Chapter 1 Economics: Foundations And Models

Front 1

Other than being essential, give other reason for water being so cheap.

Back 1

Abundance.

Front 2

How can diamond and water be differentiated?

Back 2

Diamonds, which are hardly essential for life, but are much scarcer than water and therefore far more expensive.

Front 3

Throughout many parts of the world, what has been a major policy issue?

Back 3

The perceived scarcity water.

Front 4

In terms of water, what is the common problem with a significant number of countries?

Back 4

A significant number of countries face severe shortages.

Front 5

Geographically, describe Australia.

Back 5

Around 65 per cent of Australia's water run-off occurs in the tropical northern regions, but most of the heavily populated cities are located in Australia's southern regions.

Front 6

Provide a story about Australia's agricultural output.

Back 6

Nearly 75 per cent of Australia's irrigated agricultural output is grown in the Murray Darling Basin, which receives as little as 6 per cent of total water run-off.

Front 7

Give a sense of paradox for Australia.

Back 7

Although Australia may not have a shortage of water by some official definitions, its people and agricultural activities often do experience very severe water shortages as they are largely located where water is least plentiful.

Front 8

In 2030, what can happen in Australia?

Back 8

According to the Water Services Association of Australia, by 2030 Australia's major cities will face a water shortage of over 800 gigalitres per year, which is equivalent to more than Sydney's current total annual water usage.

Front 9

What can be done to fix the water demand and water extraction?

Back 9

About 75 per cent of the mean annual flow in the Murray Darling Basin is diverted with the result that the mouth of the Murray River has often closed in recent years of lower rainfall.

Front 10

Give the composition in the Australian economy.

Back 10

The agricultural industry consumes about half, households about 13 per cent, with the remainder consumed by other (non-agriculture) commercial users,

Front 11

How to cope with climate variability?

Back 11

More than twice the average annual flow in the basin is held in storage.

Front 12

How does high level of storage and extraction create a problem?

Back 12

Such high levels of storage and extraction have very damaging impacts on the health of the rivers, floodplains, wetlands and estuaries of the Murray Darling.

Front 13

Give example of land management factors and elaborate the importance of it.

Back 13

Many other land management factors such as drainage, nutrient and chemical pesticide loading are also very important to the health and ecological function of rivers, groundwater, wetlands, floodplains and estuaries.

Front 14

What is the impression of Australia's policies to alleviate water shortage problems?

Back 14

Although not all politicians and scientists agree on every proposal, most agree that policies must be such that they improve the productivity of water-using industries.

Front 15

What does economic analysis think of the price of water?

Back 15

Economic analysis also indicates that the price of water, particularly for use by industry, has been too low, leading to overuse.

Front 16

What does economists think about the pricing of water?

Back 16

Economists have long argued that the pricing of water should more appropriately reflect its scarcity.

Front 17

Give one example of questions for economics.

Back 17

How are the prices of goods and services determined?

Front 18

Give one example of questions for economics.

Back 18

Why does government control the prices of some goods and services, and what are the effects of those controls?

Front 19

How does economics become interesting?

Back 19

Economics is a dynamic field with new problems and questions constantly arising.

Front 20

How does economists keep themselves active?

Back 20

Economists are always at work developing new methods to analyse economic issues.

Front 21

Give an example on the world living in scarcity.

Back 21

You might like to own five Mercedes-Benz cars and spend three months each year in five-star European hotels, but unless you are a close relative of James Packer you probably lack the money to fulfil these dreams.

Front 22

What must people do every day?

Back 22

You must make choices about how to spend your limited income on the many goods and services available.

Front 23

Give one example on time limiting your ability to attain goals.

Back 23

If you spend an hour studying for your economics test, you have one less hour available to study for your statistics test.

Front 24

Why are firms and the government in the same situation?

Back 24

They have limited resources available to them as they attempt to attain their goals.

Front 25

Give one of the important ideas on how people make choices and interact in markets.

Back 25

People respond to incentives.

Front 26

Give one of the important ideas on how people make choices and interact in markets.

Back 26

Optimal decisions are made at the margin.

Front 27

Give examples of fundamental questions that any economy must answer.

Back 27

What goods and services will be produced?

Front 28

Give examples of fundamental questions that any economy must answer.

Back 28

How will the goods and services be produced?

Front 29

Why is the assumption that people being rational not always true?

Back 29

This assumptions does not mean that economists believe that everyone knows everything or always makes the 'best' decision.

Front 30

What makes individuals rational?

Back 30

Rational individuals weigh the benefits and costs of each action, and they choose and action only if the benefits outweigh the costs.

Front 31

What does economists assume about managers?

Back 31

Economists assume that the managers have acted rationally on the basis of the information available to them in choosing the price.

Front 32

What does economists think about consumers and firms?

Back 32

Economists emphasis that consumers and firms consistently respond to economic incentives.

Front 33

Comment on the fact 'People respond to economic incentives'

Back 33

This fact may seem obvious, but it is often overlooked.

Front 34

Why is the government's expenditure increasing rapidly?

Back 34

The government's expenditure on the PBS - currently over $10 billion annually - is increasing rapidly, mainly due to the high cost of subsidising new and expensive prescription medicines to make them available at prices people can afford.

Front 35

How many prescriptions did the government pay part of the price? What was the purpose of this intention?

Back 35

The government paid part of the price of over 200 million prescriptions for subsidised medicines supplied up to the year ending June 2011.

Front 36

Describe on how the scheme accounts for.

Back 36

The scheme accounts for around 20 per cent of the total Australian government's health budget and continues to grow

Front 37

What should a medicine available on the PBS must do?

Back 37

For a medicine to be available on the PBS it must not only satisfy the criterion that it has a significant impact on patient health but also be cost effective in that the extra benefit to patients must be worth the cost to government (the taxpayer).

Front 38

What do many Australians not understand?

Back 38

Many Australians do not fully understand this second criterion and believe that if a medicine improves your health it must be worth taking no matter what the cost!

Front 39

What do most decisions involve?

Back 39

Most decisions involve doing a little more or a little less.

Front 40

What happens to the decision if you are trying to decrease your spending and increase your saving?

Back 40

If you are trying to decrease your spending and increase your saving, the decision is not really a choice between saving every dollar you earn or spending it all.

Front 41

Describe the marginal cost from watching television.

Back 41

The marginal cost (MC) is the lower grade you receive from having studied a little less.

Front 42

Explain on how watching a television program and studying is related.

Back 42

Usually you will know whether the additional enjoyment from watching a television program is worth the additional cost involved in not spending that hour studying without giving it a lot of thought.

Front 43

In business situations, what do firms often have to do?

Back 43

In business situations, firms often have to make careful calculations to determine, for example, whether the additional revenue received from increasing production is greater or less than the additional cost of the production.

Front 44

How do fruit flowers deal with marginal analysis?

Back 44

For fruit flowers, do they need to change their expansion plans for their orchards if the price of water rises, or is the additional amount they must pay for water less than the additional revenue they would receive from selling more fruit?

Front 45

What does trade-off force society to do?

Back 45

Trade-offs force society to make choices.

Front 46

Who makes/does not make decisions?

Back 46

Of course, 'society' does not make decisions; only individuals make decisions.

Front 47

The answer to the question of what will be produced is determined by who?

Back 47

The answer to the question of what will be produced is determined by the choices made by consumers, firms and governments.

Front 48

What must Apple choose?

Back 48

Apple must choose whether to devote its scarce resources to making more iPhones or more MacBook laptop computers.

Front 49

What is the opportunity cost of producing more iPhones?

Back 49

The opportunity cost of producing more iPhones is the loss of production of MacBooks.

Front 50

What is the opportunity cost of buying a cup of coffee?

Back 50

You could have chosen the cup of tea.

Front 51

What is the opportunity cost of the entrepreneurial services to her own business?

Back 51

The opportunity cost of the entrepreneurial services to her own business is $80,000, even though she does not pay herself an explicit salary.

Front 52

Give an example of firm facing a trade-off between using more workers and using more machines.

Back 52

For example, a local service station has to choose whether to provide car repair services using more diagnostic computers and fewer car mechanics or more car mechanics and fewer diagnostic computers.

Front 53

Give an example of firm facing a trade-off between using more workers and using more machines.

Back 53

Similarly, movie studios have to choose whether to produce animated films using highly skilled animators tot draw them by hand or fewer animators and more computers.

Front 54

Give an example of firm facing a trade-off between using more workers and using more machines.

Back 54

In deciding whether to move production offshore to China, firms are often choosing between a production method in their home country that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines.

Front 55

Explain on how people are willing to give up some of their income.

Back 55

Often, people are willing to give up some of their income-and therefore some of their ability to purchase goods and services-by donating to charities to increase incomes of poorer people.

Front 56

What is an important policy question?

Back 56

An important policy question is whether the government should intervene to make the distribution of income more equal.

Front 57

What did government employees manage?

Back 57

Government employees managed factories and stores.

Front 58

What was the objective of Soviet Union's managers?

Back 58

The objective of Soviet Union's managers was to follow the government's orders, rather than to satisfy the wants of consumers.

Front 59

What is the problem with centrally planned economies?

Back 59

Centrally planned economies like the former Soviet Union have not been successful in producing low-cost, high-quality goods and services.

Front 60

What finally led to the collapse of the Soviet Union in 1991?

