1. Introduction to economics Flashcards
Adam Smith
- father of modern economics (now also classical economics)
- introduced the free market - ,,invisible hand” of competition will result in the most efficient outcome
Free market
Free market: one where consumers may buy what they like and producers may produce what they like, with no gov interferences
Social science
Social science: a study of people in a society and how they interact wtih each other.
Tangible - intangible goods
Tangable goods: physical goods that can be touched, such as apples or pens.
Intangible goods: non-physical goods that cannot be touched, ex: insurance or haircut service.
Conflict between wants, needs and resources.
Human needs and wants are infinite while resources on Earth are finite
Economics
a social science studying how scarce resources are allocated to fulfill the infinite wanst of consumers.
Economic good
Economic good: any good or service that has a price and is thus being rationed
Scarcity
SCARCITY: basic economic problem, the gap between limited resources and limitless wants of consumers
Opportunity cost
Opportunity cost: the next best alternative forgone when an economic decision is made
The basic economic problem
- What to produce and in what quantities?
- How things should be produced?
- Who should things be produced for?
Factors of production
Factors of production: four resources that allow an economy to produce output
C - capital
E - entrepreneurship
L - land
L - labour
Labour
Labour: human physical and mental contribution of the existing workforce to production.
Capital
Capital: factor of production that comes from investment in physical capital and human capital.
Entrepreneurship
Entrepreneurship: ability to manage and tak risks in production.
PPC
Production possibilities curve
- used to represent scarcity, choice and opportunity cost
- shows the maximum combination of goods and services that can be produced by an economy in a given time period, if all the resources in the economy are used fully and efficiently and the state of technology is fixed (at potential output)
- shifts can occur if factors of production increase/decrease
Utility (total, marginal)
Utility: a measure of usefulness and pleasure (how much consumer receives when thwy consume the product).
Total utility: total satisfaction gained from consuming a certain quantity of a product.
Marginal utility: extra utility gained from consuming one more unit of a product (usually decreases with number).
Positive statement
Positive statement: is one that may be proven right or wrong by looking at the facts
Ex: The unemployment rate in China is 4.8%.
Normative statement
Normative statement: is a matter of opinion and cannot be proven right or wrong
Ex: The Chinese gov put too little emphasis on rural unemployment.
Ceteris paribus
Ceteris paribus: all other things being equal.
Used because economics use models and when analysing one factor, ceteris paribus allows not to take other factors into account
Circular flow of income
Circular flow of income:
Rationing systems:
- Planned economy
- Free market economy
Planned economy
Planned economy (command economy): one where the decisions what to produce, how to produce and who to produce are made by the government.
- all resources are collectively owned
- gov bodies arrange production, set wages and prices: planned centrally
- problem: hard to forsee the future and plan
- ex: USSR, to some extent China
DISADV of pure planned:
- difficult to plan accurately: shortage/surplus
- resources not efficiently used
- no incentives to work
- gov might take over freedom of choice
- gov have different aims from society
Free market economy
Free market economy (capitalism): one where production is in private hands and demand and supply are left free to set wages and prices in the economy
- should work relatively efficiently, few cases of surplus and shortage
- individuals make decisions in production to gain the largest profits
DISADV fo pure free market:
- overprovided demerit goods
- underprovided merit goods
- resources used up too quickly
- firms may grow to domninate economies
Sustainable development
Sustainable development: dveelopment that meets the needs of current generation without limiting the ability of future generations ton meet their needs
