Introduction to Economics Questions and Answers [With PDF]

Why can’t we have everything we want? Why do prices change? Why do some countries grow faster than others? Economics is the subject that answers questions like these. This chapter gives you the foundation: what economics is, why scarcity forces us to choose, the main economic systems, and the difference between micro and macroeconomics. Here are 25 important questions with clear answers, ready for exams, vivas and interviews.

This is Chapter 1 of our Economics course. Continue with Concepts of Economics afterwards.

Meaning, History and Importance

Q1. What is economics?

Economics is the study of how people, businesses and governments make choices about using limited resources to satisfy unlimited wants.

Q2. What is the main goal of economics?

The main goal is to improve human welfare. Human wants are endless, but the resources to satisfy them are limited and have more than one use. Economics studies how to use those resources in the best way, how people earn and spend money, and how to balance wants with what is available.

Q3. What is the brief history of economics?

The word economics comes from the Greek word oikonomia, meaning household management. Early thinkers such as Aristotle used it for managing a household. Over time the study widened to cover whole societies.

Q4. Why is it important to study economics?

• It teaches how to choose the most important wants when resources are limited.
• It explains money, banking, trade, industry, budgets and transport, which drive a country’s development.
• It shows how to use resources fairly and efficiently, and what to produce and for whom.
• Economic planning needs economic knowledge.
• It helps countries gain from international trade.
• It helps people make better decisions as consumers, workers and citizens.

The Economic Problem

Q5. What are the two major economic problems?

• Scarcity of resources
• Unlimited wants

Q6. What are scarcity and unlimited wants?

People always want more than they can have. Resources such as land, labour, capital and money are limited, so only some of our wants can be met. This gap between wants and resources is scarcity. Because of it, people rank their wants and satisfy the most important ones first. This is called choice or want selection.

Free goods such as sunlight and air are not scarce, because we do not have to pay for them. Economics focuses on goods that are scarce.

Q7. What are the three central problems every economy must solve?

• What to produce and in what quantity?
• How to produce, with which technique and resources?
• For whom to produce, that is, how output is shared among people?

Q8. What are the ten principles of economics?

According to N. Gregory Mankiw, the ten principles are:

1. People face trade-offs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.
8. A country’s standard of living depends on its ability to produce goods and services.
9. Prices rise when the government prints too much money.
10. Society faces a short-run trade-off between inflation and unemployment.

Q9. What is opportunity cost?

Because resources are scarce, choosing one thing means giving up another. The value of the best alternative that you give up is the opportunity cost. Example: if you spend 1,000 on a concert ticket instead of books, the books are the opportunity cost.

Economic Activities and Systems

Q10. What are economic and non-economic activities?

Q11. What is an economic system?

The way a society organizes the production, distribution, exchange and use of resources, goods and services.

Q12. What are the types of economic systems?

• Capitalist (market) economy
• Socialist (planned) economy
• Mixed economy
• Islamic economy

Q13. What is a capitalist economy?

An economy in which resources and the means of production are mainly owned by individuals and private firms, and most decisions about what to produce and buy are made through the market.

Q14. What are the characteristics of a capitalist economy?

• Private ownership of resources and the means of production.
• Freedom of enterprise, with little government interference.
• Competition among firms and consumers.
• Prices are mainly set by demand and supply.
• The profit motive drives production.
• Income and wealth can be unequally distributed.

Q15. What is a socialist economy?

A planned (command) economy in which the main resources and means of production are owned by the state, and the central government takes the major economic decisions.

Q16. What are the characteristics of a socialist economy?

• State or collective ownership of resources.
• Central planning of production, prices, wages and distribution.
• The aim is social welfare and reducing inequality in basic needs such as food, housing, education and health.
• The state decides how much is produced and how it is distributed.
• Prices are mostly fixed by the state. This can hold down price rises, but it can also cause shortages and hidden inflation.

Q17. What is the difference between capitalist and socialist systems?

Q18. What is a mixed economy?

An economy that combines features of capitalism and socialism. Private firms and the government both play important roles. Markets decide many things, while the government regulates, provides public services and reduces inequality.

Q19. What are the characteristics of a mixed economy?

• Public and private ownership exist side by side.
• The private and public sectors both operate.
• The government plans, and private plans are coordinated with national goals.
• Prices are mostly set by the market, but the government can regulate some of them.
• Private ownership means income may still be unequal, though taxes and welfare policies can reduce it.

Q20. What is an Islamic economic system?

An economic system whose rules come from Islamic law (Shariah), based on the Quran and the Sunnah. Economic activities such as production, consumption, trade and finance are organized according to those principles.

Q21. What are the characteristics of an Islamic economy?

• Resources are regarded as a trust: people use and protect them as stewards.
• Activities are classified as lawful (halal) and unlawful (haram) in production, consumption and trade.
• Interest (riba) is prohibited, and profit and risk sharing is encouraged.
• Wealth is redistributed through zakat and charity, from the rich to the needy.
• Prices are mainly set by demand and supply, with limited intervention to prevent unfair practices.

Economic Agents, Micro and Macro

Q22. Who are the economic agents?

• Households (consumers): own resources, supply labour and buy goods and services.
• Firms (producers): use resources to produce goods and services.
• Government: collects taxes, spends on public services and regulates the economy.

Q23. What is microeconomics?

The branch of economics that studies the decisions of individual households, firms and markets, and how prices are set. Examples: the price of rice, a firm’s output, a consumer’s choice.

Q24. What is macroeconomics?

The branch of economics that studies the economy as a whole, at national and global level. It covers national income, economic growth, inflation, unemployment, the price level, government budgets and international trade.

Q25. What are the differences between microeconomics and macroeconomics?

Quick Revision Points

• Economics = choice under scarcity. Wants are unlimited, resources are limited.
• Opportunity cost = value of the next best alternative given up.
• Central problems: what, how and for whom to produce.
• Systems: capitalist, socialist, mixed and Islamic.
• Micro studies individual units. Macro studies the whole economy.

Test yourself with the chapter quiz below, then continue to Concepts of Economics.