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60 question-and-answer flashcards covering key definitions, theories and examples from the lecture on basic Economics concepts, branches, systems, consumer sovereignty and the production possibility frontier.
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How did Adam Smith define Economics in "The Wealth of Nations"?
As an inquiry into the nature and causes of the wealth of nations.
How did Alfred Marshall define Economics?
As a study of mankind in the ordinary business of life.
State Lionel Robbins’ widely-used definition of Economics.
Economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses.
What common theme runs through most definitions of Economics?
The management of scarce resources to satisfy unlimited wants.
In simple terms, what does Economics study?
How individuals, firms and governments use limited resources to satisfy unlimited wants.
What does Microeconomics focus on?
The behaviour and decisions of individual economic units such as consumers, producers and government agencies.
What does Macroeconomics study?
The economy as a whole, including national output, unemployment, inflation and interest rates.
Give two key issues analysed in Macroeconomics.
National output (GDP) and the rate of inflation (other acceptable answers: unemployment, interest rates).
Under Microeconomics, what does the theory of product pricing examine?
How market demand and supply determine the price of an individual commodity.
What does the factor-pricing theory in Microeconomics determine?
The prices of land, labour, capital and entrepreneurship—respectively rent, wages, interest and profit.
Which three efficiency questions are addressed by the theory of economic welfare?
Efficiency in production, consumption/distribution and overall economic efficiency to maximise public welfare.
List the four basic economic questions any economy must answer.
What to produce? How to produce? When to produce? For whom to produce?
How does Microeconomics help in analysing individual behaviour?
By explaining how consumers and producers make choices under conditions of scarcity and price signals.
Why is Microeconomics useful for resource allocation?
It guides the judicious use of scarce resources among competing uses through market signals.
How does Microeconomics assist in economic policy formulation?
Through analysis of price mechanisms it helps governments set price, tax and trade policies.
Name a key limitation of Microeconomics related to employment assumptions.
It assumes full employment, which is rarely true in reality.
Why is Microeconomics sometimes said to give a ‘narrow picture’?
Because it studies individual parts of the economy and may not represent the whole economy’s behaviour.
Differentiate Positive and Normative Economics in one sentence.
Positive economics describes what is, whereas normative economics suggests what ought to be based on value judgements.
Give an example of a positive statement.
“The current inflation rate in Kenya is 5.7 %.”
Give an example of a normative statement.
“The poor should pay no taxes.”
Define economic ‘needs’.
Basic goods and services essential for survival, such as food, water, clothing and shelter.
Define economic ‘wants’.
Desires for goods, services or experiences that provide utility but are not essential for survival.
What is ‘utility’ in Economics?
The satisfaction a consumer derives from consuming a good or service.
What are ‘means’ in an economic context?
The scarce resources (factors of production) like money, time and labour used to satisfy wants.
Define ‘scarcity’.
The condition in which available resources are insufficient to satisfy all human wants at a given time.
What is meant by ‘choice’ in Economics?
Selecting which wants to satisfy with limited resources, leaving others unmet.
Explain ‘scale of preference’.
A ranked list of wants arranged in order of importance.
State the definition of opportunity cost.
The value of the next best alternative foregone when a choice is made.
When can opportunity cost be zero?
When resources are so abundant—or have only one use—that choosing one option does not limit another.
Define an ‘economic system’.
The structure a society uses to organise production, distribution and consumption of goods and services.
Name three allocation questions answered by any economic system.
What to produce, how to produce and for whom to produce (others: how to distribute, when to produce).
What is a capitalist (free-market) economic system?
An economy where most resources are privately owned and decisions are driven by profit through the price mechanism.
What is the primary motive for production in capitalism?
Profit maximisation.
What role does price play in a free-market economy?
It signals producers to supply more or less and consumers to demand more or less, thereby allocating resources.
State two key characteristics of capitalism.
Private ownership of resources and competition among buyers and sellers (others: limited government, economic freedom).
How does capitalism aim to maximise consumer satisfaction?
Producers tailor output to consumer tastes, treating the consumer as ‘king’ in the market.
Identify a major disadvantage of capitalism concerning income distribution.
It tends to create economic inequality—rich get richer, poor get poorer.
Why can unemployment persist in a capitalist system?
Because lack of central planning may lead to idle factors and cyclical downturns.
Define a socialist (planned) economic system.
An economy where most resources are state-owned and allocation decisions are made by the government to promote social welfare.
What is the main production motive in socialism?
Promotion of social welfare rather than profit.
Who owns the means of production in a socialist economy?
The state or government.
How are wages and prices determined in a socialist economy?
By the government, not by market forces.
Name one advantage of socialism related to equality.
More equal distribution of income and wealth due to state control of resources.
How does socialism contribute to economic stability?
Central planning aligns supply with society’s needs, reducing over- or under-production fluctuations.
Give a disadvantage of socialism regarding occupational choice.
Individuals have limited or no freedom to choose their occupation.
Why might corruption arise in planned economies?
Officials who allocate resources may misuse power due to lack of market discipline.
Define a mixed economic system.
An economy where resources are partly state-owned and partly privately owned, with decisions shared between government planning and market forces.
Describe ownership of resources in a mixed economy.
Some industries belong to the public sector, while others remain in private hands.
State one advantage of a mixed economy concerning individual liberty.
It preserves economic freedom for consumers and producers while pursuing social welfare goals.
How can high taxes be a drawback in mixed economies?
They fund social programmes but may discourage private investment and economic growth.
What is meant by consumer sovereignty?
The idea that consumer preferences dictate what and how much producers supply in a market economy.
How do consumers "vote" under consumer sovereignty?
By spending money on preferred goods and services, signaling producers through demand.
List two limitations on consumer sovereignty.
Unequal income distribution and monopoly power (others: government restrictions, lack of information, irrational behaviour).
Define the Production Possibility Frontier (PPF).
A curve showing all possible combinations of two goods an economy can produce with given resources and technology at full efficiency.
What does a point inside the PPF indicate?
Inefficient use or underutilisation of resources.
Why is the typical PPF concave to the origin?
Because resources are not perfectly adaptable; the opportunity cost of producing more of one good rises as its output increases.
What leads to an outward shift of the PPF?
Economic growth due to more resources, better technology or improved labour productivity.
State three core assumptions behind a simple PPF.
Fixed resource base, constant technology, and full and efficient use of resources.
What economic principle is illustrated by moving along the PPF?
Opportunity cost—producing more of one good requires sacrificing some of another.
How can a nation consume beyond its PPF?
By engaging in international trade and specializing according to comparative advantage.