Learning activity 1.

1
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Learning activity 1.2

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Learning activity 1.3

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Learning activity 1.4

Quiz on learning unit 1

1. The opportunity cost of a choice is the value of the best, foregone opportunity.

1. True
2. False

Make sure you understand the concept opportunity cost. It is a very important concept
in Economics.

2. If Sipho resigns from his salary-earning job to open his own business, the salary he
previously earned must be included in the opportunity cost of the business.

1. True
2. False
 The salary the previously earned form part of the opportunity cost that is attached to the
opening of Sipho's own business. He has to consider carefully whether he is making the
right decision to open a business, and the income that he could have earned if he did
not open this business (i.e the opportunity cost of starting the business) is an important
consideration in this decision.

3. Economics studies human behaviour and is therefore classified as a social science.

1. True
2. False

All economics decisions (what to produce, how to produce and for whom to produce?)
are taken by humans, and therefore Economics is definitely a social science.

4. Economics studies human behaviour and is therefore classified as a natural science.

1. True
2. False

Because Economics studies human behaviour it is classified as a social science. Natural

sciences includes physics, chemistry and biology. It studies natural phenomena and not
human behaviour.

5. The purpose of an economic system is to solve the three central economic questions
(What? How? and For whom?)

1. True
2. False

The purpose of an economics system is to solve the problem of scarcity versus unlimited
needs and wants of humans. Therefore decisions have to be taken regarding what will
be produced, how it will be produced and for whom it will be produced.

6. Economic systems are based on any or a combination of three coordinating

mechanisms: Tradition, command and the market.

1. True
2. False

Usually an economic system will have some characteristics of all three coordinating
mechanisms. The coordinating mechanism that plays the largest role will usually
determine the classification. For example, most economic decisions in the United States
are determined by the market, therefore we can classify it as a market system. Most
economic decisions in China will be determined by central decision-making, therefore it
 will be classified as a command system. However, both these economies will also
include characteristics of alternative systems; therefore most economies, including the
South African economy, are in reality mixed economic systems.

7. The distinction between a market economy and a centrally planned economy lies in the
type of coordinating mechanism used to solve the central economic questions.

1. True
2. False

In a pure market economy the forces of demand and supply will determine the quantity
that will be produced as well as the price at which it will be sold. In a pure centrally
planned economy such decisions will be taken by different authorities and committees
that are responsible to allocate resources in that economy. Thus the coordinating
mechanisms are what distinguish these systems from each other.

8. For a market to exist physical contact must take place between the prospective buyers
and the prospective sellers of the good or service in question.

1. True
2. False

Physical contact is not a prerequisite for the existence of a market. The JSE Stock
Exchange is an example of a market that exist in cyberspace. Buyers and sellers do not
even have to communicate with each other directly – computer programmes can
coordinate the market mechanism, and the transaction can also be facilitated
electronically.

9. Households are responsible for the spending on consumer goods.

1. True
2. False

Households are the economic units that take decisions on what to consume in the
economy, while business enterprises supply the goods and the services that are
available for consumption. It is, of course true, that government may also purchase
goods and services. However, we call this government spending and not consumption.
You will learn about this in learning unit 8.

10. Firms are mainly involved in consumption while households are mainly involved in
production.
 1. True
2. False

Firms are mainly involved with production, while households are involved with
consumption decisions. Households supply their factors of production to firms, and firms
use these factors of production to produce goods and services. The income that is paid
to households by the firms, is then used by the households to pay for the consumption
goods and services they purchase.

Learning activity 1.5

Short questions on learning unit 1

1. Briefly explain the basic economic problem in your own words.

In this question, you have to refer to three aspects.

Firstly, the economic problem has to be explained by referring to the three basic
questions to which the economic system must find answers. The questions are: What
should be produced, how should goods be produced, and for whom should goods and
services be produced?
Secondly, a discussion of the economic problem requires a definition of economics.
Thirdly, a description of the scarcity concepts (i.e. limited means and unlimited wants)
is required.

2. Briefly explain the difference between a planned or command system and capitalist or
market system.

Under a market system, the government plays a secondary role to the private sector.
Private property is allowed, and prices allow markets to coordinate the economy. Under
a planned economy, the government plays the primary role in the economy. It decides
‘what’ must be produced, what ‘resources’ must be used and what ‘wants’ must be
satisfied. Prices and markets play a limited role, if any, in the economy.

3. Explain in which type of system (market oriented or command) you are likely to find the
following situations:

3.1 The government department of planning sets targets for infrastructure

development for the next five years.
 3.2 Due to the fall in the harvest of wheat in 2015, the price of bread will increase
considerably.
3.3 The government does not vary from the legislated price of bread, despite the fall
in the wheat harvest.
3.4 Investors are free to buy shares in both domestic and international companies.

1.1 Planned system

1.2 Market system
1.3 Planned system
1.4 Market system

4. Describe each of the factors of production listed below:

4.1 Land
4.2 Capital
4.3 Labour
4.4 Entrepreneurship

4.1 Land refers to the land and all natural resources used in the production process.
4.2 Capital refers to goods used in the production of other goods. In economics, it
typically does not refer to money.
4.3 Labour refers to all the mental and physical resources provided by people.
4.4 Entrepreneurship refers to the ability of certain people to use their initiative and
embark on business activities.

5. Classify each of the following in terms of a factor of production:

5.1 A bio-scientist working on a vaccine for Ebola

5.2 A South African R200 banknote
5.3 The technology that transforms coal into electricity
5.4 The physical labour of a builder
5.5 The milk used to make cheese
5.6 A person buying clothing at a factory store and selling it again
5.7 A professional soccer player

5.1 labour
5.2 not a factor of production
5.3 capital
 5.4 labour
5.5 natural resource
5.6 entrepreneur
5.7 labour
11.