Lesson 2 - What Is Economics?

Question 1

What is economics and what is it concerned with?

Answer 1

• a social science that looks at human behaviour
• focused on economic welfare

Question 2

How is economics a social science?

Answer 2

It has hypotheses that can be tested in the real world, but not definite laws

Question 3

Define ceteris paribus

Answer 3

• when we model a change, we assume that everything else remains constant

Question 4

Give 5 factors affecting economic welfare

Answer 4

• income
• education
• health
• environment
• inequality

Question 5

What is a positive statement?

Answer 5

A statement that is factual, so it can be proven correct or incorrect

Question 6

What is a normative statement?

Answer 6

An opinion, and a statement that cannot be proven

Question 7

Explain the concept of rationality in economics

Answer 7

The idea that everyone acts rationally (people make decisions that maximise their welfare and utility)

Question 8

What is utility?

Answer 8

The satisfaction gained from consuming a good or service

Question 9

What is behavioural economics focused on?

Answer 9

Human behaviour and decision making

Question 10

What is nudging?

Answer 10

Encouraging someone to take a particular course of action by tailoring how they make those choices (choice architecture)

Question 11

Explain the concept of bounded rationality

Answer 11

• people can only make rational decisions with perfect information and logic
• however, this is not the case in real life, so decisions are made with bounded rationality

Question 12

Name and explain the 6 types of biases

Answer 12

• current moment = people prefer pleasure now over pleasure later
• status quo = we want things to stay the same
• negativity = we tend to focus on negative information
• anchoring = we compare everything to the first piece of information recieved
• availability = we expect future events to happen because similar ones have happened in the past
• memory = we remember events associated with emotions

Question 13

What is choice architecture?

Answer 13

Making it easy for people to make certain decisions

Question 14

Explain the 2008 financial crisis

Answer 14

• banks gave out loans to sub prime borrowers to buy houses
• everyone owns houses, so demand for them fall
• house prices fell and people couldn’t afford to repay their mortgages
• people (and companies) who had invested in them now lost a lot of money, and people started to panic.
• Some large banks went bankrupt
  led to people worrying about the stock market and led to stocks around the world falling a lot!