week 1

Question 1

what is the scarcity principle

Answer 1

having more of one thing means having less of something else
all economic decisions have costs

Question 2

what is the cost-benefit principle

Answer 2

a rational decision maker should take an action if and only if the benefit outweighs the cost

Question 3

what are the three decision pitfalls to avoid

Answer 3

measuring money and benefits as proportions rather than absolute money amounts
ignoring opportunity costs
failing to think at the margin - when taking on an activity, the focus should be on the cost and opportunity of each additional unit of activity

Question 4

what is an opportunity cost

Answer 4

the value of the next best alternative that is forgone by taking a particular action

Question 5

what is a sunk cost

Answer 5

a cost that is not recoverable the moment a decision is made
the only costs that should influence a decision are those we can avoid by not taking the action

Question 6

what is microeconomics

Answer 6

the study of individual choices under scarcity and its implications for the behaviour of prices and quantities in individual markets

Question 7

what is macroeconomics

Answer 7

the study of the performance of national economies and the policies that governments use to try improve that performance

Question 8

what is positive economics

Answer 8

independent of the ethical value system of the economist

Question 9

what is normative economics

Answer 9

consists of statements in economics that reflect or are based on the ethical value system of the economist, implicitly, explicitly or by omission

Question 10

what is the market

Answer 10

the market for any good/service consists of all the buyers and sellers for that good/service

Question 11

what is the goal of consumers

Answer 11

utility maximisation

Question 12

what is the goal of producers

Answer 12

profit maximisation

Question 13

what is a demand curve

Answer 13

shows the relationship between how much of a good/service buyers wish to buy and the price of that good/service
downward sloping - as price of a good/service decreases the buyer wishes to buy moe

Question 14

what is the substitution effect

Answer 14

when the price of a good rises, consumers will switch to other substitute goods

Question 15

what is the income effect

Answer 15

when the price of a good rises, consumers become effectively poorer, as a result they may purchase less of that good

Question 16

what is the buyers reservation price

Answer 16

the largest amount a consumer is willing to pay for that good
equal to the benefit they receive from that good

Question 17

is the demand curve always downward sloping

Answer 17

Giffen good - upward sloping demand curve
example non luxury goods eg bread

Question 18

what is the supply curve

Answer 18

the relationship between how much of a good/service sellers wish to sell and the price
as the price of a good/service increases the sellers wish to sell more

Question 19

why do supply curves slope upwards

Answer 19

sellers reservation price - the minimum price required by a seller to sell a unit of a good
as market price decreases, sellers with high reservation prices drop out the market

Question 20

what is the market equilibrium

Answer 20

a state in which there is no pressure on price/quantities to change

Question 21

what is excess demand

Answer 21

buyers want to buy but cannot, offer a higher price
upward pressure on prices, market is out of equilibrium

Question 22

what is excess supply

Answer 22

sellers want to sell but cannot, offer lower price
downward pressure on market, market is out of equilibrium

Question 23

what is a price floor

Answer 23

lowest legal price a good can sold for
can cause excess supply

Question 24

what is a price ceiling

Answer 24

highest legal price a good can be sold for
can cause excess demand