Chapter 1

Question 1

What is “Economics”?

Answer 1

Economics is the study of how individual and societies allocate their limited resources to satisfy their nearly unlimited wants.

Question 2

What is “Scarcity”?

Answer 2

Scarcity refers to the limited nature of society’s resources, given society’s unlimited wants and needs.

Question 3

Distinguish between the study of microeconomics and macroeconomics.

Answer 3

Microeconomics is the study of the individual units that make up the economy whereas

Macroeconomics is the study of the overall aspects and workings of an economy (deals with complex issues like unemployment and inflation).

Question 4

What does “economic thinking” require?

Answer 4

Economic thinking requires a purposeful evaluation of the available opportunities to make the best decision possible.

Question 5

What are the five foundations of economics?

Answer 5

• Marginal Thinking
• Oppurtunity Costs
• Trade-offs
• Incentives
• Trade Creates Value

Question 6

What are incentives and the different types?

Answer 6

Incentives are factors that motivate a person to act or exert effort.

• Positive Incentives
• Negative Incentives
• Direct incentives
• Indirect incentives

Question 7

What are “positive incentives”?

Answer 7

Positive Incentives encourage actions by offering rewards or payments (eg. Year-end bonus to work hard)

Question 8

What are “negative incentives”?

Answer 8

Negative incentives discourage action by providing undesirable consequences or punishments (eg. Speeding tickets to discourage speeding)

Question 9

What are “direct incentives”?

Answer 9

Direct incentives involve one incentive having a direct consequence (eg. Lowering gas prices for more customers)

Question 10

What are “indirect incentives”?

Answer 10

Indirect incentives involve unintended consequences (eg. Using government assistance as a permanent source of income instead of as a safety net)

Question 11

What are “trade-offs”?

Answer 11

Trade-offs includes the understanding that each and every decision incurs a cost and we should find how to best utilise our scarce resources. Doing one thing often means that you will not have the time, resources, or energy to do something else.

Question 12

What is “opportunity cost”?

Answer 12

Opportunity cost is the highest-valued alternative that must be sacrificed to get something else. The key to making the best possible decision is to minimise your opportunity cost by selecting the option that gives you the largest benefit.

Question 13

What is “marginal thinking”?

Answer 13

Marginal Thinking requires decision-makers to evaluate whether the benefit of one more unit of something is greater than the cost (Eg. weighing how much money you want against the grades you want). Weigh the costs and benefits of your actions and choose the things with the greatest payoff.

Question 14

What is the function of “markets”?

Answer 14

Markets bring buyers and sellers together to exchange goods and services.

Question 15

What is “barter”?

Answer 15

Barter involves individuals trading a good they already have or providing a service in exchange for something they want.

Question 16

What is “trade”?

Answer 16

Trade is the voluntary exchange between two or more parties.

Question 17

What is a “comparative advantage”?

Answer 17

Comparative advantage refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor. By harnessing the power of increased specialisation, global companies and economics create value through increased growth and production.