Economic Principles

Question 1

Define Economics

Answer 1

the study of how agents (individuals and groups) choose to allocate scarce resources to satisfy unlimited wants, and how those choices affect society

Question 2

What is the difference between macro and microeconomics?

Answer 2

Microeconomics
o the study of how households, firms or industries make decisions and how they interact in the market

Macroeconomics
o the study of the economy as a whole, and economy-wide phenomena

Question 3

What is the difference between positive and normative economics?

Answer 3

Positive Economics
o Objective and factual, this refers to what economic agents do
o Limited to statements that are verifiable – can be confirmed or tested with data
o This is when economists are acting like scientists

Normative Economics
o Subjective, and concerned with what people should do
o Economists acting as public policy advisors

Question 4

Describe the four principles of economics

Answer 4

People Face Trade Offs
o A trade-off occurs when an agent must give up one thing in order to get something else
o Individuals face trade-offs because we have unlimited wants but limited resources (money/time) to satisfy those wants
o Governments also face trade-offs in their spending/taxation decisions

Opportunity Cost
o In economics, the cost of something refers to what you give up to get it
o Opportunity Cost = the best alternative that must be given up in order to obtain an item
o This ‘best alternative’ can only be one
o A cost-benefit analysis can help to identify the best alternative by summing benefits and subtracting costs

Rational People Think At the Margins
o A marginal change refers to a small, incremental change
o Typically, a decision in terms of quantity
o Marginal Analysis = what is the benefit of additional consumption vs what is the cost of additional consumption

People Respond to Incentives
o The actions of people will be influenced by the potential of reward or punishment
o To be effective, incentives must a cost/benefit that consumers aren’t willing to overlook

Question 5

What are the various relationships that can be described in graphs?

Answer 5

Positive: the variables are moving in the same direction

Negative (Inverse): one variable is moving in the opposite direction of the other variable

No Relationship (Independent) - there is no association between the two variables in question

Question 6

How do you calculate the slope of a straight line?

Answer 6

Slope = change in y/change in x = rise/run

Question 7

In what formula do you express the slope of a straight line?

Answer 7

y=mx+b

Y = y-axis
M = slope
X = x-axis
B = constant/y-intercept