1.1 + 1.2 What is economics? Flashcards
economics
social science that studies how human beings use their limited resources to satisfy their infinite needs and wants and how they improve their economic well-being.
microeconomics
concerned with the individual parts of the economy; it deals with individual units within the economy such as firms, consumers or markets
macroeconomics
concerned with the economy as whole; deals with aggregates such as the overall level of unemployment, total output of an economy and its growth through time and the average price level
scarcity
excess of human wants over what can actually be produced to fulfill these wants
choices
since resources are scarce, choices must be made - society has to choose between goods and services to produce and how much of it they want
efficiency
scare resources must be used in the best way possible to produce the combinations of goods and services that are optimum for society. this is know as allocative efficiency
equity
fairness: inequality in the distribution of wealth and income
economic well being
living standards enjoyed by the members of an economy and includes the dimensions of: security, meeting basic needs, make economic choices and maintain all of this over time
sustainability
ability of the present generation to meet its need without compromising the ability of future generations to meet their own needs
change
economics is not static: so the study focuses not only on the level of a variable but its change from one situation to another
interdependence
an action of an agent will impact other agents
intervention
government involvement in the workings of markets despite markets being considered as the best mechanism to organize economic activity
Factos of production
Land, Labour, Capital, Entrepreneurship
Land
inputs into productions provided by nature
Labour
human input (both physical and mental) into production
Capital
manufactured resources: produced means of productions
entrepreneurship
willingness and ability that some individuals have to take risks and to manage the other three factors of production
opportunity cost
what you lost: alternative foregone of a choice
economic goods vs free goods
economic: require scare resources to be sacrificed
free: zero opportunity cost of production
three basic questions
what to produce?
how to produce?
for whom?
assumptions behind a PPC
Each economy produces only two goods.
The goods are produced using combinations of the available resources.
At each moment in time the amount of resources that the country has is fixed.
The state of technology at each moment in time is fixed.
The points on the curve mean that all resources in the economy are fully employed.
At any point inside the PPC
not all the factors of production in the economy are being used (there is unemployment of resources) or they are being used inefficiently.
points on the PPC
where there is economic efficiency and no resources are being unemployed. Any point on the PPC shows maximum potential output.
points outside the PPC are
unatainable
actual growth
situation in which a point inside the PCC curve moved more outside (still inside the curve but closer to the line)
The country is now producing more of good X and good Y than before, using more of its scarce resources.
potential growth
If a change in the economy caused an increase in the maximum amount of goods that can be produced, known as the potential output, the PPC would shift outwards
The potential output of a country can be increased (causing the PPC to shift outwards) by one or a combination of the following factors:
An increase in the quantity of factors of production
An increase in the quality of factors of production
An improvement in technology
The PPC is usually a curve and not a straight line because
the opportunity cost is not normally constant as you transfer resources from the production of one good to the other. This is because not all of the factors of production are equally well suited to the production of both goods.
model of closed economy
The assumptions of closed economy
Households own all the factors of production.
Firms produce all goods and services.
There is no government.
There are no other countries to trade with (it is a closed economy).
There are no banks or commercial institutions.
circular flow of income
Leakages
flows of money that leave the economy as savings, taxes and imports. They are the part of domestic households’ income that is not spent on domestic goods and services.
injections
expenditures on domestic goods and services not originating from the household
If leakages are bigger than injections
the money that flows out is greater than the amount that flows in, so the national income will fall as there will be less income circulating and the economy will shrink.
if injections are bigger than leakages
national income increases
if injections are equal to leakages
national income does not change
what is a positive statement
a statement that is a fact and can be proven right or wrong
what is a normative statement
a point of view: value of judgement
ceteris paribus
statement of “all else constant”
An example of a normative economic statement would be
‘Extreme poverty should be eradicated’ or ‘Health care should be provided free to everyone’.
example of a positive economic statement would be
‘If the government increases spending, unemployment will fall’ or ‘Brazil’s inflation rate in 2016 was 9 per cent’.
