UNIT 1: REVIEW QUESTIONS

Go to Memorandum
Answer the following questions.

Question 1
Define economics.

Question 2
Use a sentence or two to explain the relationships between wants, means, scarcity and choice.

Question 3
Define opportunity cost and use an example to explain it.

Question 4
Define a production possibility curve and use such a curve to illustrate scarcity, choice and
opportunity cost.

Question 5
Distinguish between microeconomics and macroeconomics and provide two examples of
microeconomic issues and two examples of macroeconomic issues in South Africa today.

Question 6
Use an example to explain the difference between the level of a variable (eg price or wage) and
the rate of change in the same variable.

Question 7
Explain why economics is classified as a social science.

Question 8
Explain the difference between consumer goods and capital goods and give at least two examples
of each.

Question 9
Distinguish between:
(a) Final goods and intermediate goods.
(b) Economic goods and free goods.
(c) Consumer goods and capital goods.

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(d) Private goods and public goods.

Question 10
Give an example of an economic problem involving opportunity cost that the South African
government is currently facing.

Question 11
Use everyday examples to illustrate the relationship between scarcity, choice and opportunity
cost.

Question 12
Use the principle of opportunity cost to explain:
(a) why students watch more TV the week after the examinations than the week before the
examinations.
(b) why garden services are so popular today.
(c) why a self-employed person plays more rounds of golf per week while on holiday than during
the rest of the year.

Question 13
“The fact that the Chinese economy has grown so rapidly in recent decades implies that China is
one of the richest countries in the world today.” Do you agree with this statement? Explain.

Question 14
What does ceteris paribus mean? Briefly explain the role of this term in economic analysis.

Question 15
Mention the three basic purposes of macroeconomic theory.

Question 16
Mention and illustrate two possible reasons for a rightward shift of the production possibilities
curve.

Question 17
Use a production possibilities curve to distinguish between maximum attainable combinations,
attainable but inefficient combinations and unattainable combinations of the production of two
goods.

Question 18
Use a production possibilities curves to illustrate each of the following (putting goods on the
vertical axis and services on the horizontal axis):

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(a) a shift in production from services towards goods.
(b) an increase in the potential output of the economy due to a greater availability of factors of
production.
(c) an increase in productivity in the services sector.
(d) a decrease in productivity in the goods sector.

Question 19
Use an example to explain what the fallacy of composition means.

Question 20
Use an example to explain the difference between the level of a variable (eg a price or wage) and
the rate of change in the same variable.

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 MEMORANDUM
Go back to Review questions
Answer the following questions.

Question 1
Define economics.

Economics is the study of the choices individuals and society are forced to make because
wants are unlimited, while the means to satisfy those wants are scarce. Alternatively:
“economics is the study of man in the ordinary business of life” (Alfred Marshall).

Question 2
Use a sentence or two to explain the relationships between wants, means, scarcity and choice.

Wants are plentiful, but the means to satisfy those wants are scarce. Because the means
are scarce, choices have to be made.

Question 3
Define opportunity cost and use an example to explain it.

Every time a choice is made, something has to be sacrificed. The opportunity cost of a
particular choice is the best alternative that is sacrificed in the process. For example, John
Smith has to choose between buying a textbook and buying a new DVD, since he cannot
afford to purchase both. If he chooses to buy the textbook, the opportunity cost is the
DVD that he has to sacrifice.

Question 4
Define a production possibility curve and use such a curve to illustrate scarcity, choice and
opportunity cost.

A production possibility curve

(frontier or boundary) illustrates the
different (maximum) combinations
of two goods or services (or groups
of goods or services) that can be
produced with the available
resources (including the available
technology). In the diagram, the
curve shows the maximum
combinations of food and clothing
that can be produced if all the
factors of production are employed
fully and efficiently.

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 Scarcity is illustrated by the fact that we cannot move beyond the curve. Choice is
illustrated by the fact that a choice has to be made about how much food and how much
clothing should be produced. Opportunity cost is illustrated by the fact that more of one
product can only be produced by sacrificing some of the other product. For example, a
move from A to B, means that more clothing is produced but this occurs at the expense of
producing less food. This is what opportunity cost is all about.

