11 principles Flashcards
The first principle is trade-offs
- What is meant?
- And what is the most common/important?
1) All economic decisions involve tradeoffs (party before exam leaves less time to study)
2) Efficiency vs. Equality - greater equality by distributing from rich to poor, but creates less incentive to work
The second principle sorounds costs - what is important to include?
Opportunity costs
The third principle is about rational people - describe
People maximise utility, therefore make decisions by evaluating costs and benefits of marginal changes.
Fourth is about incentives
- What is it
- Explain
- People respond to incentives
- Incentives is something that induces a person to act (reward or punishment)
The fifth principle is about trade
- What is important to remember?
Explain the principle - What is the discussion about Absolute vs. comparative advantage
- Trade can make everyone better of
- Specialise on producing one good or service and exchange it for another?
- Get a better price abroad
- But, if a country does everything better, should she/he do everything? Absolute vs. comparative advantage
- Everybody is better off with specialisation: zero-sum games vs. games where everyone gaines from economic interaction
What can be said about a market? (6th principle)
- Markets are usually a good way to organise economic activity
- Market is a ground of buyers and sellers
- “organising economic activity” means:
- what goods to produce
- how to produce them
- how much to produce
- who gets them
- these answers vary over time
What does a market economy mean? (Still 6th principle)
And what concept is important to note? (who is the authors?)
And how does this concept work?
1) A market economy allocates resources through decentralised decisions of many households and firms as they interact in the markets
2) Adam smith: Each household and firms acts as if led by “an invisible hand” to promote general economic well-being
2. 1) The invisible hand works through the price system
- buyers and sellers determine the price
- price reflect the value (and costs)
- maximise socities well-being
7th principle is about the government, what is it?
- Governments can sometimes improve market outcomes
- Enforcing property rights
- Avoid market failures (when the market failes to allocate society’s resources efficiently. Causes are:
- Externalities: whent the consumption or production of a good affects others
- negative: polution
- positive: research
- Market power: a single buyer or seller has substantial influence on market price (monopoly)
- Asset price bubles; prices may not be good aggregators of information
- Externalities: whent the consumption or production of a good affects others
- Promote equality
- Ex-ante: equality of opportunity
- Ex-post: minimum wages
THe 8th principle is about a country’s standard of living, what does it depend on?
- Its ability to produce goods and services
- Productivity: The amount of goods and services produced per unit of labor
- Productivity depends on equipment, skills and technology available to workers, but also quality of institutions, law and markets
- Innovation is crucial to increase productivity
- –> Its better to increase quality/innovation and get high prices (rents) than compete based on continuing lower prices
- Productivity: The amount of goods and services produced per unit of labor
The 10th principle is about inflation and enployment, what is it?
- In the short run, many economic policies push inflation and unemployment in opposite directions. For instance:
- Higher prices –> real wages go down –> firms hire more workers (since they are cheaper)
- If you expect prices to go down continuoslly (deflation), wait with consumption –> less economic activity –> less employment
11th principle is about financial crisis, what is it?
- Financial crisis is very important for macro effects
- Financial crises are a materialisation of systemic risk
- Systemic risk is endogenous: it depends on the financial system’s incentives.
- Financial crises are a materialisation of systemic risk
