ECONOMICS

Question 1

what is economics?

Answer 1

the study of how society chooses to allocate its scarce land, labour and capital resources to the production of goods and services to satisfy the population’s needs and unlimited wants.

Question 2

what is a need?

Answer 2

something essential for a person’s survival and is limited

Question 3

what is a want?

Answer 3

a desire that a person has that is not essential for survival and is unlimited

Question 4

what are economic resources?

Answer 4

inputs that are used in the production of goods and services, and include land resources, labour resources and capital resources.

Question 5

what is land?

Answer 5

any natural resource provided by nature used in the process of production

Question 6

what is labour?

Answer 6

the mental and physical capacity of workers to produce goods and services

Question 7

what is capital?

Answer 7

are man-made tools, machinery and equipment used in the production of goods and services

Question 8

what is scarcity?

Answer 8

the problem that every society faces where we as humans have needs and unlimited wants, yet only limited productive land, labour and capital resources to satisfy these needs and wants

Question 9

what is choice?

Answer 9

an economic decision made between competing alternatives

Question 10

what is opportunity cost?

Answer 10

the loss of the value of the next best alternative forgone whenever an economic decision is made

Question 11

what is the production possibilities model?

Answer 11

a simple economic tool used to illustrate the trade-offs that exist when an economy decides what goods to produce

Question 12

what two major assumptions does the production possibilities model make?

Answer 12

• that an economy can only produce two different goods or services
• that all scare resources are being fully utilised (or employed)

Question 13

what are economic resources or ‘factors of production’?

Answer 13

• land - any natural resource provided by nature used in the process of production
• labour - the mental and physical capacity of workers to produce goods and services
• capital- are man-made tools, machinery and equipment used in the production of goods and services

Question 14

what is efficiency?

Answer 14

the optimal use of resources in the production of goods and services, with no wastage

Question 15

what is behavioural economics?

Answer 15

a field of study that combines insights from psychology, economics, and neuroscience to better understand how people make decisions in real-world situations

Question 16

what is bounded rationality?

Answer 16

a concept in behavioural economics that suggests that people have limited rationality and make decisions based on a limited set of information and cognitive abilities, and often rely on mental shortcuts to simplify complex decision-making

Question 17

what are the types of bounded rationality?

Answer 17

• herd behaviour
• vividness
• framing effect
• anchoring bias
• sunk cost fallacy

Question 18

what is herd behaviour?

Answer 18

when individuals in a group follow the decisions of others, rather than making their own choices

Question 19

what is vividness?

Answer 19

a type of irrationality because consumers may place too much weight on a small number of vivid observations

Question 20

what is framing effect?

Answer 20

a cognitive bias in which people’s decisions are influenced by how information is presented or ‘framed’

Question 21

what is anchoring bias?

Answer 21

a cognitive bias where people rely too heavily on the first piece of information they receive when making a decision even if that information may not be relevant or accurate

Question 22

what is sunk cost fallacy?

Answer 22

a cognitive bias where people continue to invest time, money, or other resources into a decision, even if it’s no longer rational to do so, simply because they’ve already invested a lot of time, money, or resources in it

Question 23

what is the tradition economic theory?

Answer 23

The main assumption that was often made about consumers by economists and businesses is that all consumers are rational. This meant they believed that:

• consumers will always make logical decisions that are in their own self-interest and that maximise their utility
• consumers are not emotional or impulsive and will carefully weigh up the costs and benefits carefully before making a decision
• consumers make decisions by themselves and for themselves and are not influenced by external factors
• consumers always have the information they need to make an informed choice
• consumers have the same preferences that do not change over time

Question 24

what is bounded willpower?

Answer 24

the idea that consumers do not possess absolute self-control when confronted with choices

Question 25

what is bounded self-interest?

Answer 25

the idea that consumers care about fairness and are not always driven by self-interest in order to maximise personal benefit

Question 26

what is macroeconomics?

Answer 26

a branch of economics that looks at the big picture of the economy as a whole

Question 27

what is economic activity?

Answer 27

the overall level of production and consumption of goods and services in an economy over a certain period of time

Question 28

what are the two types of living standards?

Answer 28

• material living standards
• non-material living standards

Question 29

what are material living standards?

Answer 29

the degree to which a citizen can access goods and services. quantifiable and measurable

Question 30

what are non-material living standards?

Answer 30

referring to one’s wellbeing and quality of life. qualitative and difficult to measure.

Question 31

what is inflation?

Answer 31

the general increase in prices of goods and services in an economy over time

Question 32

why is inflation bad?

Answer 32

• reduced purchasing power - when inflation is high, the prices of goods and services increase rapidly. so the same amount of money can buy fewer goods and services, meaning household purchasing power decreases
• wage-price spiral: the wage-price spiral is a self-reinforcing cycle where high inflation and loss of purchasing power leads workers to demand high wages from their employees.

Question 33

what are the causes of inflation?

Answer 33

• excessive spending in the economy: if there is more money available than there are goods and services to buy, this will lead to shortages if goods and services in the economy and prices will go up
• costs of production: if the cost of land, labour and capital resources increase, the price of the finished product will likely go up as well

Question 34

what are interest rates?

Answer 34

the cost of borrowing money

Question 35

who is the reserve bank of australia?

Answer 35

• The Central Bank of Australia
• the RBA’s main objective is to maintain price stability, which means keeping inflation low and stable over the medium term, around 2-3%
• they use the monetary5 policy to increase interest rates, which leads to Australians spending less money which will hopefully decrease inflation over time

Question 36

how do higher interest rates impact high inflation?

Answer 36

• higher costs of borrowing
• increased savings
• increase mortgage repayments

Question 37

what is international trade?

Answer 37

involves the buying and selling of goods and services across international boundaries

Question 38

what is free trade?

Answer 38

the absence of government intervention of any kind in international trade

Question 39

what is the theory of absolute advantage?

Answer 39

if countries specialise in and export the good in which they have an absolute advantage, the result is increased production and consumption in each country, increasing material living standards in each country

Question 40

what are the benefits of free trade between countries?

Answer 40

• increased competition - when countries trade, domestic firms become exposed to competition from products produced by firms in other countries and are therefore forced to become more efficient
• specialisation - if a country uses its scarce resources to specialise in the production of those goods and services it is most efficient at producing, it can produce more of these and trade some of them for other goods produced more efficiently in other countries
• greater choice for consumers - the goods and services each country can produce differ widely with respect to their variety and their quality
• increased flow of new ideas and technology - as goods and services flow from country to country, they enable new ideas new technologies and skills to be transferred

Question 41

what are some potential negatives of free trade?

Answer 41

• increased unemployment - free trade increases competition in the economy, and more competition forces businesses to try to produce at the lowest cost possible. in this process of trying to lower production costs, labour is replaced with machinery
• infant’ domestic industries cannot develop - allowing foreign competition that is already producing at a lower cost and higher quality, might lead to the discontinuation of new industries before they have a chance to compete with the world
• predatory pricing - pricing goods or services at such a low level that other firms cannot compete and are forced to leave the market,
• loss of culture - experts have argued that free trade is increasing a loss of culture in Australia and is increasing the ‘Americanisation’ of the world