Economics Definitions and Schools of Thought

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Questions and Answers

What primary focus does the Classical School of Thought attribute to economics?

The analysis of human behavior

The study of social welfare and well-being

The production and distribution of wealth (correct)

The examination of scarcity and choice

Which school of thought shifted the definition of economics from wealth to welfare?

Neo-classical School of Thought (correct)

Classical School of Thought

Modern School of Thought

Behavioral School of Thought

According to Robbins, what does economics primarily study?

The influence of government on markets

Individual consumer choices in large markets

Human behavior concerning scarce resources (correct)

The relationship between wealth and poverty

What is the primary concern of macroeconomics?

The performance of the overall economy Signup and view all the answers

Which of the following accurately describes microeconomics?

It examines the behavior of individual decision-making units. Signup and view all the answers

What criticism is often directed towards the Classical School of Thought's definition of economics?

It overlooks scarcity and choice. Signup and view all the answers

Which aspect of economics does Neo-classical School of Thought largely ignore according to some economists?

Non-material goods and services Signup and view all the answers

What does the term 'micro' specifically imply in economic studies?

It signifies small individual decision units. Signup and view all the answers

What is the primary focus of normative economics?

Discussing what should be or ought to be Signup and view all the answers

Which statement is an example of positive economics?

High interest rates discourage consumption levels in an economy Signup and view all the answers

What is the first stage of capital formation?

Creation of savings Signup and view all the answers

Which factor is essential for the mobilization of savings?

Strength of financial markets Signup and view all the answers

What are capital goods?

Machines, tools, and factories used for production Signup and view all the answers

What is one consequence of a high average level of income regarding savings?

People tend to save more Signup and view all the answers

Why is investment of savings crucial in capital formation?

It allows for the development of new investment projects Signup and view all the answers

What does an economic system primarily aim to allocate?

Scarce resources among unlimited wants Signup and view all the answers

What distinguishes a planned economy from a market economy?

Resource allocation is determined by government in a planned economy. Signup and view all the answers

Which of the following is a characteristic of a market economy?

Allocation based on demand and supply. Signup and view all the answers

In a mixed economy, what role does the government play?

It addresses market failures and income distribution. Signup and view all the answers

How does the government respond when the private sector fails to supply goods?

By providing subsidies to enhance supply. Signup and view all the answers

What is the primary goal of price control in a mixed economy?

To protect consumers from high prices. Signup and view all the answers

What does the absence of government intervention in a market economy typically lead to?

Inequalities and monopolistic practices. Signup and view all the answers

Which of the following accurately describes resource allocation in a planned economy?

It is determined by the government without market influence. Signup and view all the answers

What measure may a government take in response to an excess supply of unwanted commodities?

Impose quotas on production. Signup and view all the answers

What is the primary reason interest is prohibited in the Islamic economic system?

It requires a lending party to take on no risk. Signup and view all the answers

What role does the government play in the Islamic economic system?

It safeguards the interests and welfare of economic participants. Signup and view all the answers

What does the term 'Zakat' refer to in the Islamic economic context?

A tax on wealth to support the less fortunate. Signup and view all the answers

Which of the following best describes the characteristic of 'Mudaraba'?

The bank provides financial capital while the manager provides human capital. Signup and view all the answers

What is one of the aims of Islamic economics concerning resource distribution?

Promoting an equitable distribution of resources. Signup and view all the answers

What does the term 'HALAL' refer to in the context of the Islamic economic system?

Economic activities that are permissible under Islamic law. Signup and view all the answers

In the context of monopolies within market economies, what is a potential issue noted in the provided information?

They lead to concentration of wealth and can distort macroeconomic variables. Signup and view all the answers

What is forbidden in the Islamic economic system concerning wealth management?

Hoarding wealth for personal use. Signup and view all the answers

What does a point below the Production Possibility Curve (PPC) indicate?

It is attainable but inefficient. Signup and view all the answers

When moving from point A to point B in the context of a PPC, what is the opportunity cost?

A decrease in consumer goods manufactured. Signup and view all the answers

What is a characteristic of the Production Possibility Curve (PPC)?

It is downward sloping and concave to the origin. Signup and view all the answers

What could lead to a rightward shift in the Production Possibility Curve (PPC)?

Technological improvements or increases in resources. Signup and view all the answers

Which of the following statements is true regarding the PPC?

All points below the PPC are inefficient. Signup and view all the answers

What causes a leftward shift in the Production Possibility Curve (PPC)?

Depletion of resources due to war or natural disasters. Signup and view all the answers

How does an increase in capital goods production affect consumer goods?

It requires a decrease in consumer goods output. Signup and view all the answers

Which of the following is NOT a reason for a rightward shift in the PPC?

A reduction in workforce size. Signup and view all the answers

Study Notes

Economics Definitions: Different Schools of Thought

Classical School of Thought: Adam Smith is considered the father of economics, authoring "The Wealth of Nations"
Neo-classical School of Thought: Alfred Marshall defined economics as the study of mankind's ordinary business, focusing on the attainment and use of material well-being
Modern School of Thought: Lionel Robbins defined it as the study of human behavior as a relationship between given ends and scarce means with alternative uses.

Micro and Macro Economics

Microeconomics: Focuses on individual decision units like markets, firms, and households
Macroeconomics: Analyzes the overall performance of the economy
Normative Economics: Discusses what "ought to be" or "should be" and cannot be proven or disproven
Positive Economics: Analyzes economic facts and behavior as they are and can be proved or disproved

Capital Formation

Definition: Net capital accumulation for a country, reflecting additions to the stock of capital goods
Stages:
- Creation of Savings: Depends on individual's will and power to save, influenced by income levels
- Mobilization of Savings: Transfer of savings from households to businesses for investment, relying on developed financial markets
- Investment of Savings: Deployment of savings into real capital, requiring investment projects and risk-taking businesses

Economic Systems

Planned Economy: Government makes all decisions about resource allocation, with minimal market input, and sets prices for resources, goods, and services
Market Economy: Decisions about resources are governed by market forces of supply and demand, with minimal government intervention, and prices are determined by the interaction of producers and consumers
Mixed Economy: A combination of planned and market economy where both the private sector and the government participate in resource allocation decisions

The Role of the State

Government's role in a mixed economy includes addressing market inadequacies:
- Distribution of Income: Redistributing income to address inequality through taxation and public spending
- Price Control: Regulating prices of essential goods and services to protect consumers from exploitation by monopolies
- Interest: Islamic systems prohibit interest, promoting profit sharing and partnership models for financing
- Monopoly: Government interventions to counter market distortions by monopolies and wealth concentration
- Economic Freedom: Balancing economic freedom with acceptable economic activity according to Islamic teachings

Islamic Economic System: Features

State Ownership: Not forbidden but entrepreneurs are free to profit within the system's rules
Moderation: Emphasizes equitable wealth distribution and sharing
Prohibition of Interest: Prohibits interest charging, promoting risk-sharing financing practices
Earnings: Restricted to goods permissible in Islamic teachings
Ban on Hoarding Wealth: Encourages resource utilization for benefit of society
Zakat: Financial tax on the wealthy to support the less fortunate

Islamic Finance Models

Mudaraba: A partnership where the investment company (bank) provides capital and the manager (Mudarib) provides expertise, profits are shared based on agreed terms, and the bank bears any losses.

Production Possibility Curve (PPC)

Definition: A graph depicting all possible combinations of goods that can be produced from a given set of resources
Characteristics:
- Downwards sloping and concave to the origin, reflecting increasing opportunity costs
- Points along the PPC represent efficient and attainable production levels
- Points below the PPC are attainable but inefficient
- Points above the PPC are unattainable with current resources
Shifts in PPC:
- Rightward Shift: Increase in resources (labor, capital, resource quality, technology)
- Leftward Shift: Decrease in resources (e.g., due to war or natural disasters)

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Description

This quiz explores key definitions and concepts from various schools of thought in economics, including Classical, Neo-classical, and Modern perspectives. It also covers fundamental aspects of micro and macroeconomics, as well as normative and positive economics. Test your understanding of these essential economic principles.