Chapter 1 - Foundations & Models

Question 1

Scarcity

Answer 1

Although our wants are endless, our resources are limited. This can also drive up price.

Question 2

Economics

Answer 2

Is the study of the choices people make to attain their goals with limited resources.

Question 3

Resources

Answer 3

Inputs used to produce a good or service. E.g. minerals, water, labour. Also known as factors of production.

Question 4

Economic Models

Answer 4

Simplified versions of reality used to analyse real world economic situations.

Question 5

The Three Key Economic Ideas

Answer 5

1. People are rational. They use as much information as possible to weigh up the benefit and costs.
2. People respond to Economic Incentives. Pharmaceutical Benefits Scheme.
3. Optimal decisions are made at the margin. MB=MC

Question 6

Market

Answer 6

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Question 7

Optimal Decision

Answer 7

MB=MC

Question 8

Marginal

Answer 8

The extra additional benefit or cost of a decision

Question 9

Marginal Analysis

Answer 9

Analysis that involved comparing marginal benefit and marginal cost.

Question 10

Trade-offs

Answer 10

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

Question 11

What goods and services will be produced

Answer 11

Consumers, firms and government face the problem of scarcity by trading off one good or service for another.

Question 12

Opportunity cost

Answer 12

The highest valued alternative that must be given up to engage in an activity. I.E. Open own business or work for $80k a year in a job.

Question 13

How will the goods and services be produced

Answer 13

In many cases, firms face a trade off between using more workers or more machines.

Question 14

Who will receive the goods and services produced.

Answer 14

Depends on how income is distributed. People donate to charities and forego some income for goods. Taxes try and distribute wealth more evenly.

Question 15

Centrally planned economy

Answer 15

An economy in which the government decides how economic resources will be allocated. I.e. former soviet union, Brazil

Question 16

Market economy

Answer 16

An economy in which the decisions of individuals and businesses interacting in markets allocate economic resources.

Question 17

Consumer sovereignty

Answer 17

The concept that in a market economy it is ultimately consumers who decide what goods and services will be produced. This occurs because firms must produce goods and services that meet the wants of consumers or the firms will go out of business.

Question 18

Mixed economy

Answer 18

An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources.

Question 19

Productive efficiency

Answer 19

When a good or service is produced using the least amount of resources.

Question 20

Allocative efficiency

Answer 20

When production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Question 21

Dynamic Efficiency

Answer 21

When technology and innovation are adopted over time.

Question 22

Voluntary exchange

Answer 22

Occurs in markets where both the buyer and the seller of the product are better off by the transaction.

Question 23

Equity

Answer 23

The fair distribution of economic benefits between individuals and between societies. There is often a trade off between efficiency and equity.

Question 24

To develop an economic model

Answer 24

1. Decide on the assumptions
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. revise the model, If it fails to explain the data well
5. Retain the revised model to help answer similar questions.

Question 25

Economic variable

Answer 25

Something measurable that relates to resource use that can have different values. E.g wages, prices or hours worked.

Question 26

Positive analysis

Answer 26

Analysis concerned with ‘what is’ and involves value free statements that can be checked by using facts.

Question 27

Normative analysis

Answer 27

Analysis concerned with what ought to be and involves making value judgements, which cannot be tested. I.e. The PBS is wrong and disadvantages lower incomes.

Question 28

Microeconomics

Answer 28

The study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices.

Question 29

Macroecomics

Answer 29

The study of the economy as a whole, including topics like inflation, unemployment and economic growth.