Section1

Question 1

Scarcity

Answer 1

Scarcity means that society has limited resources and cannot produce all the goods and services people wish to have.
“cake”

Question 2

Economics

Answer 2

Economics is the study of how societies use scarce resources to produce, consume, and distribute goods and services to maximize societal well-being and future societies.
Is a social science.

Question 3

Efficiency

Answer 3

Efficiency refers to society getting the most it can from its scarce resources.

Question 4

Equity

Answer 4

Equity is the fair distribution of economic prosperity among the members of society.
Prosperity = Wohlstand, Erfolg, Reichtum
“Divide the cake”

Question 5

Opportunity Cost

Answer 5

The opportunity cost of an item is what you give up to obtain it, including both monetary costs and time.

Question 6

Trade-off

Answer 6

A trade-off is the balance achieved between two desirable but incompatible features or goals, such as leisure vs. work.

Question 7

Market Economy

Answer 7

A market economy is an economic system where production and consumption are determined by firms and households based on supply and demand.
An economic system in which resources are allocated
through the decentralized decisions of a variety of firms and individuals who
interact in the markets for goods and services.

Question 8

Planned Economy

Answer 8

In a planned economy, the government makes all decisions about the production and distribution of goods and services.

Question 9

Rational Thinking

Answer 9

Rational thinking refers to making decisions by comparing the marginal benefits and marginal costs of actions.
Neoclassical microeconomics (mainstream economics) assumes that humans are
rational and maximize their individual self-interest.

Question 10

Behavioural Economics

Answer 10

Unlike neoclassical economics, behavioural economics:

• considers psychological factors
• recognising that individuals are not always rational and maximize their individual self-interest.

Question 11

Resources

Answer 11

 Land (natural resources, e.g. iron ore or oil)
 Labor (human efforts, e.g. hours of worker in factory)
 Capital (production equipment and structures, e.g.
machinery; money)

Question 12

Every society has to resolve basic economic problems:

Answer 12

1. Which goods to produce and in what quantities?
2. How to produce the goods, which resources and what kind of
   production technology should be used?
3. For whom are the produced goods? Who will benefit from the
   economic efforts: the workers, the shareholders or the landlords?
4. How to produce and consume goods in a sustainable way?

Question 13

Factors that Influence Well-Being

Answer 13

Well-being encompasses being in good health, feel happy and satisfied with life, have good
material living conditions, live in a sustainable socio-economic as well as natural system.

Question 14

OECD Better Life Index

Answer 14

Subjective and objective indicators that captures 11 dimensions of well-being: housing, income, jobs,
community, education, environment,
civic engagement, health, life
satisfaction, safety and work-life
balance

Question 15

HDI = Human Development Index

Answer 15

The Human Development Index (HDI) was developed by the UNDP.
HDI has three dimensions:
1. Life expectancy index
2. Education index
3. Income index
People and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.

Question 16

GDP – Gross Domestic
Product

Answer 16

GDP as an Indicator of Well-Being…
 It is the measure of the market
value of all final goods and
services produced in a country
during a given year. It measures
the overall performance of an
economy.
 It is part of the national income
and product accounts.
GDP measures the level of
production of a country.
This level might be correlated
with quality of life, however, there
are many aspects of well-being
that are not captured by GDP:
1. Quality of Nature and
environment
2. Education
3. Health
4. Crime and safety
5. Income and wealth distribution

Question 17

Mixed economies

Answer 17

Today no society can be completely assigned to one of both categories (market or planned economy). Rather there are mixed economies -> answers given by firms, households and the state.

