Week 1

Question 1

Define economics

Answer 1

Economics is concerned with the choices that individuals, businesses, governments and societies make as they cope with scarcity and the incentives that influence these choices.

Question 2

Define an incentive

Answer 2

A reward that encourages an action or penalty that discourages one.

Question 3

What are 4 fundamental questions in economics

Answer 3

1) What goods will be produced?
2) How will they be produced?
3) Who will receive them?
4) How involved should the government be in the market?

Question 4

Describe the Fallacy of Composition and provide an example

Answer 4

The fallacy of composition is that the sum of the parts does not necessarily equal the whole.

The paradox of thrift is one example. While an individual can save money by spending less, society as a whole cannot as it everyone saves a portion of their income, there is less demand and consumption which leads to lower production, lower income and higher unemployment.

Question 5

What caused macroeconomics to gain attention?

Answer 5

The Great Depression caused economics to bifurcate as standard ‘classical’ economic theory could not fully explain the dynamics at the economy wide level.

Question 6

What is the difference between positive and normative statements?

Answer 6

Positive statements are of what is and can be proved/disproved and answered objectively.

Normative statements are subjective statements relating to what ought to be.

Question 7

What is the purpose of modelling?

Answer 7

Modelling helps people to understand reality by simplifying the world into key logical components.

Question 8

Define a correlation and why it is not causation

Answer 8

A correlation is a statistical relationship between data sets (opposite direction = - correlation). Correlations may be spurious - highly correlated simply by chance

Question 9

Three steps to testing for causation

Answer 9

1) Test if correlations are consistent with predictions and reality
2) Conduct a controlled comparison (two groups differentiated by one factor or examining date and analysis)
3) Cause must be shown to proceed effect and directly linked empirically.

Question 10

4 Key assumptions in macroeconomics

Answer 10

1) People are rational, maximising and self interested
2) Resources are scare
3) People respond to incentives
4) People compete with each other to get the most for themselves.

Question 11

Define endogenous variables

Answer 11

Variables that are explained within the model.

Question 12

Define exogenous variables

Answer 12

Variables that are explained outside the model but impact it

Question 13

Define functional relations

Answer 13

rules that characterise the relationship between endogenous variables.

Question 14

Describe the Production Model

Answer 14

The production model considers a world with a single representative firm. The firm takes inputs and uses technology to transform them into outputs.

Inputs include labour, land and capital.

Question 15

Define physical cpaital

Answer 15

Physical capital includes the quantity of factories, equipment, housing and inventories at a point in time.

Question 16

Define Human capital

Answer 16

Human capital includes the stock of skills and education in society at a point in time

Question 17

Formula for the Typical Representation of Porduction

Answer 17

Production Model
Q = f(K,L,LA)
Output = f(capital, labour, land)

Question 18

Describe the circular flow model

Answer 18

The circular flow model is the basis for most national income accounting. In return for money, households offer firms factors of production (labour) which is then used to produce goods and services. These are then sold to households.

Some resources may also go to the government which are then distributed via transfer costs and subsidies.

Question 19

What does the Production Possibilities Frontier Show?

Answer 19

The PPF indicates the range of goods that can be efficiently produced and the opportunity cost of production.

Points on the curve are efficient, inside are inefficient and outside are unattainable with current technology and productive resources. Improving technology would push the curve outwards.