1) CH1 Ten Principles on economics Flashcards
See chapter one of the text book
What means begin “rational”?
Maximize benefits under a constraint (generally the budget).
What are the 3 elements that give value?
Utility (until 19th) Scarcity (until 19th) Labour/added value (since 19th)
What will allow people to live together, according to Adam Smith?
The market.
What is the necessary background for the market, according to Adam Smith?
The Nation State
What are the 2 elements of “decision making”?
Existence of individuals => property Decision rule: rationality, computation => economic calculus
What was the first name of “economics” before the 1930’s?
Political economy
What is the constraint in economics?
Natural ressources, budget…
What is the cost of something?
What you give up to get it.
What does mean “thinking at the margin”?
You think at the last unit you get.
For economists, why do you act?
Because of incentives: You do because you think you will get a reward.
What is necessary to have a peaceful market?
The Nation to put up laws and support costs that cannot be supported by individuals or companies (roads…)
On what does depend the “standard of living”?
The country’s production, wealth and how it is distributed, AND other measures of level of life.
What is a “trade-off”?
To get one thing, you have to give up another thing.
What are the 4 principles in economics about how people make decisions?
1) People face tradeoffs 2) The cost of something : what you give up to get it 3) Rational people think at the margin 4) People respond to incentives
What are the 3 principles in economics about how people interact?
1) Trade can make everyone better off 2) Market is usually a good way to organize economic activity. 3) Government can sometimes improve market outcomes.
What are the 3 principles in economics about how the economy as a whole works?
1) A country’s standard of living depends on its ability to produce goods and services. 2) Prices rise when the government prints too much money. 3) Society face a short-run tradeoff between inflation and unemployment.
What are the 2 uses of money?
1) Unit of accompatibility / comparison of goods 2) exchange
What is the utility of price?
It is a vector of informations.
According to classical and neoclassical, what are the 2 prices?
1) Nominal price, price a a t-time with inflation 2) Real price without inflation: purchase power of the wage.
What is inflation?
amount / basket of goods I can buy to survive in my society (price index) Prices are going up.
What is disinflation?
Prices are getting lower.
What is deflation?
GDP is going low.
What are the 3 reasons for inflation?
1) Too much money circulating. => put money in the bank 2) Full employment. => rise production capabilities 3) Shortage of a good
What is the law of diminishing returns?
The more worker, the less productivity, the less gain, the higher prices
Who “invented” the law of diminishing returns?
Turgo then Ricardo.
What are the 3 components of production?
K: Interest Labour (wage) Land (rent) Now, land is in the K (capital)
What is happening in production for K and L in a developed society? In a less developed society?
K+ L- K- L+
Under which judgments do we act, according to A. Smith?
The judgment of unknown spectator and an unknown / god.
What is efficiency in a society?
Society gets the most that it can from its scarce ressources.
What is equity in a society?
Ressources are distributed fairly among the members.
What is the opportunity cost?
What you give up to get the item.
Why can market make people better off?
Because people gain from the ability to trade with each other.
What is the “Indivisible hand” (A. Smith)?
People follow their best-interest and everyone is better-off. This is a win-win situation.
What is a wale fare society?
Society where everyone is happy, increasing the wealth of Nation (labour).
What is GDP?
The sum of added values, trading evaluated.
How can be measured the GDP?
At a state level or a the individual level.
What is productivity?
Number of goods produced from each hour of a worker’s time.
What does mean that society faces a short-run trade-off between inflation and unemployment?
That’s the Philipps Curve:
