Study Guide for BUS102 Introduction to Economics
2018 - Semester 1
Contents
Chapter 0: Course Information 10
Key points – Chapter ZERO 10
Brief summary of course information 10
Course information 11
Learning support 12
Blackboard 12
Hints for success in this course 13
Reading 14
Assessment tasks 14
Task #1 – online multiple choice tests 15
Task #2 – responses to articles 15
Task #3 – Final exam 16
Chapter 1: Opportunity Cost; The Policy Consensus; Economic growth 17
Key points – Chapter one 17
Introduction 17
A parable: The
oken window fallacy 18
Opportunity cost 21
Can economists agree on anything? 22
Some history of economic thought 22
Economic policy consensus before the Global Financial Crisis 24
Keynesian policy 27
Why is economic growth so important? 28
The power of compound growth 28
End of chapter exercises – chapter 1 31
Multiple choice 31
Multi-choice answers 35
Tutorial exercises 35
Review of key points – Chapter 1 39
Chapter 2: GDP and the general price level 40
Key points – Chapter 2 40
Introduction 40
GDP and other definitions 40
Components of GDP 43
Inflation 44
Nominal vs real prices 45
Why is inflation a problem? 47
Why is deflation a problem? 49
The quantity theory of money 50
What is money anyway? 51
How do the commercial banks create money? 52
End of chapter exercises – chapter 2 53
Multiple choice 53
Multi-choice answers 57
Tutorial questions 57
Review of key points – Chapter 2 64
Chapter 3: Money and interest rates 65
Key points – Chapter 3 65
Introduction 65
The term structure of interest rates 65
How do interest rates influence economic activity? 66
Consumption 67
Investment 67
Government spending 72
Net exports 72
Monetary policy 73
Taylor rule 74
The price of a bond and its rate of return (interest rate) 75
When monetary policy comes up against deflation 76
End of chapter exercises – chapter 3 77
Multiple choice 77
Multi-choice answers 81
Tutorial questions 81
Review of key points – Chapter 3 86
Chapter 4: The business cycle and unemployment 87
Key points – Chapter 4 87
Introduction 87
What is the business cycle? 87
The business cycle 87
Which variables are pro-cyclical? 89
What causes free market instability? 91
Unemployment 93
Facts and definitions 93
The unemployment-inflation trade-off 95
References 98
End of chapter exercises –chapter 4 99
Multiple choice 99
Multi-choice answers 103
Tutorial questions 103
Review of key points – Chapter 4 107
Chapter 5: Keynesian economics and neo-classical economics 108
Key points – Chapter 5 108
Introduction 108
Fiscal policy vs monetary policy 108
The Keynesian approach to fiscal policy 109
Deficits and automatic stabilisers 109
The economy as a circular flow 110
The Keynesian multiplier 112
The Keynesian prescription 113
The growth of government 114
End of chapter exercises –chapter 5 117
Multiple choice 117
Multi-choice answers 121
Tutorial questions 121
Review of key points – Chapter 5 125
Chapter 6: The market system –supply and demand 126
Key points – Chapter 6 126
Introduction 126
The market system 126
Economic systems 126
Prices 127
Market supply and demand 128
Shifts in supply and demand 130
Some thought experiments in supply and demand 132
What happens if a price ceiling is set? 132
What happens if a price floor is set? 133
Who will bear a tax imposed on a good? 134
Applications of markets in macroeconomics 135
The market for loanable funds 135
What can the loanable funds approach explain? 136
The bond market 137
The labour market 138
End of chapter exercises –chapter 6 141
Multiple choice 141
Multi-choice answers 145
Tutorial exercises 145
Review of key points – Chapter 6 151
Chapter 7: The efficiency of the market system 152
Key points – Chapter 7 152
Introduction 152
Consumer surplus, producer surplus and the efficiency of the market system 152
The context of the market system 154
How interventions reduce economic welfare 155
What has economics to say about the firm's pricing decision? 156
Price elasticity of demand 157
Determinants of a product's elasticity 159
Other types of elasticity 160
End of chapter exercises – chapter 7 161
Multiple choice 161
Multi-choice answers 166
Tutorial exercises 166
Review of key points – Chapter 7 171
Chapter 8: competition and market power 172
Key points – Chapter 8 172
Introduction 172
A simple rule for profit maximization 172
Example of calculating marginal cost 173
The profit-maximizing rule 174
The marginalist principle in general 175
The principal-agent problem 176
When should the firm invest or take on labour? 177
Labour and capital 177
The hiring decision 177
Limitations of neo-classical labour market analysis 178
The market vs the firm: transaction costs 178
How can a firm sustain market power? 179
Market structure and market power 179
How to keep market power or competitive advantage 180
Oligopoly 183
End of chapter exercises – chapter 8 184
Multiple choice 184
Multi-choice answers 188
Tutorial exercises: Profit maximization and market power 188
Review of key points – Chapter 8 192
Chapter 9: Market failure and government Intervention 193
Key points – Chapter 9 193
Introduction 193
Should government encourage competition? 193
Types of regulation 194
Reinforcing the price mechanism 194
Consumer protection 195
The capture theory of regulation 196
Privatisation 196
Can government intervention improve market outcomes? 197
The tradition of objection to uncontrolled capitalism 197
Income redistribution 197
Abuse of monopoly or market power 199
Externalities 199
Public goods 201
Information as a public good 202
If market failure, why not government failure? 203
End of chapter exercises –chapter 9 204
Multiple choice 204
Multi-choice answers 208
Tutorial questions 208
Review of key points – Chapter 9 214
Chapter 10: trade; capital and labour flows 215
Key points – Chapter 10 215
Introduction 215
Can there be anything to gain from trade protection? 215
Why does trade take place and what are its advantages? 215
Absolute advantage and comparative advantage 216
Absolute advantage and comparative advantage in words 216
Absolute advantage and comparative advantage in numbers 217
What determines comparative advantage? 218
Factor endowments 219
Other reasons for trade 220
Should the government intervene, and if so, what is the ‘best’ way to intervene? 221
Trade liberalisation 223
