Lecture 1

Question 1

What are the three key ideas of economics?

Answer 1

1. people are rational
2. marginal decision making
3. incentives change people’s behaviour

Question 2

Make up a story that demonstrates all three key ideas.

Answer 2

1. Dave sees a jacket in the window for a thousand pounds.
2. He decides to research online and finds one that is 20% off somewhere else. [rational because researching variants]
3. He goes to this new store and sees the jacket. He thinks to himself, how many MORE dates can I get with this jacket. [marginal benefit as looks at additional benefit rather than total value]
4. He considers the opportunity cost of buying the jacket: it means he has no money to take his dates to a nice place. [he considers opportunity cost because he thinks about what he could have done instead]
5. However, the woman working at the store compliments him in the jacket and says it suits him. The incentive of impressing this woman changes his mind and he purchases the jacket. [incentives have changed his behavoiur]

Question 3

What is an economic model?

Answer 3

a simplification of reality that can be used to analyze economic situations

Question 4

0What are the steps of building an economic model?

Answer 4

1. assumptions
2. hypothesis
3. test with data
4. revise

Question 5

What are the two types of analysis?

Answer 5

1. positive
2. normative

Question 6

Which type of analysis do economists generally perform?

Answer 6

positive

Question 7

What are the differences between the two types of analysis?

Answer 7

1. positive - how world actually is
2. normative - how world should be

Question 8

Give an example of the differences between the two types of analyses.

Answer 8

Student loan debt.

Positive:
1. how much would it cost?
2. what benefits would there be to the economy?
3. which groups would benefit most?
4. how would this change incentives for future borrowers?

Normative:
1. is it fair?
2. which groups should be prioritized?

Economists do positive, not normative.

Question 9

What is the difference between microeconomics and macroeconomics?

Answer 9

Microeconomics = study of individuals:
1. how actors make choices
2. how actors interact
3. how government influences choices

Macroeconomics = study of economy as a whole:
1. inflation
2. unemployment
3. growth

Question 10

What is a production possibilities frontier?

Answer 10

graph that shows the maximum possible combinations of two products that could be gotten with current resources

Question 11

What are the essential features of a production possibilities frontier graph?

Answer 11

1. x-axis is quantity of first thing
2. y-axis is quantity of second thing
3. line shows efficient combinations
4. below the line is inefficient
5. above the line is impossible with current resources