Unit 1 AOS1 - Thinking Like a Economist

Question 1

Microeconomics

Answer 1

The operation of smaller fragments that make up the whole economy.

e.g. demand, supply, price, etc.

Question 2

Macroeconomics

Answer 2

Examines the workings of the Australian overall economic conditions. It focuses on national spending, GDP, national incomes, overall unemployment and inflation rates.

Question 3

Positive Economics

Answer 3

An economic analysis of issues/questions and based on verifiable facts in an economy.

e.g. if tax rates increase, individuals will likely spend less money.

Question 4

Normative Economics

Answer 4

Provides opinions on how the economy should be based on personal value-based statements.

e.g. government should increase spending on defense by cutting welfare benefits.

Question 5

Needs

Answer 5

Essential goods and service needed for survival.

Question 6

Wants

Answer 6

Non-essential goods and services that make life more enjoyable.

Question 7

Factor of Production: Natural

Answer 7

Raw material found in nature that are used to produce goods and service.

e.g. soil, water, wood

Question 8

Factor of Production: Labour

Answer 8

Intellectual skill, knowledge, and manual effort that individuals provide to produce goods and service.

e.g. farmer harvesting

Question 9

Factor of Production: Capital

Answer 9

Man-made physical assets used in the production process.

e.g. machinery, tools, buildings

Question 10

Problem of Relative Scarcity

Answer 10

Australia limited resources are outnumbered by society’s unlimited needs and wants. As a result, economic choices must be made about which needs and wants to satisfy first and how to best allocate resources to do so.

Question 11

Three Basic Economic Questions

Answer 11

1. What and how much to produce?
2. How to produce?

3.For whom to produce?

Question 12

Opportunity Cost

Answer 12

The benefits forgone by the decision not to direct resources into the next best alternative.

Question 13

Opportunity Cost for Individuals

Answer 13

e.g. buying a Zooper Dooper for $2, opportunity cost would be the cost of Magmum icecream for $4.

Question 14

Opportunity Cost for Businesses

Answer 14

e.g. choosing to grow pickles and not having the opportunity to have a dairy farm.

Question 15

Opportunity Cost for Government

Answer 15

e.g. government increase spending benefits; opportunity cost is the increase spending in defense.

Question 16

Trade-offs

Answer 16

Occurs whenever individuals, businesses or government make choices about the different ways in which limited resources may be used for consumption or production.

e.g. the trade-ff between earning more money or having less stress and more of a social life.

Question 17

Cost-Benefit Analysis

Answer 17

The practice of adding up the value of all anticipated direct and indirect short-term and long-term costs of a particular economic choice and then comparing them against the value of all anticipated benefits to arrive at the most beneficial decision overall.

Question 18

Economic Activity

Answer 18

the production, distribution, and consumption of goods and services within an economy.

Question 19

How changing levels of economic activity influence material and non-material living standards?

Answer 19

High levels:
-can cause significant and inversible environment damage which can negatively impact non-material living standards.
s.
-material living standards tend to increase as more jobs are available, resulting in lower unemployment and increased incomes for households, which increases their ability to access goods and services.

Low levels:
-there is less pollution and pressure on the natural environment, which may improve non-material living standards.
-material living standards tend to decrease as unemployment rises and income falls, reducing people’s ability to access goods and service

Question 20

Economic Agents

Answer 20

A person or an entity that plays an active role in a nation’s economy.

Question 21

Public sector

Answer 21

The government sector collects income tax from the household sector and uses the taxation revenue to provide public goods and services, like schools, Medicare, welfare benefits, etc..

Question 22

Private Sector

Answer 22

The business sector purchases resources from the household sector in exchange for income and produces finished goods and services for consumption.

Question 23

Traditional Economic Viewpoint of Consumer Behavior

Answer 23

1.Consumer act rationally and in their self-interest.

2. Consumers make informed and smart decisions.
3. Consumers maximize utility and marginal benefits from consumption.

4.Consumers have ordered preferences.

Question 24

Incentives

Answer 24

Encourage consumption= payment of subsides and offering tax rebates

Question 25

Disincentives

Answer 25

discourage consumption=impose indirect (and direct for businesses) taxes and laws, regulation and fines

Question 26

The Economic Systems

Answer 26

-Mixed economy -Market economy -Command economy -Traditional economy

Question 27

Traditional Economy

Answer 27

What will be produced: What has always been produced How will it be produced: The way it's always been produced. For whom will it be produced: Decisions by traditions, customs and culture.

