Unit 1 (Economic Methodology; Demand & Supply; Elasticities & Price Determination)

Question 1

Allocative efficiency

Answer 1

Allocative efficiency occurs when the value that consumers place on a good or service equals the cost of the resources used up in production.

Question 2

opportunity cost

Answer 2

measures the cost of a choice made in terms of the next best alternative foregone or sacrificed e.g. work leisure choices, gov spending priorities, use of scare farm land.

Question 3

Capital goods

Answer 3

Goods that are used to make consumer goods and services capital inputs include fixed plant and machinery.

Question 4

Consumer goods and services

Answer 4

Goods and services which satisfy our needs and wants directly

Question 5

Consumer durable

Answer 5

Products that provide a steady flow of satisfaction / utility over their working life (e.g. a washing machine)

Question 6

Consumer non-durables

Answer 6

Products that are used up in the act of consumption e.g. drinking a coffee

Question 7

(PPFs)

Answer 7

depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed.

Question 8

Causes of Shifts in the Production Possibility Frontier

Answer 8

1.Better management of factor inputs.
2.Increase in the stock of capital and labour supply.
3. Innovation and invention of new products and resources *Higher productivity / efficiency of factor inputs.
4.Discovery / extraction of new natural resources (land).
5.Higher productivity / efficiency of factor inputs.

Question 9

Ceteris Paribus

Answer 9

economists isolate the relationship between two variables by assuming ceteris
paribus – i.e. all other influencing factors are held constant.

Question 10

Factors of production

Answer 10

-Land
-Labour
-Capital
-Enterprise

Question 11

Choice architecture

Answer 11

refers to the way choices are presented to consumers. The
different designs affect the choice consumers make.

Question 12

Framing

Answer 12

is the way by which consumers are influenced by the context of how a
choice is presented. The context is made includes word choices and it affects the
choice consumers make

Question 13

Nudges

Answer 13

aims to change the behaviour of consumers without taking away their
freedom of choice. It comes under the category of choice architecture e.g. promoting healthy vs banning junk food.

Question 14

Default choice

Answer 14

A default choice is when a consumer is automatically enrolled into a system, such as
a pension scheme

Question 15

Restricted Choice

Answer 15

The choice
of the consumer is restricted,

Question 16

Mandated choice

Answer 16

A mandated choice is when consumers are required to state whether they wish to
participate in an action.

Question 17

Symmetric information

Answer 17

means that consumers and producers have perfect market
information to make their decision= efficient allocative of resource

Question 18

Asymmetric information

Answer 18

leads to market failure. This is when there is unequal
knowledge between consumers and producers. e.g. customer and car dealer

Question 19

Anchoring

Answer 19

This is a type of bias created by the human tendency to rely on the first piece of
information they are given.

Question 20

Availability

Answer 20

This is a form of bias towards events that were recent, personal or memorable. This
is because they are overestimated and cause emotional responses

Question 21

Altruism

Answer 21

The selfless and disinterested concern towards the well-being of others.

Question 22

Bounded rationality

Answer 22

the inability to make rational economic decisions due to imperfect info, time constraints etc.

Question 23

Utility

Answer 23

the benefit/wellbeing/satisfaction gained from the consumption of a good or service