Area of study 1 (Thinking like an economist) Introductory concepts

Question 1

K.K.1 (Two main branches of economics)
Define the term “Economics.”

Answer 1

A social science studying the decisions of buyers, sellers, and governments on how scarce resources are to be allocated within an economy.

Question 2

K.K.1
Define an Economy

Answer 2

A region (such as a nation) where a production of goods and services exists, expenditure on those goods and services results, and income is earned by the producers in that region.

Question 3

K.K.1
1: Define Production
2: Define Income
3: Define Expenditure

Answer 3

1: The process of developing a good or service such as an electric vehicle.
2: The money that is provided to those who’ve produced a good or service.
3: The spending of income by producers on goods and services.

Question 4

K.K.1
Define Micro-Economics

Answer 4

A branch of economics that evaluates the decision-making of buyers and sellers within a specific market in an economy. And how different factors effect this decision making.

Question 5

K.K.1
Define Macro-Economics

Answer 5

A branch of economics that evaluates the overall performance of an entire economy on a larger scale. Concerning factors such as economic growth, inflation, and unemployment.

Question 6

K.K.2 (Two main forms of economic analysis)
Define positive economics

Answer 6

A form of economic analysis where economic relationships and statements are based on factual evidence and objective in nature.

Eg: Stating Australia has seen recent economic growth is based on statistics and factual in nature.

Question 7

K.K.2
Define normative economics

Answer 7

A form of economic analysis that is subjective in nature and where economic statements or relationships are based on opinions.

Eg: Stating that the production of fossil fuels yields negative implications on non-material living standards. This statement is based purely on opinion and not factually supported.

Question 8

Define economic activity

Answer 8

Referred to as the production, income, and expenditure occurring within an economy.

Question 9

K.K.3 (Factors of production used to satisfy needs and wants)
Distinguish between needs and wants

Answer 9

A need is a good or service which is essential for human survival. Such as water.
In contrast, a want is a good or service that is not essential for survival and is instead desired to improve life quality and satisfaction.

Question 10

K.K.3
List the four factors of production used to satisfy needs and wants.

Answer 10

Land:
Labor:
Capital:
Entrepreneurship:

Question 11

K.K.3
Define land as a factor of production

Answer 11

Land as a production factor is defined as any naturally occurring resource used in a manner to aid the production of goods and services.

Eg: A farm

Question 12

K.K.3
Define labor as a factor of production

Answer 12

Labor as a production factor is defined as any physical or mental work done by humans to produce goods and services in an economy.

Eg: Factories use workers to develop products.

Question 13

K.K.3
Define capital as a factor of production

Answer 13

Capital as a production factor is defined as any produced good used to aid further production of goods and services.

Eg: A clothing store may use a sewer to produce their goods.

Question 14

K.K.3
Define entrepreneurship as a factor of production

Answer 14

This production factor encompasses the skills of individuals (such as creativity or innovation) combined with other production factors used to produce goods and services.

Question 15

K.K.4 (The basic economic problem of relative scarcity and the need for economic decision making)
Define relative scarcity

Answer 15

Relative scarcity is an economic concept that states that the needs and wants of consumers are unlimited. However, the resources (which sellers use to produce goods/services to satisfy these endless demands) are limited.

Therefore, producers cannot satisfy the unlimited wants and needs of consumers with their available resources.

Causing the problem of scarcity, where there is an under-supply of goods and services in an economy compared to the demand for goods and services by consumers.

Hence, both consumers and producers must make key decisions to maximize their use of limited resources.

Question 16

K.K.4
Describe how relative scarcity impacts producers within an economy

Answer 16

Sellers in an economy must decide which combination of production factors must be taken to produce goods/services and satisfy consumer’s needs and wants.
Whilst keeping in mind that these resources used in production are limited.

Question 17

K.K.4
Describe how relative scarcity impacts consumers in an economy

Answer 17

Buyers in an economy must decide how to best use their limited income (and subsequent wealth) to satisfy their needs and wants as much as possible through their expenditure on goods and services.

Question 18

K.K.5 (The concept and applications of opportunity cost)

Define the term “opportunity cost.”

Answer 18

Opportunity cost is defined as the value of the next best alternative option forgone when an economic agent makes a particular decision.

Question 19

K.K.5
Practice problem (Opportunity cost)
Ex: Jamie is running a store outside of his house and has six books to sell and three movies to sell. He can sell one book for $10 and two movies for $40. What is the opportunity cost of selling all six books only?

