OJA 1 - Basic Concepts in Economics

Question 1

What is scarcity?

Answer 1

• It is the basic economic problem, it is the gap between limited resources and theoretically limitless wants.
• it is the state of being scarce (=insufficient for the demand), or in a short supply, shortage

Question 2

What helps to determine the best allocation of resouces?

Answer 2

Price and demand.

Question 3

What are opportunity costs?

Answer 3

It is the cost of the next best alternative, it is the missed opportunity for another one.

What I am giving up in order to have something else (I am studying now and what I am giving up is the money I could make from working)

But of course you can partially earn them by scholarship, part-time job, parent’s money

Question 4

What is a trade-off?

Answer 4

It is a situation in which you accept something you don’t like/want in order to have something that you want.

It is a trade-off between something and something

Choosing one thing requires trading-off one goal/want/need for another

Question 5

What are incentives?

Answer 5

It is the motivation, rewards/penalties associated with choices

Question 6

What are side effects?

Answer 6

It is related to negative & positive externalities, when making a decision you must think through the full scope of the effects of that decisions otherwise incentives may not work or even be counter-productive

Question 7

What do economics study?

Answer 7

It is a social science, it studies human behaviour, however it is not an exact science because it uses models, assumptions, predictions and estimations

It studies choices, usage and allocation of scarce to produce goods and services and distributing them among people in order to satisfy human wants and needs

Question 8

What is the difference between needs/wants and resources?

Answer 8

Needs and wants are INFINITE (unlimited)

Resouces are FINITE (limited)

Question 9

What is behavioral economics?

Answer 9

It is a study of psychology, it relates to the economic decision-making processes of individuals and institutions, especially studies irrational choices

Question 10

What is Maslow’s Hierarchy of Needs?

Answer 10

It is a theory of motivation which states that 5 categories of human needs dictate an individual’s behavior

Those needs are in pyramid shape beginning with psychological needs and moves up to safety, love and belonging, esteem and at the top is self-actualization

A person can only move on the higher-level needs when their basic needs are adequately fullfiled

Question 11

What renewable resouces do we have?

Answer 11

Biomass, hydropower, geothermal power, wind energy, solar energy

Question 12

What non-revewable sources do we have?

Answer 12

Fossil fuels and nuclear energy - oil, natural gas and coal

Question 13

How should we use limited, scarce sources?

Answer 13

We must decide which of these resouces to use and how to use them efficiently

Question 14

What is a biomass?

Answer 14

It is a renewable resource, it is the organic material from plans or animals (wood, sewage, ethanol)

Question 15

What is solar energy?

Answer 15

It is a renewable resource, it is the light and heat that come from the sun, the sunlight is converted into electrical energy by for e.g. photovoltaic panels (PV)

Question 16

What is geothermal energy?

Answer 16

It is a renewable resource that comes from the heat within the earth’s core

Question 17

What is a hydropower?

Answer 17

It is a renewable resource, it uses the natural flow of moving water to generate electricity

Question 18

What is a wind energy?

Answer 18

It is a renewable resource that generates electricity by turning wind turbines

Question 19

What are the current issues related to renewable resources?

Answer 19

• it is not always working (e.g. solar energy works only when it is sunny)
• it is not possible to store it

Question 20

What are current issues related to non-renewable resouces?

Answer 20

• they are limited, we will run out of them one day (esp. natural gas and coal)
• they are creating waste, such as carbon dioxide, CO2, which has an impact on our health, enviroment and it causes global warming

Question 21

What is the difference between efficient and effective?

Answer 21

Efficient = achieving maximum productivity with minimum wasted effort/expense, working in a well-organized/competent way

Effective = successful in producing a desired/intended result (not necessarily in efficient way)

Question 22

What are the reasons for scarcity?

Answer 22

• unavailability of resources
• inefficient use of resources
• lack of adequate technologies for exploitation (resources)

Question 23

What are the 3 fundamental economic questions?

Answer 23

1. What is produced?
2. How is it produced?
3. Who gets to consume it?

Question 24

What is produced?

Answer 24

• Goods (used or consumed) - mostly represent things/items/articles
• Services - material (repairs) or personal (improving the quality of life)

Question 25

How is it produced?

Answer 25

By Economic sectors, by technology, local or imported, enviromental concerns

Question 26

Who gets to consume it?

Answer 26

Economic subjects, users, consumers, at home or abroad

Question 27

Who are economic subjects/agents?

Answer 27

Households (individuals), firms (businesses), state/government (country)

Question 28

What do macroeconomics study?

Answer 28

It studies behaviour of a national or regional economy as a whole - on a national level

Explains the economic reality in aggregates - in totals

Question 29

What do microeconomics study?

Answer 29

It studies the behaviour of subject of smaller size than the state, studies how households & companies behave in terms of production and consumption, sale and purchase, etc.

Question 30

What is the difference between economics and economy?

Answer 30

• Economics = social science that studies human behaviour
• Economy = a complex of applied economic activities related to the production, exchange and consumption of goods and services within a country or area

Question 31

What economic sectors do we have?

Answer 31

1) type of production (production, service sector)
2) ownership (public, private, voluntary sector)
3) stage in production (primary, secondary, tertiary, quaternary)

Question 32

What are resources?

Answer 32

These are all the materials available in our environment which help us to satisfy our wants and needs

Question 33

What factors of production do we have?

Answer 33

1) LAND (e.g. natural resources, soil)
2) LABOUR (work of people)
3) CAPITAL (financial assets - goods, money, buildings)
4) ENTREPRENEURSHIP (risk-taking, organizing and biding all other factors together for profit)

Question 34

Who owns factors of production/is reposible for distribution?

Answer 34

It depends on the economic system of a country:
• when it is a market economy, it is owned by private owners and
• if it is a command economy it is owned by the state and is responsible for what is to be produced

Question 35

What are payoffs?

Answer 35

The results that reward you for your work (e.g. money)

Question 36

What is analysis paralysis?

Answer 36

It is the inability to make a decision due to over-thinking problem - having too much data makes it difficult for us to pick one

Question 37

What is marginal benefit/utility?

Answer 37

It is additional satisfaction that comes from consuming an additional unit of a good/service.

Question 38

What is marginal analysis?

Answer 38

It is analyzing the benefits of one additional unit vs. the costs of that unit (e.g. in production, consumption)

Question 39

What is diminishing marginal utility?

Answer 39

That means when the consumption of units increases, the marginal utility decreases (the satisfaction is smaller)

e.g. when I am hungry the first bite of pizza feels good, I derive very high utility from it, however, with the fourth bite the utility gesta lower because I am not that hungry anymore.

A consumer may be willing to pay more for the first bite of pizza than fort the second or third due to the decreased utility from it.

Question 40

What is a sunk cost?

Answer 40

It is a cost that has already been incurred and cannot be recovered

e.g. A company invests in a project but the results don’t appear and the company keeps the project alive with hopes and it costs them more money - instead, they should have closed on the project.

Question 41

What is a sunk cost dilemma?

Answer 41

It describes the emotional difficulty of deciding whether to proceed or abandon a project when time and money have already been spent, but the desired results have not been achieved.

Question 42

What is the sunk cost fallacy?

Answer 42

It happens when a company continue a behaviour or endeavour as a result of previously invested resouces (time, money, effort)

A company is likely to keep investing into a project because they have already spent some money on it, even though continuing is not the best idea

Question 43

What are economies of scale?

Answer 43

• These are cost advantages gained by companies when production becomes efficient
• They can achieve economies of scale by increasing production and lowering costs - costs are spread over a large number of goods

e.g. bulk orders, selling 1000 T-shirts a month