1. What is Economics?

Economics is the study of how societies choose to use scarce productive

resources that have alternative uses, to produce commodities of various
kinds, and to distribute them among different groups.
2. Why should we study economics?
To understand how society manages scares resources.

how people decide what to buy,

how much to work, save, and spend
how firms decide how much to produce,
how many workers to hire
how society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other needs.

3. Give the principles of HOW PEOPLE MAKE DECISIONS?

a) People face tradeoffs. (Principle #1)
b) The cost of something is what you give up to get it. (Principle #2)
c) Rational people think at the margin. (Principle #3)
d) People respond to incentives. (Principle #4)

4. Give the principles of HOW PEOPLE INTERACT?

a) Trade can make everyone better off. (Principle #5)
b) Markets are usually a good way to organize economic activity.
(Principle #6)
c) Governments can sometimes improve market outcomes.
(Principle #7)

5. Give the principles of HOW THE ECONOMY AS A WHOLE WORKS?

a) A countrys standard of living depends on its ability to produce goods
& services. (Principle #8)
b) Prices rise when the government prints too much money.
(Principle #9)
c) Society faces a short-run tradeoff between inflation and
unemployment. (Principle #10)

6. What is a product?
A product is a good or service that is the output of a particular production
process.

7. What is a production system?

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 A production system is a description of the set of outputs that can be
produced by a given set of factors of production (or inputs) inputs using a
given method of production or production process.
8. What are three types of factors of production (inputs)?
Expendables
Capital
Capital services

9. What are the expendable factors of production?

Expendable factors of production are raw materials or produced factors
that are completely used up or consumed during a single production
period.
10. What is capital?
Capital is a stock that is not used up during a single production period,
provides services over time, and retains a unique identity.
11. What are capital services?
Capital services are the flow of productive services that can be obtained
from a given capital stock during a production period.
12. What are the constraints to determine an economic environment?
Positive economics
Normative economics
Conditionally normative economics

13. What is positive economics?

Positive economic analysis is the process of under-standing, describing,
and predicting economic behavior.
14. What is normative economic analysis?
Normative economic analysis is the process of determining what "ought to
be" or how to use resources optimally so as to achieve the maximum well-
being for individuals in society.
15. What is conditional normative economic analysis?
Conditional normative economics concerns itself with under-standing,
describing and predicting economic behavior.

16. What are the two fundamental assumptions in economics?

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 Every economic agent tries to make the best out of any situation.
(Maximization hypothesis)
Every economic agent faces constraints.

17. Define the term Market.

A market is an arrangement whereby buyers and sellers interact to
determine the prices and quantities of a commodity.
18. What is the demand?
Quantity demanded is the amount of a good that buyers are willing and
able to purchase.
19. What is the law of diminishing demand?
The law of demand states that there is an inverse relationship between
price and quantity demanded.
20. What are the determinants of demand?
Market price (P)
Consumer income (M)
Prices of related goods (Pr)
Tastes (T)
Expectations (Pe)
Number of consumers (N)

21. What is market demand?

Market demand refers to the sum of all individual demands for a
particular good or service.
22. What is the relationship between consumer income and market demand?
As income increases the demand for a normal good will increase.
As income increases the demand for an inferior good will decrease.

23. What are the substitutes and compliments?

When a fall in the price of one good reduces the demand for another good,
the two goods are called substitutes.
When a fall in the price of one good increases the demand for another
good, the two goods are called complements.

24. What is supply?

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 Quantity supplied is the amount of a good that sellers are willing and able
to sell.
25. What is the law of supply?
The law of supply states that there is a direct (positive) relationship
between price and quantity supplied.
26. What are the determinants of supply?
Market price (P)
Input prices (PI)
Related goods prices (Pr)
Technology (T)
Expectations (Pe)
Number of firms (F)

27. What is market supply?

Market supply refers to the sum of all individual supplies for all sellers of
a particular good or service.
28. Give the demand and supply cycle.

Supply market for Demand

goods and
Goods & Services sold Goods & services
services
bought

Firms Households

Inputs for production Market for Labor, land and capital

factors of
Demands production Supply

29. What is equilibrium price?

The price that balances supply and demand. On a graph, it is the price at
which the supply and demand curves intersect.

30. What is equilibrium quantity?

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 The quantity that balances supply and demand. On a graph it is the
quantity at which the supply and demand curves intersect.
31. What is surplus?
When the price is above the equilibrium price, the quantity supplied
exceeds the quantity demanded. There is excess supply or a surplus.
32. What is shortage?
When the price is below the equilibrium price, the quantity demanded
exceeds the quantity supplied. There is excess demand or a shortage.
33. What is price ceiling?
A legally established maximum price at which a good can be sold.

34. What is price floor?

A legally established minimum price at which a good can be sold.

35. What are the effects of price ceiling?

Shortages
Non-price rationing
Black market
Corruption

36. What is rent control?

Rent controls are ceilings placed on the rents that landlords may charge
their tenants.
37. What is the minimum wage law?
Minimum wage laws dictate the lowest price possible for labor that any
employer may pay.
38. What is Pareto Law?
Paretos law is about identifying the vital few and trivial many.

39. How are you going to use this law to develop the economy of a country?

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People Income
100 100000
FEW - 20 (20%) VITAL - 80000
MANY - 80 (80%) TRIVIAL - 20000
Initially we should identify the sectors which gives the vital few and trivial
many to the countries economy. This will identifies using the wealth creation
or the value addition of each sector. After identifying the vital few, we should
plan to improve the vital few portion and we should not target the trivial many.

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