If free trade in goods is a good thing, how about free flow of the factors of production? 224
Free flow of the factors of production? 224
What do we mean by capital flows? 225
Modelling capital flows: supply and demand again! 225
Free trade of goods … free flow of capital … free flow of labour? 228
Theory: the gains from migration 228
It’s not all about wages 229
End of chapter exercises –chapter 10 230
Multiple choice 230
Multi-choice answers 235
Tutorial questions 235
Review of key points – Chapter 10 240
Chapter 11: The balance of payments; exchange rates 241
Key points – Chapter 11 241
Introduction 241
The balance of payments 241
What is the BOP? 241
What the BOP is not 243
Does the BOP matter? 244
The exchange rate 245
Volatile exchange rates: a problem for an importer 245
The exchange rate defined 246
Trade-weighted index 247
The real exchange rate 247
What determines the value of AUD? 248
A fixed exchange rate 249
The cu
ency market 249
Exchange rate theories 251
Purchasing power parity 251
Limitations of PPP 252
Interest rate parity 252
Bu
les and sentiment 253
How can you prepare for the exam? 253
End of chapter exercises – chapter 11 254
Multiple choice 254
Multi-choice answers 258
Tutorial questions 258
Review of key points – Chapter 11 262
Appendix: The use of mathematics in economics 263
Topics 263
Percentage changes 264
Examples 264
Simple and compound interest 265
Examples 265
Present value 267
Examples 267
Real versus nominal interest rates 268
Examples 268
Real versus nominal prices 269
Examples 269
Exercises for practice 271
Answers 273
Chapter 0: Course Information
Key points – Chapter ZERO
The most important points covered in this chapter are:
(1) The ASSESSMENT tasks that you need to complete.
(2) The ESSENTIAL READING.
(3) How best to succeed in this course.
Brief summary of course information
It is fundamental to complete all assessment tasks if you want to pass this course; the main reason for students failing in the past is not submitting all assessment tasks.
The assessments consist of:
(1) Nine online multiple-choice tests. These are similar to the test at the end of each chapter of this guide. Your best six count for five marks each for a total of 30%. You can find the tests on Blackboard under “Assessment.”
(2) There are two articles to read and answer questions about. Each is worth 15% for a total of 30%. For deadlines and template, look on Blackboard in “Assessment.”
(3) An exam. This is at the end of the course and is a closed book exam. A sample exam will be posted on Blackboard close to the end of the course. The exam is worth 40%.
This Study Guide is essential reading for the course. No text book is necessary; if you want to read more, use the li
ary or internet. Each chapter in this guide contains notes and tutorial exercises. There is space in the tutorial exercises for you to write in your answers. Understanding the tutorial exercises is the key to success in this course.
Please consult Blackboard to find out the schedule of when assessment is due and what you need to do to keep up. Although the course outline provides such information, it is better to check Blackboard regularly in case any changes have to be made. Extensions to assessment deadlines will only be given for exceptional circumstances such as serious illness or bereavement and not for workload reasons or time management issues.
If you have questions about course content, please post them on the Discussion Board on Blackboard or email the course coordinator or tutor. Staff contact details can be found on Blackboard.
Course information
This course is compulsory for students of Business, but the ideas in it are equally useful to students in Arts and Sciences. If you have done some Economics before, maybe at high school level, you will recognise some of the concepts but maybe the approach will be different. If you have never studied Economics before, you may at first find yourself faced with a different and challenging way of thinking. Give yourself time to adjust and to learn a few new concepts. You may be surprised that, after a few weeks of finding new ideas difficult, that you will start to see things more clearly as you see the same tools applied more than once.
The main point of this course is for you to understand some important ideas which you can use in other courses, your future work and in life in general. Your understanding will not necessarily need to focus on the technicalities of economics (equations and graphs) which, for most people, help but, for a few, hinder their understanding of concepts. However, there will be some use of supply and demand diagrams and you are expected to be literate (in English) and numerate and, if necessary, to develop your skills further in both of these areas. Good economics requires a combination of literary and technical skills. If you need to refresh your knowledge of some basic maths, please see the Appendix for topics relevant to this course.
There are three contact hours in each week of this course: a 2-hour lecture and a 1-hour tutorial. A recording of the lecture will be available on Blackboard. However, unless you have a very high degree of self-motivation, it is advisable to attend class and, much more importantly, to concentrate during these contact hours. There is little point being present if your attention is on social media or on socialising in person. Trying to turn off all of your electronic devices and focus your attention on the subject at hand and you will find not only that you learn more but that the time appears to pass more quickly. Since this Study Guide already provides you with full notes, you could focus on just listening and watching, but it can enhance your learning if you have pen and paper and take note of important points for yourself and also actively work through examples given in class.
Having said that attendance at class, provided you engage with the material, will help your learning, remember that knowledge and skills are only useful if they are embodied in individuals that is, learning takes place in your
ain. So, do not expect to do well by just coming to class; you need to read and, above all in economics, you need to do, you need to practise doing the exercises.
Learning support
If you need help, ask EARLY. You can ask questions in tutorials, you can post questions for