Question 28

Command Economy

Answer 28

What will be produced: What the government orders. How will it be produced: However, the government says. For whom will it be produced: Whoever the government allows.

Question 29

Market Economy

Answer 29

What will be produced: What the people will buy. How will it be produced: Using least expensive method. For whom will it be produced: Whoever is willing to buy it.

Question 30

Mixed Economy

Answer 30

Most decisions are made by the operation of markets and relative prices. There is government intervention in some markets to improve societal outcomes and reduce market failure.

Question 31

How the Three Basic Questions are Answered

Answer 31

What and how much to produce: Involved making decisions about producing the right types and quantities of good and services. How to produce: Involved making decisions about the production methods that will be used to make goods and services. For whom to produce: Involved making decisions about how good and services, and all incomes that have been produced will be divided or shared between people.

Question 32

Explain the Traditional Viewpoint: consumer act rationally and in their self-interest

Answer 32

It is generally believed that consumers behave rationally, or in a self-interested way. This means when consumers spend their limited income, they do so in a way that maximizes their overall satisfaction by selecting the best mix of goods and services. e.g. if one has a dollars' worth of candy or a dollars' worth of stickers, and the individual liked candy more, it would not be rational for the individual to purchase stickers because it would decrease their satisfaction.

Question 33

Explain the Traditional Viewpoint: consumers make informed and smart decisions

Answer 33

It is assumed that consumers make informed decisions, and they have perfect knowledge. This means that before purchasing a product or service, consumers try to get reliable factual information from various sources so they can weight up the potential advantaged and disadvantages, allowing them to make the best purchase decision possible. e.g. If a student was deciding between which shoe brand to buy, Nike or Adidas, they would do research on the trends, prices and quality of the shoes, weighing the advantages and disadvantages before deciding on what brand to buy.

Question 34

Explain the Traditional Viewpoint: maximalization of utility and marginal benefits from consumptions

Answer 34

Marginal utility describes the extra satisfaction gained from consuming each additional of a good and service at a point of time. As the number of units consumed increases, satisfaction (utility) decreases. Consumers will consider the marginal benefits gained from each purchase they make. e.g. It is a very hot day, and you are thirsty. So, you drink a icy cold Coca-Cola which provides you great utility, so you purchase another, but this time it is less satisfying that when you consumed it the first time.

Question 35

Explain the Traditional Viewpoint: consumers have ordered preferences

Answer 35

Consumers have many things they need and want, but our ability to satisfy these things are limited, partly because of income. After purchasing an essential good or service to meet our basic needs, typically attention turns to our wants and non-essential goods/services to make our life more pleasurable. e.g. An individual may spend money on food, shelter, food, clothing before making purchases on designer products, haircuts, nails.

Question 36

Relationship between trade-off, cost-benefit analysis and opportunity cost.

Answer 36

Trade-offs occur whenever individuals, business, or government make choices between different ways that limited resources can be used. This can lead to opportunity cost it can lead to giving up one next best alternative use of our limited resources. In order to understand and take trade-offs into account, decision makers will use cost-benefit analysis. This refers to evaluating the costs and benefits of a particular decision that will maximize efficiency, satisfaction and wellbeing.

Question 37

The traditional economic viewpoint of business behaviour

Answer 37

The traditional view of businesses is that they generally seek profit maximization in both short-term and long-term. In order to maximize profit, businesses maximise sales revenue which means businesses use strategies that seek to capture extra customers and try to grow the amount of goods and services they sell. Businesses also minimise production costs by cutting the cost of wages, raw materials, equipment, transport, and utilities. So, businesses need to be efficient in the use of resources where the aim is to gain a higher level of output from given level of inputs.

Question 38

How do Consumers Respond to Subsides?

Answer 38

The government pays subsides or cash payments to encourage consumer purchase a product whose consumption brings social benefits. They make some good and services attractive and affordable, even free of charge. Rational and self-interested consumers usually gravitate towards these offers. e.g. free COVID-19 testing and vaccination, covering costs of childcare for working parents and training courses for the unemployed.

Question 39

How do Consumers Respond to Tax Rebates?

Answer 39

The government offers tax rebates to encourage consumption of a good and service considered beneficial or desirable. These are tax discounts and reduce the amount of tax paid on taxable incomes, making items cheaper and more attractive to purchase for consumers. e.g. There are tax rebates of up to 30% of the cost of premiums for those households taking out private health insurance. Encouraging consumers to take our private health insurance makes healthcare cheaper.

