1.1 Thinking Like an Economist

Question 1

Microeconomics

Answer 1

The study of individual and business decisions regarding the allocation of resources and the prices of Goods and Services. Looks at individual markets.

Question 2

Macroeconomics

Answer 2

The study of the economy as a while, looks at decisions of countries and governments.

Question 3

Normative economics

Answer 3

Statements or claims based on opinion or value judgements, based on opinion. Provide business & government w/ hypothetical & future-based decision making insight based on theoretical models or tools. Takes facts, makes predictions.

Question 4

Positive economics

Answer 4

Fact-based economic statements, can be tested/verified to be true/false, based on evidence. Validate state of economy to provide insight into ‘why’ and ‘how’ the economy’s performed. Assist in devising plans and reaching desired goals.

Question 5

Land resources

Answer 5

Any natural resource provided by nature, used in process of production.

Question 6

Capital resources

Answer 6

Physical plant (factories), machinery & equipment used to produce other goods and services, man made resources.

Question 7

Labour resources

Answer 7

Mental & physical capacity of workers to produce goods & services.

Question 8

Entrepreneurship resources

Answer 8

A special type of labour, creative ability of individuals to the combination of resources to produce products & take financial risks to make a profit.

Question 9

Relative scarcity

Answer 9

The problem the world faces is that we, as humans, have needs & unlimited wants, yet only limited productive resources.

Question 10

Utility/satisfaction

Answer 10

Benefit, satisfaction, or usefulness one gets from the consumption of a good or service.

Question 11

Diminishing returns

Answer 11

Increasing use of resources (input) will yield more output but at a diminishing rate (increasing at a decreasing rate).

Question 12

Marginal utility

Answer 12

Addition to the total utility from the consumption of one more unit of a good or service. All economic decisions are based on perceived marginal utility of one more unit of a good.

Question 13

Production Possibility Frontier/Curve

Answer 13

Shows combination of two or more goods & or services that can be produced using all available resources efficiently.

Question 14

Productive efficiency

Answer 14

A situation in which the economy could not produce any more G&S without sacrificing production of another. Shown on PPF.

Question 15

Allocative efficiency

Answer 15

A situation where resources are allocated to production of G&S which most satisfy needs & wants of society. Hypothetical point on PPF.

Question 16

Microeconomic trade-offs

Answer 16

Trade-offs between spending & saving or between work & leisure.

Question 17

Macroeconomic trade-offs

Answer 17

Trade-offs between economic growth & the environment, or between equity & efficiency.

Question 18

Opportunity cost

Answer 18

Loss of the value of the next best alternative forgone when making an economic decision, can be measured/calculated, choice for better alternative made now.

Question 19

Trade-off

Answer 19

Loss of multiple options when making an economic decision, cannot be measured/calculated, a choice is forgone (either in present or future).

Question 20

Current vs future trade-offs

Answer 20

Economic decisions need to balance our current needs with or against our future needs.

Question 21

The 3 basic economic questions

Answer 21

1. What and how much to produce?
2. How to produce?
3. For whom to produce?

Question 22

Resource allocation

Answer 22

Refers to assigning available resources, or factors of production, to specific uses chosen among many possible alternatives.

Question 23

Planned economy

Answer 23

Government owns resources and decides where to allocate resources.

Question 24

Marlet economy

Answer 24

Resources are owned by individuals and are allocated via the forces of supply and demand, and the market mechanism.

Question 25

Economic activity

Answer 25

The volume of production/output, employment, income, & expenditure in an economy.

Question 26

Economic agents

Answer 26

A person, company, or organisation that has influence on the economy by producing, buying, or selling (consumers, firms, government).

Question 27

Public sector

Answer 27

Made of government owned, controlled, & managed orgnisations or other state-run corporations. The govt. make decisions that maximise living standards.

Question 28

Private sector

Answer 28

Run by consumers and firms. Consumers seek to maximise utility while firms maximise profits.

Question 29

Traditional Viewpoint of Consumer

Answer 29

• Rationality
• Ordered preferences
• Informed decision making
• Marginal benefits from consumption

Question 30

Incentive

Answer 30

Something that motivates or encourages someone to do something.

Question 31

Tax rebates

Answer 31

An amount of money paid back to you because you’ve paid too much or as an incentive for buying something.

Question 32

Subsidies

Answer 32

A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government.

Question 33

Taxes

Answer 33

A compulsory levy is charged by the government, and this increases the price of the good/service.

Question 34

Regulations

Answer 34

imposition of rules by government, supported by the use of penalties that are intended specifically to modify the behaviour of individuals and firms.

Question 35

The traditional economic viewpoint of businesses in the economy

Answer 35

Profit maximisation in the short and long term. Firms make decisions to maximise output and sales revenue, and minimise production costs.

Question 36

Maximise revenue

Answer 36

Maximise revenue from selling goods and services. Uses strategies to attract more customers and grow the firm’s share of the market in which it sells.

Question 37

Minimise production cost

Answer 37

Seek to source inputs at a lower cost and increase productivity by increasing output for every unit of input (productivity = output/input).

Question 38

Strategies to maximise profits

Answer 38

Ensure excellent production method, develop good relations with customers to find out what they want and expect, product is technically superior in design and more advanced than rivals, and multiple branding to increase market share (identical products under different names to max shelf space).