1. Economics and the economy Flashcards
The key economic problem for a society is
How to reconcile the conflict between PEOPLE’S VIRTUALLY LIMITLESS DESIRES for goods and services, and THE SCRCITY RESOURCES (labor, machinery, raw materials, and so on) with which these goods and services can be produced.
The three basic (1) that every society faces are: (2)
- trade-offs
2. WHAT goods and services to produce, HOW to produce them and FOR WHOM to produce them.
A (1) is (2) if the demand of that resource at a zero price would exceed the available supply.
Economics is the study of how society (3) under conditions of scarcity.
- resource
- scarce
- makes choices
What, how and for whom to produce?
The answer to those questions is the result of the independent decisions of many (1).
In (2) a government planning office decides what will be produced, how it will be produced and for whom it will be produced. Detailed instructions are then issued to (3).
- individuals and firms
- a command economy
- households, firms and workers
Individuals decide how much to (1), what to (2) and how much to (3) of various goods and services.
- work
- buy
- buy
Firms decide what to (1), (2) to produce of various goods and services and which (3) to use in production.
- produce
- how much
- resources
The cost of an activity normally includes:
the (1), which is the amount of money we need to pay for doing it, and the (2), which is the value of the best alternative we must sacrifice for doing that activity.
- explicit cost
2. opportunity cost
The (1) (in a country or in the world) tells us (2)
- income distribution
2. how total income is divided between different groups or individuals
The (1) applies when one input (such as labor) is varied but other inputs (such as equipment and land) remain fixed.
The (1) says that each extra worker adds (2) to output than the previous extra worker added.
- law of diminishing marginal returns
2. less
By moving workers from one industry to the other, the economy can make more of one good but only by making (1) of the other good. There is a (2) between food output and film output.
The (3) shows, for each output of one good, the
maximum amount of the other good that can be produced.
(3) tell (4)
- less
- trade-off
- production possibility frontier (PPF)
- the opportunity cost of a good
Production efficiency means
more output of one good can be obtained only by sacrificing output of other goods.
An individual has a (1) compared to another in the
production of a good if she has a (2) in producing it.
- comparative advantage
2. lower opportunity cost
An individual has an (1) in producing a good if he or she is more efficient at producing that good compared to someone else.
- absolute advantage
A market is
a process by which
- households’ decisions about consumption of alternative goods,
- firms’ decisions about what and how to produce,
- and workers’ decisions about how much and for whom to work are all reconciled by adjustment of prices.
Free markets
Markets in which governments do not intervene
The invisible hand is
the assertion that the individual pursuit of SELF-INTEREST within free markets may allocate resources efficiently from society’s viewpoint.
In (1) the government and private sector jointly solve economic problems.
The government influences decisions through (2) of free services such as (3). It also regulates the extent to which individuals may (4).
- a mixed economy
- taxation, subsidies and provision
- defence and the police
- pursue their own self-interest
Positive economics
studies objective or scientific explanations of HOW THE ECONOMY WORKS.
Normative economics
offers RECOMMENDATIONS based on PERSONAL VALUE JUDGEMENTS.
Microeconomics
offers a detailed treatment of how individuals and firms make economic decisions.
Macroeconomics emphasizes (1). It deliberately simplifies the individual building blocks of the analysis in order to retain (2) of the complete interaction of the economy.
- interactions in the economy as a whole
2. a manageable analysis
Gross domestic product (GDP) is
the value of TOTAL OUTPUT produced in an economy in a given period.
The aggregate price level
measures the average price of goods and services.
The unemployment rate is
the fraction of the labor force unemployed but ACTIVELY LOOKING FOR A JOB.
Economics analyses (1). The key economic problem is to reconcile the conflict between (2) and (3) to fulfill these demands.
- what, how and for whom society produces
- people’s virtually limited demands
- society’s limited ability to produce goods and services
Rational individuals, in making choices, must compare (1) associated with those choices. A choice is made only if (2).
- the benefits and the costs
2. the benefit of doing it is larger than its cost
The (1) (PPF) shows (2) that can be produced given the output of another good. It depicts the tradeoff or menu of choices for society in deciding (3). Resources are (4) and points outside the frontier are (5). It is inefficient to produce within the frontier.
- production possibility frontier
- the maximum amount of one good
- what to produce
- scarce
- unattainable
The (1) is the value of the best alternative that we must sacrifice. It is (2).
- opportunity cost of an activity
2. the slope of the PPF
If individuals, firms or countries have different opportunity costs of producing a good compared to others, they have (1). The fact that individuals have (1) in producing different goods creates the possibility for gains from trading.
- a comparative advantage/comparative advantages
Industrial countries rely extensively on (1) to allocate resources. The market resolves (2) by (3).
- markets
- production and consumption decisions
- adjustments in prices
In (1), decisions on what, how and for whom are made in a central planning office. (2)
- a command economy
2. No economy relies entirely on command.
A free market economy has (1). Resources are allocated entirely through markets in which individuals (2). Adam Smith argued that (3) would nevertheless allocate resources efficiently.
- no government intervention
- pursue their own self-interest
- an ‘invisible hand’
Modern economies are (1), relying mainly on the market but with (2). The (3) is hotly debated.
- mixed
- a large dose of government intervention
- optimal level of intervention
Positive economics studies (1). Normative economics (2). The two should be kept separate.
Given sufficient research, economists could agree on issues in (3). (4) involves subjective value judgements. There is (5) why people should agree about normative statements.
- how the economy actually behaves
- recommends what should be done
- positive economics
- Normative economics
- no reason
Microeconomics offers a detailed analysis of (1). For simplicity, it may (2). Macroeconomics emphasizes (3) at the cost of simplifying the individual building blocks.
- particular activities in the economy
- neglect some interactions with the rest of the economy
- these interactions