Question 18

Basic Concepts and Principles of
Economics

Answer 18

How People Make Decisions
1. People Face Trade-Offs
2. Opportunity Cost
3. Rational People Think at the Margin
4. Individuals Respond to Incentives (extrinsic motivation)
How People Interact
5. Trade Can Make Everyone Better Off
6. Markets (Social Organization Which Aims to Facilitate Exchange
Activities) Are Usually an Effective Tool for Organizing Economic Activity
7. Governments Can Improve Market Outcomes
How the Economy as a Whole Works
8. An Economy’s Standard of Living Depends on its Ability to Produce Goods
and Services
Sustainable Development
9. An Economic System Should Promote a Sustainable Development

Question 19

Bounded rationality

Answer 19

Individuals do not always have all the information to make a rational
decision or do not always have all the tools and abilities to do
an economic calculation.
-> Satisficing behavior: after defining a satisfactory result level, choose an option
that meets this level (not all options are evaluated)
-> Improving behavior: every time a decision is made, individuals try to improve the result compared to the choice made previously
Limited Information and Abilities: They might not have all the details or the skills needed to figure out the best choice.
Satisficing Behavior: Instead of looking at all the options, people pick the first choice that is “good enough” for them.
Improving Behavior: After making a decision, people try to do better the next time based on what they learned from their past decisions.
In simple terms, people don’t aim to be perfect decision-makers—they work with what they know and improve step by step.

Question 20

Behavioral Economics and motivation

Answer 20

Intrinsic motivation: for reasons internal to the person, because she enjoys an
activity, because it corresponds to her ethical values, strengthens the identity.
Altruism: the aim is to promote the welfare of other individuals, the common good
because it pleases the agent and corresponds to his ethical values. But also because it is recognized that personal well-being is strongly linked to the general well-being of the society.

Question 21

Trade Can Make Everyone Better Off
3 main ideas

Answer 21

 People gain from their ability to trade with one another.
 Competition results in gains from trading.
 Trade allows people to specialize in what they do best.

Question 22

The General Characteristics of Trade:

Answer 22

If people own different resources/goods and/or have different desires, trade will be possible and beneficial to every participant.
If one participant was worse off by agreeing to the trade, that participant would prefer not to make the deal.
Interdependence and voluntary trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
Trade activities:
 increase generally the well-being
 can create equity and environmental problems

Question 23

Market economy and competition

Answer 23

In a market economy
characterized by competitive markets, the interaction of individuals and businesses leads to maximizing the well-being of society (the invisible hand).
 Competitive markets should satisfy some basic assumptions to
maximize the well-being of society.
 State intervention (visible hand) is not necessary.

Question 24

Market failure

Answer 24

Market failure occurs when the market fails to allocate resources efficiently.
 When the market fails (breaks down), the government can intervene to promote efficiency and equity.
Market failure may be caused by:
 absence of a true price i.e., a market price that also includes the social and environmental costs of product
 market power, i.e., the ability of a single person or firm to unduly (=übermässig) influence market prices

Question 25

An Economy’s Standard of Living Depends on its Ability to Produce Goods and Services

Answer 25

Standard of living (material well-being) may be measured in different ways by comparing personal incomes or by comparing the total market value of a nation’s production.  Almost all variations in living standards are explained by differences in countries’ **productivity (ratio between output and input)** and resources.  Productivity depends on **technological change**

Question 26

The Technological Change and the Production Possibility Frontier

Answer 26

Every society has to make decisions about both the **usage of the means of production (inputs)** and about the **goods (output)** produced by the economic system.  Inputs (which can be divided into the four main categories: labor, capital, energy and materials) include everything that the firm uses in the production process (disposable technologies).  Outputs are the various goods and services which result from the production process.

Question 27

Disposable technologies

Answer 27

The term "disposable technologies" in this context refers to the set of methods, processes, and tools available to a firm for production, which can be "disposed of" or replaced as needed. It doesn't mean "disposable" in the sense of being thrown away, but rather that the firm has the flexibility to choose or switch between different technologies depending on what is most effective or efficient for production. For example: A company making cars could use robots (capital) or manual labor (labor) to assemble parts. These are part of the available "disposable technologies" they can choose from. If a better or cheaper technology becomes available (like 3D printing for car parts), the company can switch to it, "disposing" of the old one. So, "disposable technologies" simply means the range of tools and processes the firm can use for production, depending on its needs and constraints.