Back 60

Dissatisfaction with low living standards and political repression finally led to the collapse of the Soviet Union in 1991.

Front 61

What does market economies rely primarily on privately owned firms to do?

Back 61

Market economies rely primarily on privately owned firms to produce goods and services and to decide how to produce them.

Front 62

For market economy, what can you say about markets and the government?

Back 62

Markets, rather than the government, determine who receives the goods and services produced.

Front 63

In the past 15 years, what happened to some firms in Australia, the USA and elsewhere?

Back 63

In the past 15 years some firms in Australia, the USA and elsewhere, particularly in the electronics and furniture industries, have been under pressure to reduce their costs to meet the low-cost competition of Chinese and Indian firms.

Front 64

Why is $90 000 per year provided to engineers with training and skills?

Back 64

They can purchase goods and services and pay taxes.

Front 65

What happens if the engineer also owns a house that is rented out?

Back 65

If the engineer also owns a house that is rented out, their income will be even higher.

Front 66

What is one of the attractive features of markets?

Back 66

Rewarding hard work.

Front 67

How to make the person's income higher?

Back 67

Generally, the more extensive the training a person has received and the longer the hours the person works, the higher the person's income will be.

Front 68

At the beginning of the twentieth century, what happened to government intervention in the economy?

Back 68

Beginning in the middle of the twentieth century, government intervention in the economy dramatically increased in every market economy.

Front 69

Why is government intervention important?

Back 69

Government intervention increase was primarily caused by the high rates of unemployment and business bankruptcies during the Great Depression of the 1930s. Some government intervention was also intended to raise the incomes of the elderly, the sick and people with limited skills.

Front 70

Give examples that governments provide goods and services that the market does not.

Back 70

Governments also provide goods and services that the market does not provide, such as roads, street lighting and national defence, or that the market fails to provide in sufficient quantities or at affordable prices, such as education and health services.

Front 71

How did China gain its reputation for having rapid economic growth?

Back 71

Production of most goods and services is now determined in the market, albeit with substantial government intervention.

Front 72

Why does competition lead to dynamic efficiency?

Back 72

Competition can lead to dynamic efficiency, as firms seek to adapt their product and use new technologies over time to secure their share of sales in the market.

Front 73

When can allocative efficiency be achieved?

Back 73

Allocative efficiency is achieved when the combination of competition between firms and voluntary exchange between firms and consumers results in firms producing the mix of goods and services that consumers prefer most.

Front 74

How does water get exposed to allocative inefficiency?

Back 74

Water is an increasingly scarce resource, which may be overused if government restrictions on water usage and pricing are set at levels that are too low.

Front 75

How long did it take for firms to discover the lowest-cost method of producing washing machine?

Back 75

It took several years for firms to discover the lowest-cost method of producing this good.

Front 76

While the production of some goods is going on, how can the environmental damage be avoided?

Back 76

Government intervention can increase efficiency, because without such intervention firms may ignore the cost of environmental damage, and thereby fail to produce the goods at the lowest possible cost from society's perspective.

Front 77

How does society think of an economic outcome?

Back 77

Just because an economic outcome is efficient this does not necessarily mean that society finds it desirable.

Front 78

Provide the positive and the negative side of equity.

Back 78

Equity may be increased by reducing the incomes of high-income people and increasing the incomes of the poor, efficiency may be reduced.

Front 79

What is the reaction of people from the equity?

Back 79

People have less incentive to open new businesses, to supply labour and to save if the government takes a significant amount of the income they earn from working or saving.

Front 80

If fewer goods and services are produced and less saving takes place, what does this result illustrate?

Back 80

This result illustrates that there is often a trade-off between efficiency and equity.

Front 81

How does engineer rely on model?

Back 81

An engineer may use a computer model of a bridge to help test whether it will withstand high winds.

Front 82

How does biologist rely on model?

Back 82

A biologist may make a physical model of a nucleic acid in order to understand its properties better.

Front 83

How does economists deal with a complicated question?

Back 83

For a complicated question, economists often use several models to examine different aspects of the issue.

Front 84

Give an example of how economic model is applied.

Back 84

For example, an economic model which predicts how the price of water affects the amount used would help in analysing what price should be charged for water.

Front 85

For economists, what is step 3 for developing a model?

Back 85

Use economic data to test the hypothesis.

Front 86

What do economic models make behavioural assumptions about?

Back 86

Economic models make behavioural assumptions about the motives of consumers and firms.

Front 87

What do economists assume about the firms?

Back 87

Economists assume that firms act to maximise their profits.

Front 88

How can we know if the assumptions in a model are too simplified or too limiting?

Back 88

We discover this when we form hypotheses based on these assumptions and test these hypotheses using real-world information.

