Basic Economic Problem
What are the three key economic questions every society must answer?
What to produce? How to produce? For whom to produce?
Name the five sectors in the extended circular flow model.
Household, Business, Financial, Government, Overseas (Foreign).
Name the three main types of economic systems.
Market, Command, and Mixed economy.
Define the law of demand.
As the price of a good increases, the quantity demanded decreases, ceteris paribus.
What are the four phases of the business cycle?
Expansion, Peak, Contraction, Trough.
What does a PPF curve represent?
The maximum possible production of two goods given available resources and technology.
Define scarcity in economics.
Scarcity is the condition where unlimited wants exceed limited resources.
What is the role of the financial sector in the circular flow?
It facilitates savings and investments by channeling funds between savers and borrowers.
In a command economy, who makes the major economic decisions?
The government.
What factors can cause a shift in the demand curve?
Changes in income, tastes and preferences, price of substitutes/complements, expectations, and population.
What happens to employment during a recession?
Employment decreases due to lower demand for goods and services.
What does a point inside the PPF indicate?
Underutilisation of resources or inefficiency.
What is opportunity cost?
The value of the next best alternative foregone when making a choice.
How do businesses contribute to the circular flow?
Businesses produce goods and services, pay income to the resource owners/households
How does a market economy determine prices?
Through supply and demand interaction in competitive markets.
What happens when there is a price ceiling below the equilibrium price?
A shortage occurs because the quantity demanded exceeds quantity supplied.
How does inflation behave during an economic expansion?
Inflation typically increases as demand rises.
What can cause the PPF to shift outward?
Economic growth due to better technology, more resources, or improved labor skills.
Explain why resources are limited.
Resources are limited because they exist in finite amounts and cannot satisfy all human wants.
Explain the impact of increased government spending on the circular flow.
Increased government spending injects money into the economy, boosting demand and potentially increasing employment and production.
What is a mixed economy?
An economy that combines elements of both market and command systems, where the government and private sector share decision-making.
How does an increase in production costs affect the supply curve?
The supply curve shifts to the left because production becomes more expensive.
What is GDP and how does it relate to the business cycle?
GDP measures a country’s total economic output and fluctuates according to the business cycle phases.
If a country specialises in producing one good over another, what happens to its PPF?
The country moves along the PPF but does not shift it unless productivity changes.
Provide an example of a trade-off a government might make when allocating resources.
A government may choose to invest in healthcare instead of military spending, sacrificing defense improvements for public health benefits.
How does trade with other countries affect the circular flow of income?
Exports inject money into the economy, increasing national income, while imports withdraw money, reducing income flow domestically.
Why do most countries use a mixed economy rather than a purely market or command system?
A mixed economy balances efficiency and equity by allowing market forces to allocate resources while the government intervenes to correct market failures and provide public goods.
Explain how equilibrium price is determined.
It is the price where the quantity demanded equals the quantity supplied.
What fiscal policy can the government use to combat a recession?
Increase government spending or decrease taxes to boost demand and economic growth.
Why is the PPF often bowed outward?
Because resources are not equally efficient in producing both goods, leading to increasing opportunity costs.