Week 0 - Foundations and Models

Question 1

What is offshoring?

Answer 1

The process of firms moving the production of goods and services outside of their home country (also referred to as outsourcing).

Question 2

What is economics?

Answer 2

The study of choices people and societies make to attain their unlimited wants, given the scarce resources. Economics studies how people make choices and interact in markets.

Question 3

What is a market?

Answer 3

A market is a group of buyers and sellers of a good or services and the institution or arrangement by which they come together to trade.

Question 4

What is scarcity?

Answer 4

The situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Question 5

What are resources?

Answer 5

Inputs used to produce goods and services, including natural resources (such as land, water and minerals), labour, capital, and entrepreneurial ability. These are also referred to as factors of production.

Question 6

What are the three key economic ideas?

Answer 6

1. People are rational.
2. People respond to economic incentives.
3. Optimal decisions are made at the margin.

Question 7

What is a marginal analysis?

Answer 7

Analysis that involves comparing marginal benefits and marginal costs.

Question 8

What is a trade-off?

Answer 8

The idea that, because of scarcity, producing more of one good or services means producing less of another good or service. Trade-offs force society to make choices.

Question 9

What is opportunity cost?

Answer 9

The opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity.

Question 10

What is a centrally planned economy?

Answer 10

An economy in which the government decides how economic resources will be allocated.

Question 11

What is a market economy?

Answer 11

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Question 12

What is consumer sovereignty?

Answer 12

The concept that in a market economy it is ultimately consumers who decide what goods and services will be produced.

Question 13

Why does consumer sovereignty occur?

Answer 13

Because firms must produce goods and services that meet the wants of consumers, or the firms will go out of business.

Question 14

What is a mixed economy?

Answer 14

An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources.

Question 15

What is productive efficiency?

Answer 15

When a good or service is produced using the least amount of resources.

Question 16

What is allocative efficiency?

Answer 16

When production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Question 17

What is dynamic efficiency?

Answer 17

When new technology and innovation are adopted over time.

Question 18

What is voluntary exchange?

Answer 18

Occurs in markets when both the buyer and seller of a product are made better off by the transaction.

Question 19

What is equity?

Answer 19

The fair distribution of economic benefits between individuals and between societies.
An efficient outcome may or may not be considered by society to be equitable.

Question 20

What are economic models?

Answer 20

Simplified versions of reality used to analyse real-world economic situations. Economic models make behavioural assumptions about the motives of consumers and firms.

Question 21

How are economic models developed?

Answer 21

To develop a model, economists generally follow these steps:
1. Decide on the assumptions to be used in developing the model.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data.
5. Retain the revised model to help answer similar economic questions in the future.

Question 22

What is the hypothesis of an economic model?

Answer 22

A hypothesis in an economic model is a statement that may be either correct or incorrect about an economic variable. In testing hypotheses, economists distinguish between correlation and causality.

Question 23

What is an economic variable?

Answer 23

Something measurable that relates to resources that can have different values, for example, wages, prices or hours worked.

Question 24

What is positive analysis?

Answer 24

Analysis concerned with what is, involving value-free statements that can be checked by using the facts.

Question 25

What is normative analysis?

Answer 25

Analysis concerned with what ought to be, involving value judgements which cannot be tested.

Question 26

What is microeconomics?

Answer 26

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Question 27

What is macroeconomics?

Answer 27

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.