Week 1

Question 1

What’s rational behaviour?

Answer 1

It refers to how economic agents seek to optimise when making decisions. Firms want to maximise profits and consumers want to maximise utility.

Question 2

What are the features of a capitalist economic system?

Answer 2

Private ownership of FOP’s, goods and services exchanged through a price mechanism; firms are predominantly driven by the desire to make profit.

Question 3

What does microeconomics mean?

Answer 3

The study of the behaviour of individuals and firms at a disaggregate level.

Question 4

What does macroeconomics mean?

Answer 4

Studies the aggregate behaviour of the economy.

Question 5

What are positive approaches to economics?

Answer 5

A positive approach attempts to describe how the world actually is.

Question 6

What are normative approaches to economics?

Answer 6

A normative approach attempts to prescribe how the world ought to be.

Question 7

What was Alfred Marshall responsible for?

Answer 7

Alfred Marshall was responsible for the change from “political economy” to “economics”.

Question 8

How did Alfred Marshall define economics?

Answer 8

“… the study of mankind in the ordinary business of life”.

Question 9

How did Lionel Robbins define economics?

Answer 9

“… a relationship between ends and scarce means which have alternative uses”.

Question 10

What was Ragnar Frisch responsible for?

Answer 10

Ragnar Frisch invented the terms “micro” and “macroeconomics” (as well as “econometrics”).

Question 11

What are the two types of economic functions?

Answer 11

• General functions describe, generally, what affects what – the general relationship but not the exact detail of it. [e.g, A = F(B,C)]
• Specific functions describe the exact relationship between variables in a model. [A = 20B + 30C]

Question 12

What’s the law of demand?

Answer 12

There’s an inverse relationship with the price and quantity demanded of a good/service.

Question 13

What’s the law of supply?

Answer 13

There’s a direct relationship with the price and quantity supplied of a good/service.

Question 14

What’s partial equilibrium analysis?

Answer 14

The analysis of an individual product.

Question 15

What are the assumptions of the basic demand and supply model?

Answer 15

There are many buyers and sellers.

Each buyer/seller has complete (or at least equal) information.

Firms produce and sell homogenous goods.

Those homogenous goods sell at a uniform price.

Question 16

What are the factors that affect demand?

Answer 16

The number of consumers.

Consumers’ income levels.

Tastes/preferences.

Price of substitutes/complements.

Question 17

What are the factors that affect supply?

Answer 17

The number of sellers

Production costs

Level of technology

Regulations

The extent of sellers outside options.

Question 18

What’s market equilibrium?

Answer 18

Where the amount that consumers are willing to buy coincides with the amount suppliers are willing to sell.

Question 19

What’s the impact on equilibrium if demand and supply were to change simultaneously?

Answer 19

Its determined by:

The relative size and direction of the changes.

The shape of the demand and supply curves (slopes and elasticity).

Question 20

What’s price elasticity of demand (PED)?

Answer 20

The responsiveness of quantity demanded to a change in price.
(Always Negative)

Question 21

What’s price elasticity of supply (PES)?

Answer 21

The responsiveness of quantity supplied to a change in price.
(Always positive)

Question 22

What are the units of elasticity?

Answer 22

“Elastic” is where the absolute value >1

“Inelastic” is where the absolute value <1

“Unit elastic” is exactly equal to 1

Question 23

What’s income elasticity of demand (YED)?

Answer 23

The responsiveness of quantity demanded to a change in income.

If YED is positive, it’s a normal good.

If YED is negative, it’s an inferior good.

Question 24

What’s cross price elasticity of demand (XED)?

Answer 24

The responsiveness of quantity demanded for good X to a change in price of good Y.

If XED is positive, goods X and Y are substitutes.

If XED is negative, goods X and Y are complements.