Question 5
Distinguish between microeconomics and macroeconomics and provide two examples of
microeconomic issues and two examples of macroeconomic issues in South Africa today.

Macroeconomics is concerned with the economy as a whole, while microeconomics

focuses on a particular part of the economy. Among the most important macroeconomic
issues in South Africa are economic growth and employment creation. Microeconomic
issues include the way in which electricity tariffs are determined and the degree of
competition in the retail clothing market.

Question 6
Use an example to explain the difference between the level of a variable (eg price or wage) and
the rate of change in the same variable.

The level of a price is its value at a point in time. For example, the price of unleaded petrol
is R12 per litre. A rate of change refers to the rate at which a variable is changing. For
example, the price of petrol increased by 15 per cent during the past year.

Question 7
Explain why economics is classified as a social science.

Economics is a social science because it deals with people, their hopes, fears and
ambitions and the ways in which they interact.

Question 8
Explain the difference between consumer goods and capital goods and give at least two examples
of each.

A consumer good is a good that is purchased to satisfy consumers’ wants. Food and
clothing, for example, are consumer goods. Capital goods are man-made goods that are
used to produce other goods. Examples include machinery, equipment and buildings.
These goods are used to produce goods and services but are not “used up” in the process.

Question 9
Distinguish between:
(a) Final goods and intermediate goods.
(b) Economic goods and free goods.

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(c) Consumer goods and capital goods.
(d) Private goods and public goods.

All these distinctions are set out clearly in Box 1-2 on pp 7 to 9 of the textbook.

Question 10
Give an example of an economic problem involving opportunity cost that the South African
government is currently facing.

The SA government wants to introduce a National Health Insurance system (to improve
health services) but it also wants to provide houses to everyone who is living in shacks.
There are also many other services that the government wishes to provide or to improve.
But every time it uses resources for a certain purpose (housing, health, education,
infrastructure, social welfare payments) it has to sacrifice something else, that is, it incurs
opportunity cost. You may choose your own examples.

Question 11
Use everyday examples to illustrate the relationship between scarcity, choice and opportunity
cost.

Time is a scarce factor. It is Saturday afternoon and I have chosen to use my time to
compile answers to the review questions that form part of the supporting material for
Economics. By choosing this, I have had to sacrifice playing golf or taking a walk on the
beach or watching sport on TV. Playing golf is the best available alternative. The
opportunity cost of compiling these answers is thus the round of golf that I have had to
sacrifice (forgo). Now you can choose your own examples.

Question 12
Use the principle of opportunity cost to explain:
(a) why students watch more TV the week after the examinations than the week before the
examinations.
(b) why garden services are so popular today.
(c) why a self-employed person plays more rounds of golf per week while on holiday than during
the rest of the year.

(a) Before the examinations the opportunity cost (in terms of study time) is particularly high,
but after the examinations the opportunity cost is low and students will therefore tend to
watch more TV.
(b) Because the opportunity cost of working in the garden is so high. One could, for example,
have earned income or enjoyed leisure. To avoid sacrificing these alternatives, you hire
the garden services to do the work.
(c) During the year the opportunity cost is high, since every hour on the golf course could
have been used to earn income. During holidays, however, the opportunity cost is low.
There are fewer or less costly alternatives to forgo.

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Question 13
“The fact that the Chinese economy has grown so rapidly in recent decades implies that China is
one of the richest countries in the world today.” Do you agree with this statement? Explain.

China is a large country with a massive population. The Chinese economy has also grown
very rapidly in recent decades. As a result, income and wealth in China are much higher
than a few decades ago. Because of the size of the population, the Chinese economy has
also become the second largest economy in the world. From that perspective, China may
be regarded as a rich country. But China grew off a very low base and even today the
average Chinese is much poorer than his or her counterpart in many other countries. The
level of real per capita income in China is still relatively low, compared to the level in the
developed countries.