Front 89

State an example of a hypothesis in an economic model.

Back 89

An example of a hypothesis in an economic model is the statement that 'charging more for water will lead to a decline in water usage.

Front 90

What is an economic hypothesis usually about?

Back 90

An economic hypothesis is usually about a casual relationship; in this case, the hypothesis states that a higher water price causes, or leads to, reduced amounts of water usage.

Front 91

Explain how testing a hypothesis can be tricky.

Back 91

For example, showing that higher prices for water have in the past led to lower amounts being used would not be enough to demonstrate that the higher prices caused a reduction in water usage.

Front 92

Give an example of just because of two things are correlated-that is, they are associated with each other-does not mean that one caused the other.

Back 92

For example, suppose that in the past the government had increased the price of water but at the same time rainfall increased, reducing the need for as much irrigation from rivers and dams.

Front 93

Give an example of just because of two things are correlated-that is, they are associated with each other-does not mean that one caused the other.

Back 93

Biological engineering had developed varieties of crops that didn't require as much water.

Front 94

Why do economists often refer to a hypothesis having been 'not rejected', rather than being 'accepted', by statistical analysis?

Back 94

In many cases the acceptance is tentative, however, pending the gathering of new data or further statistical analysis.

Front 95

What may explain why our hypothesis was rejected by the economic statistics?

Back 95

For example, perhaps the model we used to determine the effect of pricing on water usage did not distinguish between water used for domestic purposes and water used by industry. If, in fact, we distinguished between alternative uses, we might have found that water used for domestic purpose was affected less by price changes than water used for industrial purposes.

Front 96

Provide an example of positive analysis.

Back 96

A reduction in taxation rates will lead to an increase in spending by individuals.

Front 97

Provide an example of normative analysis.

Back 97

Individuals should receive reductions in taxation as they are able to decide how to spend money to maximise their satisfaction better than the government.

Front 98

Because of the minimum wage, what happens to some workers?

Back 98

Because of the minimum wage, some workers have difficulty finding jobs and some firms end up paying more for labour than they otherwise would have.

Front 99

Why does a positive analysis of the federal minimum wage use an economic model?

Back 99

A positive analysis of the federal minimum wage uses an economic model to estimate how many workers have lost their jobs because of the minimum wage, its impact on the costs and profits of businesses and the gains to workers receiving the minimum wage.

Front 100

What do the supporters of the minimum wage law believe?

Back 100

Supporters of the minimum wage law believe that the losses to employers and to workers who are unemployed as a result of the law are more than offset by the gains to those workers who receive higher wages than they would have without a minimum wage.

Front 101

What does positive economic analysis indicate?

Back 101

Positive economic analysis indicates that the minimum wage law causes unemployment (although economists disagree about how much unemployment is caused by minimum wage).

Front 102

What question requires normative analysis?

Back 102

Do the gains to the winners more than offset the losses to the losers?

Front 103

Give an example of issues that economists have studied.

Back 103

Economists have studied such issues as how families decide the number of children to have, why people have difficulty losing weight or attaining other desirable goals and why people often ignore relevant information when making decisions.

Front 104

What do most economists agree?

Back 104

Most economists agree that immigrants into Australia do not create unemployment, that is, they do not take jobs from existing Australian residents. Instead, immigration creates demand for goods and services, bring skills into Australia and contributes positively to economic growth.

Front 105

What do many countries, including Australia, have in common?

Back 105

Vasts amount of theory and economic modelling are made of evidence.

Front 106

What are politicians acutely aware of?

Back 106

Politicians are acutely aware of conclusions voters believe to be correct but which may not be supported by positive analysis.

Front 107

Describe a proportion of total annual population growth for Australia.

Back 107

Net overseas migration increased from contributing 48.4 per cent to total population growth in 2006 to 65.5 per cent in 2009.

Front 108

Provide policy issues that microeconomics also involve.

Back 108

Microeconomics also involves policy issues, such as analysing the most efficient way to reduce teenage smoking, analysing the costs and benefits of approving the sale of a new prescription drug and analysing the most efficient way to reduce air pollution.

Front 109

What does macroeconomic issues include?

Back 109

Macroeconomic issues include explaining why economies experience periods of recession and increasing unemployment and why over the long run some economies have grown much faster than others.

Front 110

Give an example of microeconomic issue.

Back 110

Understanding how much new machinery and equipment firms decide to purchase, we have to analyse the incentives individuals firms face.

Front 111

In Microeconomics, what do we explore?

Back 111

In Microeconomics, we explore many key economic models and give examples of how they can be applied in the real world.

Front 112

Why is the economic principles important?

Back 112

Economic principles will improve your ability to make choices in many aspects of your life. These principles will also improve your understanding of how decisions are made in business and government.