The Basic Core of Economics

Question 1

Microeconomics definition

Answer 1

Microeconomics examines behaviour and decisions of individual firms and households and way they interact in specific industries and markets, used to analyse decisions made by individual firms, or to look at how certain factors can affect the market for a specific good

Question 2

Macroeconomics definition

Answer 2

Macroeconomics focuses on the whole national economy or even the whole world economy, examines the workings and problems of the whole economy, looking at features such as GDP growth and unemployment, used to examine the factors that contribute to a country or region’s overall economic growth, or to determine the cause of economic fluctuations (e.g. recessions)

Question 3

Economics mantra

Answer 3

Economics mantra: people make choices with scarce resources, and they interact with others when they make these choices

Question 4

Opportunity cost definition

Answer 4

Opportunity cost is the value of the next-best forgone alternative to making a choice. Economists consider this the real cost of a decision; for example, if a baseball player decided to attend college on a scholarship instead of entering the MLB draft, then even if he is going to school for free, the opportunity cost of that decision is the salary he could be making as a professional.

Question 5

Gains from trade definition

Answer 5

Gains from trade are improvements in income, production, or satisfaction owing to the exchange of goods or services.

Question 6

What can economic interaction lead to?

Answer 6

Specialisation, division of labour, comparative advantage

Question 7

Specialisation definition

Answer 7

Specialisation: a concentration of production effort on a single specific task

Question 8

Division of labour definition

Answer 8

Division of labour: the division of production into various parts in which different groups of workers specialise

Question 9

Comparative advantage definition

Answer 9

Comparative advantage: a situation in which a person or group can produce one good at a lower opportunity cost than another person or group

Question 10

What can specialisation, division of labour, and comparative advantage lead to?

Answer 10

Greater production due to greater efficiency

Question 11

What are the five main components in the governments role in trade?

Answer 11

Predictable policy framework, rule of law, reliance on market economy, good incentives, specific role of government

Question 12

Predictable policy framework definition

Answer 12

Predictable policy framework: the government needs to be predictable in its decision-making process

Question 13

Rule of law definition

Answer 13

Rule of law (e.g. property rights): property rights need to be clearly defined and enforced

Question 14

Reliance on market economy definition

Answer 14

Reliance on market economy: the government needs to allow the market to determine prices and quantities produced

Question 15

Good incentives definition

Answer 15

Good incentives: the government needs to provide good incentives for economic activity, such as patents to encourage innovation

Question 16

Specific role of government definition

Answer 16

Specific role of government: the government needs to be able to intervene in the case of market failure, when the market would fail to reach the efficient outcome

Question 17

Production possibilities curve

Answer 17

a graph which illustrates the tradeoffs that an economy faces when deciding what to produce