Week 1: What is Economics?

Question 1

What is the central concern of economics?

Answer 1

The production, distribution, and consumption of goods and services

Question 2

What is microeconomics?

Answer 2

The behaviour of individual decision makers (consumers, households, and firms) and the operation of specific product, labour, and capital markets

Question 3

What is macroeconomics?

Answer 3

The behaviour of national, regional, or provincial economy as a whole (unemployment, inflation, economic growth rates)

Question 4

What is scarcity?

Answer 4

We have limited resources and unlimited wants so we must choose how to allocate these.

Question 5

How do we choose to allocate limited resources?

Answer 5

We decide what to produce, how to produce, and for whom to produce.

Question 6

What are the six key principles of “the economic way of thinking”?

Answer 6

1. Every choice involves a tradeoff.
2. A rational choice compares costs and benefits.
3. The benefit of a choice is what you gain from making it (maximum amount one is willing to pay depending on preferences and wealth).
4. The cost of a choice is what you give up by making it.
5. Choices involving “how much” compare marginal costs and marginal benefits.
6. Choices respond to incentives. Benefits and costs of an action act as incentives to do or not do it.

Question 7

What is the cost-benefit rule?

Answer 7

For either/or decisions, take action x if and only if B(x) is greater than C(x).

Question 8

What is an opportunity cost?

Answer 8

The value of the next best alternative forgone action

Question 9

What is a marginal benefit and a marginal cost?

Answer 9

A marginal benefit (MB) is the incremental benefit and marginal cost (MC) is the incremental cost as there is a one unit increase in the level of the activity.

Question 10

What are the factors of production?

Answer 10

1. Land (rent)- natural resources
2. Labour (wages)- time and physical and mental effort
3. Capital (interest)- tools, instruments, buildings, machines etc. used for production e.g. human capital (knowledge and skill) and financial capital (money)
4. Entrepreneurship (profit)- human resource that organises land, labour, and capital; drivers of progress

Question 11

What is a positive statement and a normative statement?

Answer 11

a) A positive statement is about what is currently believed and can be tested by checking facts.
b) A normative statement is about what should be, depends on values, can be agreed/disagreed with but cannot be tested. e.g. policy goals

Question 12

What is making a choice at the margin?

Answer 12

Allocating a choice (How much?)

Question 13

What is an economic model?

Answer 13

A description of some aspect of the economic world that includes only the features needed for the purpose at hand.

Question 14

What is the difference between graphs and scatter diagrams?

Answer 14

a) Graphs measure variables (quantities produced, consumed, and their prices) and their relationships.
b) Scatter diagrams reveals and describes the relationship between the values of two variables for a number of different values for each.