Introduction to Economics – Lecture Review

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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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60 Terms

1
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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.

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How did Alfred Marshall define Economics?

As a study of mankind in the ordinary business of life.

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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.

4
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What common theme runs through most definitions of Economics?

The management of scarce resources to satisfy unlimited wants.

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In simple terms, what does Economics study?

How individuals, firms and governments use limited resources to satisfy unlimited wants.

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What does Microeconomics focus on?

The behaviour and decisions of individual economic units such as consumers, producers and government agencies.

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What does Macroeconomics study?

The economy as a whole, including national output, unemployment, inflation and interest rates.

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Give two key issues analysed in Macroeconomics.

National output (GDP) and the rate of inflation (other acceptable answers: unemployment, interest rates).

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Under Microeconomics, what does the theory of product pricing examine?

How market demand and supply determine the price of an individual commodity.

10
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What does the factor-pricing theory in Microeconomics determine?

The prices of land, labour, capital and entrepreneurship—respectively rent, wages, interest and profit.

11
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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.

12
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List the four basic economic questions any economy must answer.

What to produce? How to produce? When to produce? For whom to produce?

13
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How does Microeconomics help in analysing individual behaviour?

By explaining how consumers and producers make choices under conditions of scarcity and price signals.

14
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Why is Microeconomics useful for resource allocation?

It guides the judicious use of scarce resources among competing uses through market signals.

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How does Microeconomics assist in economic policy formulation?

Through analysis of price mechanisms it helps governments set price, tax and trade policies.

16
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Name a key limitation of Microeconomics related to employment assumptions.

It assumes full employment, which is rarely true in reality.

17
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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.

18
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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.

19
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Give an example of a positive statement.

“The current inflation rate in Kenya is 5.7 %.”

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Give an example of a normative statement.

“The poor should pay no taxes.”

21
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Define economic ‘needs’.

Basic goods and services essential for survival, such as food, water, clothing and shelter.

22
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Define economic ‘wants’.

Desires for goods, services or experiences that provide utility but are not essential for survival.

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What is ‘utility’ in Economics?

The satisfaction a consumer derives from consuming a good or service.

24
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What are ‘means’ in an economic context?

The scarce resources (factors of production) like money, time and labour used to satisfy wants.

25
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Define ‘scarcity’.

The condition in which available resources are insufficient to satisfy all human wants at a given time.

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What is meant by ‘choice’ in Economics?

Selecting which wants to satisfy with limited resources, leaving others unmet.

27
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Explain ‘scale of preference’.

A ranked list of wants arranged in order of importance.

28
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State the definition of opportunity cost.

The value of the next best alternative foregone when a choice is made.

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When can opportunity cost be zero?

When resources are so abundant—or have only one use—that choosing one option does not limit another.

30
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Define an ‘economic system’.

The structure a society uses to organise production, distribution and consumption of goods and services.

31
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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).

32
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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.

33
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What is the primary motive for production in capitalism?

Profit maximisation.

34
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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.

35
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State two key characteristics of capitalism.

Private ownership of resources and competition among buyers and sellers (others: limited government, economic freedom).

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How does capitalism aim to maximise consumer satisfaction?

Producers tailor output to consumer tastes, treating the consumer as ‘king’ in the market.

37
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Identify a major disadvantage of capitalism concerning income distribution.

It tends to create economic inequality—rich get richer, poor get poorer.

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Why can unemployment persist in a capitalist system?

Because lack of central planning may lead to idle factors and cyclical downturns.

39
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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.

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What is the main production motive in socialism?

Promotion of social welfare rather than profit.

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Who owns the means of production in a socialist economy?

The state or government.

42
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How are wages and prices determined in a socialist economy?

By the government, not by market forces.

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Name one advantage of socialism related to equality.

More equal distribution of income and wealth due to state control of resources.

44
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How does socialism contribute to economic stability?

Central planning aligns supply with society’s needs, reducing over- or under-production fluctuations.

45
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Give a disadvantage of socialism regarding occupational choice.

Individuals have limited or no freedom to choose their occupation.

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Why might corruption arise in planned economies?

Officials who allocate resources may misuse power due to lack of market discipline.

47
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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.

48
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Describe ownership of resources in a mixed economy.

Some industries belong to the public sector, while others remain in private hands.

49
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State one advantage of a mixed economy concerning individual liberty.

It preserves economic freedom for consumers and producers while pursuing social welfare goals.

50
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How can high taxes be a drawback in mixed economies?

They fund social programmes but may discourage private investment and economic growth.

51
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What is meant by consumer sovereignty?

The idea that consumer preferences dictate what and how much producers supply in a market economy.

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How do consumers "vote" under consumer sovereignty?

By spending money on preferred goods and services, signaling producers through demand.

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List two limitations on consumer sovereignty.

Unequal income distribution and monopoly power (others: government restrictions, lack of information, irrational behaviour).

54
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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.

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What does a point inside the PPF indicate?

Inefficient use or underutilisation of resources.

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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.

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What leads to an outward shift of the PPF?

Economic growth due to more resources, better technology or improved labour productivity.

58
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State three core assumptions behind a simple PPF.

Fixed resource base, constant technology, and full and efficient use of resources.

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What economic principle is illustrated by moving along the PPF?

Opportunity cost—producing more of one good requires sacrificing some of another.

60
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How can a nation consume beyond its PPF?

By engaging in international trade and specializing according to comparative advantage.