Question 40

How do Consumers Respond to Indirect Taxes?

Answer 40

Governments impose indirect taxes on the consumption of goods and services to discourage buyers from purchasing because they are dangerous or have bad effects. The tax added onto the product makes it more expensive for purchase, making it less attractive to consumers. e.g. Heavy taxes on alcohol, fuel and tobacco.

Question 41

How do Consumers Respond to Laws and Government Regulations?

Answer 41

Governments add regulations and laws to prevent the consumption of particular goods and services for individuals, encouraging them to do the right thing. e.g. laws about underage drinking and smoking, wearing a seatbelt, wearing a bike helmet.

Question 42

How do Businesses Respond to Subsides?

Answer 42

The government will offer subsides or cash payments to businesses to influence their economic decisions. These subsides help over some production costs, improving profitability. Subsides aims to incentivise the production of goods and services that bring them broader benefits for an industry, economy or society in general. e.g. During COVID-19 lockdowns, there eas temporary JobKeeper wage subsidy, which involved the government paying off some wage cost for businesses so they could hang onto their staff.

Question 43

How do Businesses Respond to Tax Rebates?

Answer 43

The government offers tax rebates as incentives to influence decisions made by businesses. By offering tax discounts, rebates increase after-tax profits, encouraging expansion of businesses, production and employment, and help keep prices of goods and services lower. e.g. If a business making a profit required to pay $10,000 a year in tax and it had $2000 in tax rebates, the number of taxable dollars would be cut by $2000 to just $8000, improving the businesses profits and encouraging expansion.

Question 44

How do Businesses Respond to Direct and Indirect Taxes?

Answer 44

Direct and indirect taxes impose costs and/or reduce final profits. Company tax is a levy directly on each dollar of profit of profit or taxable incomes of businesses. The rate of tax for businesses in Australia are higher than those in other countries, Australian businesses are at a competitive disadvantage and without additional tax cuts, it discourages business expansion. The government also uses indirect taxes to affect businesses decisions and reduce market failure. They're placed on selected goods, targeting those that create social costs for the community or that use production methods that harm the environment. These taxes make production more expensive and less profitable for businesses. e.g. heavy indirect tax on production of cigarettes and alcohol to make it less profitable as the consumption of these things causes great harm and will likely suffer losses and pay costs like medical treatments.

Question 45

How do Businesses Respond to Regulations and Laws?

Answer 45

Laws and regulations can discourage some business activity. The government implements many laws and regulations to attempt to influence decisions and improve the general wellbeing of Australia. The production of certain products that bring harm to society are usually banned or restricted. Firms are usually compliant with these regulations as they want to avoid heavy government fines and other legal consequences.

Question 46

Traditional Economic Viewpoint of Government Behaviour

Answer 46

The traditional viewpoint of government in an economy is to maximise society's living standards through stabilization of economic activity, increasing efficiency in resource allocation and redistributing incomes more fairly.

Question 47

How the Government Intervenes to Stabilise the Economy?

Answer 47

During booms: slow nation spending by raising taxes and/or reducing government spending, which helps avoid inflation. During recessions: Boost national spending reducing taxes and/or increasing government spending, which helps reduce unemployment.

Question 48

How the Government Intervenes to Improve Efficiency?

Answer 48

Discouraging harmful production: like alcohol and tobacco, through regulations, high taxes, etc. Providing socially beneficial goods: education, healthcare, and housing are essential but sometimes underproduced due to operation of the markets. The government will intervene and offer them for free or at a subsided cost. Laws promoting competition: Businesses are prevented from engaging in illegal activities which maintain competition in markets, which helps the drive down of money for consumers.

Question 49

Business Style-Incentives

Answer 49

Benefits or rewards that encourage businesses to engage in certain behaviors or activities. e.g. government tax rebate for businesses that invest in environmentally friendly equipment, encouraging sustainable practices. A shopping centre offering reduced rent for new businesses in their first few weeks of operation.

Question 50

Business Style-Discentives

Answer 50

Penalties or drawbacks that discourage businesses from engaging in certain activities or behaviours. e.g. A government-imposed carbon tax on businesses with high greenhouse gas emissions, discouraging pollution. Fines for companies failing to comply with workplace safety regulations, discouraging mistreatment and neglect in the workplace.

Question 51

PPD - At a point inside the PPF

Answer 51

Underutilization of Resources at the current time and goods and services cannot be produced at its max efficiently.

Question 52

PPD - A point outside the PPF

Answer 52

A point that is unattainable in the current time due to lack of available resources.