Answer 19

Selling all three movies totaling a revenue of $60.

Question 20

K.K.6 (The production possibility curve and its applications)

Define the production possibility curve

Answer 20

A curve that represents the productive capacities of two resources in an economy at a specific point in time (With its limited resources). Showing the different combinations of quantities these two resources can be produced in. Expressed as points on this curve.

The PPC is used to demonstrate various economic concepts.

Question 21

K.K.6

List the economic concepts showcased by the Production possibility curve. (PPC)

Answer 21

Opportunity cost:
Relative scarcity:
Underutilization of resources:
Economic efficiency:

Question 22

K.K.6

Explain how the PPC displays scarcity

Answer 22

The PPC shows scarcity as it shows that only a limited amount of two products can be produced by an economy at any given time.

Therefore, sellers must decide the quantities in which they’ll produce both these products to maximize profits and satisfy consumer demand.

Question 23

K.K.6
Explain how the PPC displays opportunity cost

Answer 23

The PPC shows the opportunity cost when moving from one point on the curve to another. As when this is done the production of one product is being sacrificed by an amount to increase production in the other product being shown on the PPC.

The forgone quantity is then expressed as the opportunity cost.

Question 24

K.K.6

1: Define an under utilization of resources
2: Explain how the PPC shows this concept

Answer 24

1: An under-utilization of resources shows that an economy is not making an effective use of its resources (production factors) in the development of two products. This is often a reflection of unemployment occurring within an economy.

2: The PPC shows this concept as any point located within the curve is a representation of an under utilization of resources.

Question 25

K.K.6
Define technical efficiency

Answer 25

A situation where the limited resources in an economy are being used to a full extent and sellers are producing the maximum amount of each product that can be produced with the current resources available to that economy at the lowest cost.

Any point located on the PPC is considered “technically efficient.”

Question 26

K.K.6
Define allocative efficiency

Answer 26

Allocative efficiency refers to a specific combination of production quantities in an economy that suits the best interest of that nation and its consumers as a whole.

This will be located at one point on the PPC and subjective to that nation’s beliefs.

Question 27

K.K.7 (The need for trade-offs and cost-benefit analysis)
Define “Trade offs.”

Answer 27

The total collection of forgone opportunities that result from a single decision made by an economic agent.

Question 28

K.K.7
Define current trade-offs
Provide an example

Answer 28

Current trade-offs (also known as trade-offs in the short run) are defined as the total collection of the forgone opportunities right now (in the short run) when making a decision concerning the future benefits for an economic agent.

An example includes an individual deciding to save their money for future consumption. Resulting in a trade-off to their current consumption.

Question 29

K.K.7
Define future trade-offs
Provide an example

Answer 29

Future trade-offs (also referred to as trade-offs in the long run) are defined as the total collection of forgone opportunities in the future (or long run) when an economic agent makes a decision beneficial to them in a current context.

An example of a future trade-off is for an individual to consume more goods in a current context. With the trade-off being that they’ll have less wealth generated for their retirement.

Question 30

K.K.7
Why are trade-offs important?

Answer 30

Trade-offs are important for people, businesses, and governments t be aware of as it allow different economic agents to understand all the forgone opportunities resulting from any particular course of action.

Once trade-offs are understood, different economic agents can then conduct a cost-benefit analysis to decide if a decision or course of action is truly worth it.

Question 31

K.K.7

Define a cost-benefit analysis

Answer 31

A cost-benefit analysis is a comparison of the expected benefits to the expected costs of a certain decision, project, or course of action taken by an economic agent.

The point of a cost-benefit analysis is to determine if the benefits of a decision will outweigh the costs of a certain decision. Which determines if that decision or course of action should be taken by that economic agent.

Question 32

K.K.7

Explain how a cost-benefit ratio is derived.

Answer 32

A cost-benefit ratio is obtained by dividing the expected benefits of an economic decision by the expected costs of that decision within monetary terms.

If a ratio of 1 or greater is obtained through a cost-benefit analysis this means the expected benefits of a certain decision outweigh the costs. Meaning this will be beneficial to that economic agent.

If a ratio of less than one is obtained through a cost-benefit analysis this means the costs outweigh the benefits for a particular economic decision and it will not benefit that agent.

Question 33

K.K.8

Identify the three commonly asked questions in economics.