Question 14
What does ceteris paribus mean? Briefly explain the role of this term in economic analysis.

It means that all other factors are assumed to be constant (or to remain the same). See p
20 of the textbook. This is a crucial assumption. In economics we cannot conduct
laboratory experiments, keeping most things unchanged and varying elements one by one
in an attempt to determine their impact. Everything is changing at the same time. What
we therefore have to do is to construct a model or theory and then vary the relevant
forces one by one, while assuming that all other forces remain unchanged (ie ceteris
paribus). For example, we know that both the price of tomatoes and consumers’ income
determine the quantity of tomatoes demanded (along with a number of other things).
What we therefore have to do is to analyse how the quantity of tomatoes demanded will
respond to (say) the price of tomatoes, while keeping all other factors the
same/constant/unchanged. Only then can we try to determine cause-effect relationships.
Without the ceteris paribus assumption, everything may change simultaneously and it will
be impossible to determine cause-effect relationships.

Question 15
Mention the three basic purposes of macroeconomic theory.
Macroeconomic theory has three basic purposes. First, to explain (help us understand) how
things fit together in the economy (how the economy functions). Second, to help us to
predict what will happen if something changes. Third, to serve as the basis for decisions on
economic policy. The three key words are thus explanation, prediction and policy.

Question 16
Mention and illustrate two possible reasons for a rightward shift of the production possibilities
curve.

First, an improved technique for producing one of the goods (or categories of goods). This
is illustrated in the figures below.

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 Second, an increase in the quantity or productivity (quality) of the available resources,
illustrated by an outward shift of the production possibilities curve, as in figure below.

Question 17
Use a production possibilities curve to distinguish between maximum attainable combinations,
attainable but inefficient combinations and unattainable combinations of the production of two
goods.

Consider the diagram on the right:

Any point along the production

possibilities curve (PPC) represents or
indicates a maximum attainable
combination. A therefore represents a
maximum attainable combination. Any
point inside the PPC, such as B, represents
an inefficient combination, since more of
one or both goods may be produced, given
the available resources. C represents an
unattainable combination, since it is not
possible to achieve it, given the available
resources.

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Question 18
Use a production possibilities curves to illustrate each of the following (putting goods on the
vertical axis and services on the horizontal axis):
(a) a shift in production from services towards goods.
(b) an increase in the potential output of the economy due to a greater availability of factors of
production.
(c) an increase in productivity in the services sector.
(d) a decrease in productivity in the goods
sector.

See the diagrams. In each case PPC 1 is the

original production possibilities curve and
PPC2 the new production possibilities curve.

(a) It is illustrated by a movement along

the PPC from A to B.

(b) It is illustrated by a parallel outward

shift of the PPC.

(c) It is illustrated by the outward

movement from PPC1 to PPC2. More
services can now be produced than
before.

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 (d) It is illustrated by an inward movement from
PPC1 to PPC2. Fewer goods can now be
produced than before.

Question 19
Use an example to explain what the fallacy of composition means.
The fallacy of composition is the logical error committed when it is assumed that what is
true for the part (or individual case) is also true for the whole. One of the classic examples in
economics is the so-called “paradox of thrift”. While it is true that an individual can become
wealthier by saving (and thus adding to his/her assets) it is not true for the economy as a
whole. If everyone saves more, there will be fewer goods and services demanded.
Production will be cut back and income will fall. If everything else remains unchanged, the
economy will thus shrink (instead of expand). See also the examples on pp 15 of the
textbook.

Question 20
Use an example to explain the difference between the level of a variable (eg a price or wage) and
the rate of change in the same variable.
The level of a variable is its value at a particular time. For example, the price of a litre of
petrol is R12. The rate of change is the rate at which it changed over a certain period. For
example, if petrol cost R10 per litre a year ago and R12 per litre now, then the price
increased by 20%. Put differently: the rate of change was 20% per year. This is quite simple,
but you will be amazed at how often people confuse levels and rates of change. See the
discussion on page 16 of the textbook.

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