Economics Chapter 1 Test

Explain the three basic economic questions [10 marks]

The 3 Basic economic questions

• What to produce? (Considers the goods and services in the economy)

• How to produce? (Considers whether land, labour,capital, enterprise are needed)

• For whom to produce? (Considers who gets the goods and services)

Describe the benefits to consumers of living in a free market economy [10 marks]

Living in a free market Benefits consumers because

• Producers compete for consumers by lowering prices, improving quality, offering more variety and innovating

• This benefits consumers because it gives them more options on how to spend their money while also being able to pay a lower price.

1. Describe the 3 economic agents depicted in the circular flow of income diagram [10 marks]

Governments, firms, and households

1. Explain the importance of the ceteris paribus assumption for economic models and theories [10 marks]

This assumption allows economists to isolate and examine the precise relationship between two specific variables by freezing external influences (like income and consumer confidence). Economists can create foundational principles

1. Describe the differences between positive and normative economics. Provide examples. [10 marks]

Positive economics: Focuses on objective, factual analysis that can be tested, verified, or refuted using empirical evidence and data.

Normative Economics: Involves subjective value judgments, ethical views, and opinions about what ought or should be. These statements cannot be proven true or false using data alone.

1. Referring to the concepts of the Invisible Hand and  lassiez faire, explain Adam Smith’s main contribution to economics [10 marks]

Adam Smith, often called the "Father of Modern Economics," laid the foundation for free-market economic theory in his 1776 work, The Wealth of Nations:

Smith argued that individuals pursuing their own self-interest inadvertently promote the economic well-being of society as a whole. Price mechanisms act as an "invisible hand" coordinating buyers and sellers efficiently.

1. Explain the primary difference between Keynesian and Classical economic thought [10 marks]

Keynesian economics: asserts that short-run economic output is driven by total aggregate demand, markets from self-correcting and thus requires active government fiscal intervention during recessions.

Classical economics: focuses on the long run, markets will self-correct, government intervention is unnecessary and supply creates its own demand