Answer 33

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

Question 34

K.K.8

Describe what the first economic question asks

Answer 34

What and how much to produce?

This question asks which kinds of goods and services are to be produced within an economy and in what quantities should these goods and services be produced.

Question 35

K.K.8

Describe what the second economic question asks

Answer 35

How to produce?

This question asks which combination of resources (land, labour, and capital) should be used in the production of goods and services within an economy by its producers.

To illustrate, this question can help answer if labor should primarily be used to produce goods or services. Or alternatively, should capital be relied on instead.

Question 36

K.K.8

Describe what the third economic question asks

Answer 36

For whom to produce for?

This questions how the produced goods and services in an economy are to be distributed amongst the consumers of that economy or society. So, who gets access to these goods and services produced within the economy?

Question 37

K.K.9

Define a market economy

Answer 37

A market economy is a region where the three economic questions are answered by the forces of supply and demand within specific markets of that economy.

Question 38

K.K.9

Define a planned economy

Answer 38

A planned economy is a region where the three economic questions are answered by the government. Usually via long-term or short-term plans.

Question 39

K.K.9

Define a mixed economy

Answer 39

A mixed economy is a region where the three key economic questions are primarily answered by the forces of supply and demand within specific markets of that economy. However, there is still a degree of government intervention when answering these 3 key questions to avoid certain implications of a “pure market economy.”

Question 40

K.K.9

Describe the economic system of capitalism

Answer 40

Under a system of capitalism, resources in an economy are owned and operated by private producers.

Question 41

K.K.9

Describe the economic system of socialism

Answer 41

Under a system of socialism, resources in an economy are owned and operated by the government on behalf of its citizens.

Question 42

K.K.9

Describe how Market capitalist/socialist economies answer the three economic questions.

Answer 42

Under all market economies, the three economic questions are answered by the forces of supply and demand within specific markets of that economy. With capitalist/socialist economies only concerning resource ownership.

1 : The kinds of goods and services produced and the quantities they’re produced in are dictated by the consumer demands within that economy.

2: The combination of production factors used to produce these goods and services will be dictated by the profit incentives of producers within that economy as they will produce goods and services in a manner that minimizes cost and maximizes profit.

3: The distribution of goods and services in the economy will be decided by the levels of income of consumers within that economy.

Question 43

K.K.10

Outline what the 3-sector four flow model of economic activity is.

Answer 43

This model shows how the components of economic activity (production, income, and expenditure) flow through the key sectors of the Australian economy. Which includes the government as Australia is a “mixed economy.”

Question 44

K.K.10

List the three key sectors in the three-sector four flow model of the economy.

Answer 44

: Households
: Businesses
: The Government

Question 45

K.K.10

Describe Flow 1 of the three-sector four flow model of economic activity.

Answer 45

Flow 1 entails the household sector providing resources (production factors such as land, labor, and capital) to the business sector to produce goods and services.

Specifically, the prominent resource provided by the household sector includes labor to the business sector.

Question 46

K.K.10

Describe flow 2 of the three-sector four flow model of economic activity.

Answer 46

Flow 2 entails the business sector providing income to the household sector in return for the resources provided to produce goods and services.

Question 47

K.K.10

Describe flow 3 of the three-sector four flow model of economic activity.

Answer 47

Flow 3 entails the income retained by households to be used when purchasing goods and services produced by the business sector. Referred to as household expenditure.

However, due to taxes, there is a leakage of income which results in a flow to the government sector.

Finally, flow 3 entails a re-injection by the government sector into the business sector. As the government reinvests the income they tax into the business sector.

Question 48

K.K.10

Describe flow 4 of the three-sector four-flow model of economic activity.

Answer 48

Flow 4 entails a further production of goods and services by the business sector to the household sector.

This occurs as expenditure on production in an economy (both household and government expenditure) yields further production by the business sector.

Question 49

K.K.11

Define “living standards.”

Answer 49

Living standards measure people’s welfare within an economy and can be divided into to subcategories.

The two metrics of living standards include material and non-material living standards.

Question 50

K.K.11

Define “material living standards.”

Answer 50

Material living standards measure people’s ability to access goods and services produced within an economy.
Material living standards are measured through GDP per capita.

Question 51

K.K.11

Define “non-material living standards.”

Answer 51

Non-material living standards measure factors that affect people’s life quality within an economy which aren’t in monetary terms.

Which are measured through factors such as air quality, pollution, life expectancy, and more.