REVIEW

PART 1: MICROECONOMICS
CHAPTER 1: THE FOUNDATIONS OF ECONOMICS

THEORY

1. Economics: 1. Economics studies:

Economics is a study of rationing systems. It is the study of how
scarce resources are allocated to fulfill the infinite wants of
consumers.
2. Scarcity:
All goods and services that have a price are relatively scarce to
people’s demand for them. They are rationed and known as an
economic good.
Free goods are things that are not relatively scarce and so will not
have a price.
3. Choice
As resources are scare, people need to choose between
alternatives.
4. Opportunity cost:
Opportunity cost is defined as the next best alternative foregone
when an economic decision is made.
If a good or service has an opportunity cost then it must be
relatively scarce and be classified as an economic good. Free
goods are not limited in supply and so do not have an opportunity
A. choices leading to the best possible use of limited
resources in order to best satisfy unlimited human needs
and wants
B. how scarce resources are allocated to fulfill the finite
wants of consumers
C. irrational customers
D. conflict between buyers and sellers
2. Scarcity is the situation in which:
A. resources are unlimited, wants are finite
B. there are resources to produce everything that human being
needs and wants
C. most individuals satisfy with the goods or services they
have or can buy
D. resources are insufficient in relation to the need for them
3. Economic goods:
A. do not have a price
B. are relatively scarce to people’s demand for them
C. are not limited in supply
D. do not have opportunity cost
4. Opportunity cost is:
A. the value of the best alternative that muse be forgone when
an economic decision is made
B. the best choice that is made
C. the value of the next best alternative that must be given up
in order to obtain something else
D. the value of opportunity of a business

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cost when they are consumed. 5. The goods that have opportunity cost:
A. are relatively scare
B. are chosen rationally
C. have a price
D. All of the above
5. The basic economic problems: 6. Three basic economic questions are:
(1) What should be produced and in what quantities? A. What to produce? Why to produce? How long to produce?
(2) How should things be produced? B. When to produce? Where to produce? How much to
(3) Who should things be produced for? produce?
C. What to produce? How to produce? For whom to produce?
D. Which to produce? By whom to produce? For what reason
to produce?
6. Factors of production: 7. The risk-taking factor of production is:
Factors of production are resources that allow an economy to A. land
produce its output. B. labour
C. capital
They are: D. management
- land: including natural resources
- labour: the physical and mental contribution of the
existing workforce to production.
- capital: comes from investment in physical capital and
human capital
- management and entrepreneurship: is the organising and
risk-taking factor of production

7. Production possibility curve – PPC (or production 8. PPC shows:

possibility frontier – PPF)
PPC shows the maximum combinations of goods and services
that can be produced by an economy in a given time period, if all
the resources in the economy are being used fully and efficiently
and the state of technology is fixed. This is known as potential
output.
It is possible to produce at any point inside the PPC, but it means
that not all of the factors of production in the economy are being 9. In order to the economy to produce the greatest possible
used or that they are being used inefficiently. In reality,
economies are always producing within their PPCs, since there
are always some unemployed factors of production in a country,
A. the maximum combinations of goods and services that can
be produced by an economy in a given time period
B. the minimum combinations of goods and services that can
be produced by an economy in a given time period
C. the maximum combinations of input that can be produced
by an economy in a given time period
D. the minimum combinations of factors of production that
can be produced by an economy in a given time period
output, two conditions must be met:
A. All resources must be fully employed and used efficiently
B. There are unemployed resources and resources are used