Question 28

The Production Possibility Frontier (PPF)

Answer 28

The production possibilities frontier (PPF) is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production (resources) and the available production technology. In a two-goods economy: the amount of good X you have to forego in order to get a certain amount of good Y represents the opportunity cost of good Y. The PPF can be displaced because of technological progress.

Question 29

Means of production and factors of production

Answer 29

= input = labor, capital, energy, materials

Question 30

Sustainable Development

Answer 30

General definition: development that meets the needs of the present without compromising the ability of future generations to meet their own needs.  Nature is important for economic development  Growth in demographic, social and economic terms at a speed compatible with the ecosystem Environment: Preserve the functions of ecosystems over time Society: Guarantee wealth conditions equally distributed Economy: Generate a long-lasting growth of income and work

Question 31

The Production Possibility Frontier (PPF) and Sustainable Development

Answer 31

Y-axis: capital goods (other (car, ipod,..)) X-axis: consumer goods (essential) Shift of PPF represents a sustainable growth if critical level of natural capital has been kept and pollution and waste has been limited.

Question 32

Planetary boundaries

Answer 32

The nine (6 x=overshoot) planetary boundaries are thresholds or limits within which humanity can safely operate without causing significant harm to Earth's life-support systems. **xClimate Change Threshold:** Concentrations of greenhouse gases (e.g., CO₂ levels in the atmosphere). **Biosphere Integrity Two dimensions:** xGenetic diversity: Extinction rate of species. Functional diversity: Ecosystem resilience and species' contributions to ecosystems. **xLand-System Change Threshold:** Conversion of forests, grasslands, and other ecosystems for agriculture, urbanization, etc. **xFreshwater Use Threshold:** Global consumption of freshwater resources. **Biogeochemical Flows Two dimensions:** xNitrogen cycle: Amount of nitrogen removed from the atmosphere for human use. xPhosphorus cycle: Amount of phosphorus entering oceans due to human activities. **Ocean Acidification Threshold:** pH levels of ocean water, primarily influenced by CO₂ absorption. **Atmospheric Aerosol Loading Threshold:** Concentration of aerosols (tiny particles) in the atmosphere, impacting climate and human health. **Stratospheric Ozone Depletion Threshold:** Levels of ozone in the stratosphere that protect life from harmful ultraviolet radiation. **xNovel Entities Threshold:** Introduction of synthetic chemicals, plastics, radioactive materials, and other human-made pollutants into the environment.

Question 33

Normative statements

Answer 33

Normative statements deal with ethical concepts and value judgments. Should public administration, for example, give money to the poor? Is it correct to support the health sector with subsidies?

Question 34

Positive statements

Answer 34

Positive statements describe the facts of an economy and its behavior. How does unemployment develop, and which objective reasons can explain the developments? Which is the impact of the introduction of a subsidy on the adoption of energy efficient cars? (policy evaluation)

Question 35

The Scientific Method

Answer 35

Observation Question Hypothesis Theory/law Experiments Analysis and test of the hypothesis  Systematic and logical process for creating models and theories that can be verified experimentally  Economists try to understand and explain the real world by using a scientific method with different types of experiments/empirical analysis

Question 36

Experiments in Economics

Answer 36

Problem in economics: - Difficult to verify hypothesis in a laboratory - Economic phenomena influenced by various factors (economic, natural, social, cultural factors,..)  Substitute for a laboratory experiment needed  Use of real data coming from: - Administrative data, surveys,.. - Randomized field experiments (treated and control group) ..to perform empirical analysis

Question 37

Causality and Correlation

Answer 37

Causality: To induct that intervention A results in effect B, we must verify three conditions: 1. Intervention A must precede (=vorangehend, führen) effect B 2. Cause and Effect must be correlated 3. We need to exclude other factors/explanations that could account for effect B Correlation: Two events are correlated if they vary together, a correlation can be positive (events vary in same direction) or negative (variation in opposite directions).

Question 38

Randomized controlled experiment

Answer 38

A randomized controlled experiment is a study design where participants are randomly assigned to either a treatment (= policy instrument) group or a control group to objectively measure the effect of an intervention while minimizing bias.