wants and limited resources. Opportunity Cost: sacrifice something to have something better. Utility: measure of satisfaction of the service and good. While marginal utility is the increase of utility when the consumer consume one more of the product.Expenditure: amount of money spent. 2. Factors of production  +Land   +Labor  +Capital  +Management(Entrepreneurship)

What is the difference between positive and normative statement?-Positive statement are facts and sayings that have precise percentage, numbers ex: Cambodia has a population of 14 million. While normative statements are opinions. Example: I think that India has more women than men.

Chapter 1

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Caption: : Circular flow model

Chapter 1

In theory, there are two rationing systems:Planned economy: In a planned economy, most decisions are made by governments. The governments command what to produce, how to produce and who to produce. In 1980, almost one third of the population lived in planned economies however nowadays, there are fewer.Free market economy: All products are owned privately, decisions are made by the entrepreneurs.

Chapter 1

Disadvantages of free markets economies:+ Demerit goods are over-provided mostly gives out a lot of profit therefore it enforces a lot of illegal businesses. + Merit goods are under-provided since they are provided only to those who can afford.+ Environment may be damaged too quickly due to the use of too much resources.+ SOme members of society wouldn't be able to survive e.g orphan, the sick.+ Large firms might grow too strong and will have dominating strong power. Disadvantages of planned economies:+ There might be dis-allocation of resources, shortages and surpluses.+ There is no price system leading to inefficient use of the resources.+ Quality or output are not done well due to demotivated employees.+ The dominance of government might cause lack of freedom of choices.+ The plans of government are not popular or might be even corrupted.

Chapter 1

Economic growth is the measure of increase in the economic activity such as expenditure, goods&services and rent wages interest&profit. + If there is an increase of national income within one year, we can say that the economy has grown. (GDP, gross domestic product)Economic development is the measure of welfare, a well being.  e.g HDI ( Human Development Index )

Chapter 1

Production possibilities curve (PPF) show the maximum combinations of goods and service that can be produced by the economy at the given time. When the PPF shifts outwards, we know there is growth in an economy. Alternatively, when the PPF shifts inwards it indicates that the economy is shrinkingAn economy can be producing on thePPF curve only in theory. In reality, economies constantly struggle to reach an optimal production capacity. http://www.investopedia.com/university/economics/economics2.asp

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Caption: : Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources.

Chapter 2

Market is where buyers and sellers come together to carry out transaction. It can be physical place however nowadays, there are also online markets such as Ebay, amazon etc.Demand is the willingness and ability of a buyer. Law of demand states that if the price falls, the quantity demanded increases. The demand curve slopes downward. Supply is the willingness and ability of a supplier. Law of Supply states that if the price increases, the quantity supplied increases. The supply curve slopes upward. Change in price causes the movement along the curve. However, the non determinant factors cause the curve to shift either upward or downward (left or right). The non determinant for demand:Taste, Income, Price of other goods(substitution effect), population and seasonal changes.The non determinant for supply:Costs of the factors of production, state of technology, price of other product which the producer can produce, expectations and government.

Demand and supply curve

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Caption: : Demand Curve

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Caption: : Supply Curve

Chapter 3

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Caption: : Equilibrium

All markets tend towards the equilibrium. The ideas are ceteris parabus.Surplus: excess supply.Shortage: excess demand.Price mechanism enforces the market towards the equilibrium especially through the 'signalling' mechanism, which tells the suppliers what to supply. Price control: government put the price to help the poor people.Price floor: you can't go under the PF.Price ceiling: you can't go above the PC.

Chapter 3

Consumer's surplus: Consumer's utility because they pay at the price lower than the price they were expecting to pay.Producer's surplus: extra utility for extra earning.Marginal benefit: what people are willing to give up in order to obtain one more unit of a good.Marginal cost: value of what is given up to produce that additional unit. The most surplus is at the equilibrium price, MSB: what we want as a societyMSC: how much it costs to supply the society.

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Caption: :