1. Introduction to Economics Flashcards
Definition of an “economy”?
System used to make decisions about what is produced, how production is undertaken and who gets to consume the goods and serviced produced.
What characterizes a “market economy”?
Decisions on what to produce and consume are made by individual firms and consumers
What characterizes a “command economy”?
Decisions on what to produce and on who should get the resultant output is made by a central planned (eg. Soviet Union)
What is “scarcity of resources”?
People face TRADE-OFFS
eg. this meal or another… can’t have both….
What is “opportunity cost”?
The opportunity cost of a given action is the value of the next best action you could have chosen to pursue.
(The economic cost or value of the next best alternative forgone)
What is “marginal decisions”?
In analysing how agents behave, economists focus on marginal decisions, whereby people compare the costs & benefits of doing a little bit more (or less) of some activity
What is “incentives”?
An incentive is anything that rewards people from acting in a certain way
What is “specialisation and gains from trade”?
Modern economies are characterised by an elaborate division of labour where each person specialises in very few productive activities and obtains all other necessary goods and services by trading with other people who’ve specialised in producing different goods and services.
Specialisation tends to make people more efficient and productive for two main reasons: * People specialise in those tasks for which they have an intrinsic talent (principle of comparative advantage) * People who specialise tend to become more proficient (and, thus, more productive) A classic example is Adam Smith’s pin factory
What is “market and coordination of activities”?
Markets do so by harnessing people’s desire to exploit opportunities to make themselves better off.
- They reward (with profits, high wages) people who efficiently supply goods desired by other people
- They punish (with losses, unemployment) people who supply goods and services that people don’t want or who do that inefficiently
What are the 2 main criteria used to evaluate the outcomes produced by markets?
- Efficiency: an outcome is efficient if its impossible to change the way that resources are allocated in such a way that at least one person is made better off without someone else being made worse off (Pareto efficiency).
- Equity: economists also evaluate the outcomes produced by markets by reference to how fair or equitable they are. There is often a trade-off between efficiency and equity.
What are some examples of situations where markets can lead to ineffecient allocation of results?
- insufficient competition
- lack of information
- because markets for important goods do not exist (e.g. market for pollution, peace)
- Externalities
- Or the markets aren’t working as expected. Markets are human institutions and inherently embody politics.
What is the definition of an “economic model”?
simplified representations of (aspects) of the real economy
What are some assumptions economic models rely on?
Models rely on assumptions about agents behaviour, for instance:
- agents are rational and self-interested
- individuals maximise utility
- firms maximise profit (and minimise costs)
What is the slope of a vertical curve?
INFINITY
What is the slope of a horizontal curve?
0
