1.1 Nature of Economics (1.1.1 - 1.1.4)

Question 1

What is economics?

Answer 1

• the allocation of scare resources to provide for unlimited wants and needs

Question 2

What kind of science is economics?

Answer 2

A social science that deals with the production, consumption and distribution of goods and services

Question 3

Why do economists develop models?

Answer 3

to understand behaviour and to explain real world evidence

Question 4

Why do economists build models based on a set of assumptions?

Answer 4

• as controlled laboratory tests are not possible
• in real life economists can’t keep variables constant

Question 5

Explain the Ceteris Paribus assumption

Answer 5

When economists study the relationship between two factors, they’ll assume that one factor changes while the rest stay constant

Question 6

What does ‘Ceteris Paribus’ mean?

Answer 6

‘Everything else remains equal’

Question 7

What is a positive statement?

Answer 7

it deals with was it or will be, and can be proven or tested against real world data

Question 8

What is a normative statement?

Answer 8

it involves a value judgement and cannot be proven or tested

Question 9

What kind of words does a normative statement tend to include?

Answer 9

‘should’ and ‘ought’

Question 10

What is a value judgement?

Answer 10

statements expressed that depend on the views of the individual and the values they hold

Question 11

What is the basic Economic problem?

Answer 11

That there are not enough resources to satisfy the unlimited wants and needs of humans

Question 12

What are needs?

Answer 12

things people can’t live without

Question 13

What are wants?

Answer 13

things people can live without but desire (e.g. smartphones)

Question 14

Why do choice have to be made on how to use resources?

Answer 14

Because resources are scarce

Question 15

What is opportunity cost defined as?

Answer 15

the next best alternative forgone

Question 16

Explain opportunity cost

Answer 16

The cost of one item can be seen as the lost opportunity to consume something else

Question 17

What can Opportunity cost sometimes be referred to as?

Answer 17

A price

Question 18

Why is opportunity cost useful?

Answer 18

• It is useful when thinking about how to allocate resources
• consumers can use it to decide how to spend their earnings

Question 19

What are 2 issues with opportunity cost?

Answer 19

• Not all factors have alternatives
• Some alternatives are unknown

Question 20

What actions does economic activity include?

Answer 20

• Production of goods and services
• Consumption of goods and services

Question 21

Who are the three main economic agents?

Answer 21

1. Producers
2. Consumers
3. Governments

Question 22

What is the role of economic agents?

Answer 22

To decide how to allocate resources

Question 23

What is the objective of consumers?

Answer 23

to maximise their satisfaction in a purchase

Question 24

What is the objective of producers?

Answer 24

to maximise profits

Question 25

What is the objective of workers?

Answer 25

to balance income with job satisfaction

Question 26

What is the objective of the government?

Answer 26

to maximise the welfare of society

Question 27

What are the two types of resources?

Answer 27

Renewable and Non-renewable resources

Question 28

When may renewable resources become finite?

Answer 28

if the rate we consume the resource is quicker than the natural rate of production, the resource will become depleted and we will have a finite supply (rate of extraction)

Question 29

As finite resources get increasingly used up, what happens to its price?

Answer 29

it will get higher