Chapter 1

Question 1

What is Economics?

Answer 1

Economicsis the study of how people manage resources.

Question 2

What are resources?

Answer 2

Resources- tangible and intangible things: cash, land, time, ideas, technology, experience, relationships.

Question 3

Who made decision about resources?

Answer 3

Resource decisions are made by individuals, groups, firms, governments.

Question 4

What are the two main branches of Economics?

Answer 4

Microeconomics - study of how individuals/firms manage resources. (e.g. the study of markets, demand and supply, consumer behavior, price of goods and services etc.)

Macroeconomics- study of the economy on a regional, national, international scale (e.g. the study of inflation, unemployment, economic growth, national income, exchange rates etc.)

Question 5

What is classic theory?

Answer 5

An economic theory that suggests if demand and supply are not equal, the market will adjust so equilibrium prevails

Question 6

What is Keynesian theory (General Theory of Employment,Interest, and Money)
theory?

Answer 6

An economic theory that suggests that markets may not need to be in equilibrium for the economy to operate

Question 7

What are the 4 main economic questions?

Answer 7

What are the wants and constraints of those involved? (Scarcity)
What are the trade-offs? (Performance and Decision Making)
How will others respond? (Incentives)
Why isn’t everyone already doing it? (Efficiency)

Question 8

What is the economic scarcity?

Answer 8

Condition of wanting more than we can get with available resources.

People make decisions aimed at getting the things they want, but are constrainedby limited resources.

Question 9

What does performance and decision making entail?

Answer 9

Captured by economic measurements which:

1. Are our performance indicators
2. Tell us where we are, help us set goals

Question 10

What are the performance indicators?

Answer 10

1. Gross Domestic Product (GDP) - usually a measurement of national income (dollar value of all the final goods and services a country has produced domestically for a specific period of time).
2. Business Cycles - short-run output fluctuations

Question 11

What are unemployment rates?

Answer 11

Measure unemployed workers in the labor force:

1. Tells labor utilization in economy
2. Labor is significant input into economy’s production capacity
3. High unemployment decreases output
4. Some unemployment inevitable
5. Policy-makers are more concerned with unemployment that comes from growth stagnation

Question 12

What is consumer price index (CPI) and Inflation?

Answer 12

CPI - Measures the overall price level.

Inflation - State of an increase in an overall price level measured by the CPI.

Question 13

When does the debtor gain?

Answer 13

Debtor gains at the expense of creditor if inflation is present

Question 14

What are the effects of inflation?

Answer 14

Rapid inflation may disrupt the saving–investment process

Businesses may not borrow money to expand because the cost of borrowing rises

Households don’t want to save money because the future value of their money may be lower

Leads to lower economic output and affects long-run economic growth

Question 15

What is the monetary policy?

Answer 15

It is a policy that is conducted by the Bank of Canada in which:

Controls money supply, sets interest rates.

Low interest rates stimulate output/employment but may create higher inflation.

High rates tend to lower inflation, but may lower output/employment.

Question 16

What is the fiscal policy?

Answer 16

It is a policy that is conducted by the Federal Government in which:

Uses spending/taxation to raise economic output.

Higher government spending/lower taxes will boost economic output but may bring a higher level of inflation and public debt.

Lower government spending/higher taxes will keep inflation and public borrowing in check but may lead to lower output and employment.

Question 17

What is opportunity cost?

Answer 17

Opportunity cost - equal to the value of what you have to give up in order to get something (Value of your next best alternative)

Question 18

What is marginal decision making?

Answer 18

Marginal decision making - rational people compare the additionalbenefits of a choice against theadditionalcosts, without considering related benefits and costs of past choices

Question 19

What is sunk costs?

Answer 19

Sunk costs - costs that have already been incurred and cannot be recovered

Question 20

What are incentives?

Answer 20

Something that causes people to behave in a certain way by changing the trade-offs they face

Trade-off changes affect choices people make

Askinghow others will respondcan prevent bad decisions by predicting undesirable side effects

Question 21

What are types of incentives?

Answer 21

Positive incentive - makes peoplemore likelyto do something (e.g. 10% bonus mark for early or on time homework submission)

Negative incentive (disincentive) - makes themless likelyto do it (e.g. 10% penalty for late homework submission)

Question 22

What is efficiency and how can we increase it?

Answer 22

Resources used in the most productive way to produce goods/services with greatest societal value

Increasing efficiency - finding ways to better use resources to produce the things that people want

Question 23

What are some disruptors of efficiency include:

Answer 23

Market failure
Intervention

Question 24

What is correlation?

Answer 24

Correlation- if events appear to occur in relation to each other

Question 25

Types of correlation?

Answer 25

Positively correlated - events seem to occur at the same time and move in the same direction. (e.g. temperature and ice-cream consumption, unemployment and recession etc.)

Negatively correlated - increase in one event appears related to a decrease in another (move in opposite directions) (e.g. price of movie and demand for movie)

Uncorrelated - no consistent variable relationship
(e.g. academic performance of student A versus Student B)

Question 26

What is causation?

Answer 26

Causation- one event brings about the other (e.g. Inflation is caused by a higher demand in the economy)

Question 27

Correlation and Causation models

Answer 27

Model - simplified representation of a complicated situation

Circular flow model - flow of economic transactions in an economy

A good model:
Predict cause and effect
Make clear assumptions
Describe real world accurately

Question 28

What is Positive and Normative Analysis

Answer 28

Positive statement - statement that makes a factual declaration about how the worldactuallyworks
e.g. if price of gas raises, people buy less.

Normative statement - statement that makes a claim about how the worldshould be.
e.g. we should not allow the price to go up.