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this is the economy’s actual output. inefficiently
C. There is full employment of resource and productive
The point outside the PPC is unattainable. It could only be inefficiency
achieved if the PPC moved outwards when there is an D. Output is produced by use of the most possible resources
improvement in the quantity and/or quality of factors of at the highest possible cost
production, resulting in an increase in potential output. This 10. Countries cannot produce at points outside the PPC at the
movement is called potential growth. moment investigated because:
A. resources are scarce
A fall in the quantity of factors of production would cause the B. technology is fixed
PPC to shift inwards. This might be due to war or natural C. Both A and B
disasters. D. Neither A nor B
11. PPC curves outwards because opportunity cost is
The law of increasing opportunity cost: The PPC is concave to A. increasing
the origin because not all of the factors of production used are B. decreasing
equally good at both occupations. C. unchanged
D. infinite
12. When PPC shift outwards, there is:
A. an improvement in the quantity and quality of factors of
production
B. an improvement in the quality of output
C. war
D. natural disasters
8. Microeconomics and macroeconomics 13. Microeconomics studies:
Microeconomics deals with smaller, discrete economic agents A. individual decision-makers’ behaviours and their
and their reactions to changing events. interaction
B. measuring all the economic activity in the economy
Macroeconomics takes a wider view and considers such things as C. the economy as a whole to obtain a broad or overall
measuring all the economic activity in the economy, inflation, picture
unemployment, and the distribution of income in the whole D. total income and output of the entire economy, as well as
economy. total employment and the general price level
9. Positive economics and normative economics 14. A positive statement is:
Positive economics deals with areas of the subject that are A. a subjective statement about what should happen
capable of being proven to be correct or not. B. a statement about what ought to be and about how things
ought to work
Normative economics deals with areas of the subject that are open C. a statement that are capable of being proven to be correct
to personal opinion and belief (They can only be assessed or not
relative to beliefs and value judgements). D. a statement that cannot be true or false

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 10. Rationing systems: planned economies versus free
market economies
Planned economies (centrally planned economy or a command
economy): decisions are made by a central body, the
government, on behalf of the people and, in theory, in their best
interests. All resources are collectively owned.
16. In pure free markets:
Free market economies (a private enterprise economy or
capitalism): prices are used to ration goods and services. All
production is in private hands and demand and supply are left free
to set wages and prices in the economy. The economy should
work relatively efficiently.
15. In a free market economy,
A. resource are owned by private individuals
B. consumers and firms make economic decisions by
responding to prices that are determined in markets
C. freedom of choice and free enterprise
D. all of the above
A. dangerous goods may be over-provided
B. resources may be used up too quickly
C. large firms may use their excessive power to raise prices
D. All of the above

In reality, all economies are mixed economies.

11. Economic growth and development 17. Economic development involves:

Economic growth is an increase in actual output, a movement
from a point inside the production possibilities curve to a point
that is nearer to the curve.
Economic development is a measure of welfare, a measure of
well-being. Economic development is not just measured in 18. Sustainable development is the situation when:
monetary terms such as GDP but also in terms of other indicators,
such as education indicators, health indicators, and social
indicators.
Sustainable development is the development that meets the needs
of the present without compromising the ability of future
generations to meet their own needs.
A. increasing income and output
B. reducing unemployment and poverty
C. increasing provision of important goods and services such
as education and healthcare services
D. All of the above
A. the need of present generations are met
B. the need of future generations are met
C. Both A and B
D. Either A or B

Answers:

1A 2D 3B 4C 5D 6C 7D 8A 9A 10C 11A 12A 13A 14C 15D 16D 17D 18C

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CHAPTER 1: THE FOUNDATIONS OF ECONOMICS

DIAGRAM AND CALCULATION

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1. Points A and B on the following PPC represents:
A. combinations of the output happen when there are unemployed resources or when
resources are used inefficiently.
B. the maximum possible output combinations that can be produced with available
resources.
C. combinations that are unattainable with its current quantity and quality of resources
and technology
D. the minimum possible output combinations that can be produced with available
resources.

2. A movement from B to C:
A. Raising the production of both goods
B. Increasing the production of aircraft carriers while reducing the production of
automobiles
C. Increasing the production of automobiles while reducing the production of aircraft
carriers
D. Increasing the price of automobiles while reducing the price of aircraft carriers

3. A movement from A to D means that:

A. opportunity cost increases
B. production possibility increases
C. only X output increases
D. efficiency increases

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4. The opportunity cost of an additional unit of pine apple is:
A. 4 unit crabs forgone
B. 4 unit crabs gained
4
C. unit crabs forgone
10
4
D. unit crabs gained
10

5. The opportunity cost when we move along the curve from A to C:

A. increasing from |−1| to |−4|
1 4
B. increasing from �− � to �− �
10 10
C. decreasing from 8 to 3
D. staying unchanged

Answers:

1.B 2.C 3.B 4.C 5.B