MICROECONOMICS TEST BANK 2026
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Chapter 1: What economics is all about
REVIEW QUESTIONS
3. 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).
99. 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.
100. 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.
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.
101. Distinguish between microeconomics and macroeconomics and give two
examples of microeconomic issues and two examples of macroeconomic issues in
South Africa today.
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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.
102. 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.
103. 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.
104. 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.
105. 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). 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.
106. Use the principle of opportunity cost to explain:
d) Why students watch more TV the week after the examinations than the week
before the examinations
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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.
e) Why garden services are so popular today
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.
f) Why a self-employed person plays more rounds of golf per week while on
holiday than during the rest of the year
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.
Downloaded by Tito Titus ()
, lOMoARcPSD|61422780
Chapter 1: What economics is all about
REVIEW QUESTIONS
3. 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).
99. 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.
100. 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.
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.
101. Distinguish between microeconomics and macroeconomics and give two
examples of microeconomic issues and two examples of macroeconomic issues in
South Africa today.
Downloaded by Tito Titus ()
, lOMoARcPSD|61422780
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.
102. 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.
103. 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.
104. 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.
105. 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). 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.
106. Use the principle of opportunity cost to explain:
d) Why students watch more TV the week after the examinations than the week
before the examinations
Downloaded by Tito Titus ()
, lOMoARcPSD|61422780
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.
e) Why garden services are so popular today
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.
f) Why a self-employed person plays more rounds of golf per week while on
holiday than during the rest of the year
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.
Downloaded by Tito Titus ()
