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Principle of economics > CH 1+2+3 > Flashcards

CH 1+2+3 Flashcards

1
Q

economic interaction

A

how my choices affect other’s choices and vice versa

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2
Q

The 4 Principles that underlie individual choice: core of economics

A
  1. people must make choices because resources are scarce
  2. opportunity cost of an item
  3. “How much” decisions require trade-offs at the margin
  4. people respond to incentives
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3
Q

resource

A

anything that can be used to produce somthing else

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4
Q

scarce

A

not enough of resource

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5
Q

overal choice

A

sum of individual decisions

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6
Q

People must make choices because resources are scarce (explanation)

A

societies as a whole needs to make choices when resources are scarce
Example:
- what purchase has priotity–> limited income
- buy at more expensive local store because it’s closer by–> limited time

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7
Q

opportunity cost

A

what you haveto give up in order to get it

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8
Q

trade-off

A

comparison of costs and benefits

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9
Q

marginal decisions

A

comparing the costs and benefits of doing a little more of an activity vs doing a bit less

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10
Q

incentives

A

anything that offers rewards to people to change their behaviour

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11
Q

4 principles underlying economics of interaction of individual choices:

A
  1. there are gains from trade
  2. markets move towards equilibrium
  3. resources should be used efficiently to achieve society’s goals
  4. markets usually lead to efficiency, but if not: government intervention can improve society’s welfare
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12
Q

There are gains from trade (explanation)

A

people get more of what they want if they’re selfsufficient–> arises because of specialisation–> therefore more products can be produced than if in autarky

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13
Q

markets move towards equilibrium (explanation)

A

markets move to equilibrium because people tend to respond to incentives–> after using up the incentives they are in the same boat as the rest of the people–> equilirbium usually reached because changes of prices–> rises+fall so no opportunities for individual to be better off than others–> EVERY TIME THERE’S A CHANGE, MARKET MOVES TO EQUILIBRIUM

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14
Q

Resources should be used efficiently to achieve society’s goals (explanation)

A

resources are used in a way that has fully exploited all opportunities to make everyone better off, so not some people worse–> not rearanging resources so some better off, other wise inefficient

Problem: efficiency not always in line with goal society–> for example if they want equity–> equity promoting policies at the cost of efficiency and vice versa

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15
Q

equity

A

everyone gets a fair shae, what’s fair is subjective so not a well defined concept

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16
Q

markets usually lead to efficiency, but if not: government intervention can improve society’s welfare (explanation)

A

most of time invisible hand does the trick, incentives built into market economy to ensure resources are usually put to good use because in market economy people usually take opportunities for mutual gain (gains from trade)

BUT in case fo market failure: individual pursuit of self interest found in markets makes society worse off (because no incentives) –> market outcom einefficient–> in that case government can intervene with for example providing incentives which changes how resources are used

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17
Q

Principles of Economy-Wide interactions:

A
  1. one person’s spending is another person’s income
  2. overall spending sometimes gets out of line with economy’s productive capacity; when it does governmengt policiy can change spending
  3. increase in economy’s potential leads to economic growth pver time
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18
Q

One person’s spending is another person’s income (explanation)

A

if spend less, other their incomes will fall and vice versa–> chain reaction of changes in spending behaviour tends to have repercussions that spread economy wide
IMPORTANT ROLE IN UNDERSTANDING CYCLE OF RECESSIONS&RECOVERIES!!!!

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19
Q

overall spending sometimes gets out of line with economy’s productive capacity; when it does government policy can change spending (explanation)

A
  • if spending falls short: causes unemployment which results in economic slump
  • if spending too high: causes inflation, occurs when demand is higher than supply–> demand will still buy it even if prices rise

When slump/inflation occurs government policies can help to addres the inbalances: think linke taxes, control of amount of money in circulation etc

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20
Q

increase in economy’s potential lead to economic growth over time (explanation)

A

Technological advancement leads to the rising of economic potential –> increases in economy’s potential leads to economic growth in the long term, while short term creating winners and losers

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21
Q

economic growth

A

an increase in the amount of goods+services produced per head of the population over a period of time
IN SHORT: the increase of living standards over time

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22
Q

economy’s potential

A

total amount of goods/services economy can produce
–> can rise due to technological advancememt

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23
Q

model

A

a simplified respresentation of an economic reality–> allows us to understand the variety of economic issues

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24
Q

other things equal assumption/Ceteris paribus

A

all other relevant factors remain unchanged

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25
Q

Production Possibility Frontier (PPF)

A

illustrates the tarde-offs facing an economy that produces only two goods–> shows the maximum quantity of one good that can be produced for ant given quantity produced of the other product

  • resources are scarce–> trade offs–> on eproduct takes away resources of other products that also need it
  • production feasible or non feasible
  • illustrates the general economic concept of efficiency+inefficiency
  • opportunity cost
  • economic growth
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26
Q

efficient in production (in PPF)

A

economy as a whole couldn’t produce more of product without producing less of something else

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27
Q

efficiency in allocation (PPF)

A

economy allocates its resources so consumers are as well off as possible–> production is aligned with consumers preferences

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28
Q

opportunity cost (PPF)

A

if producing more of one good (a) other good (b) is less produced–> thus good (a) has an opportunity cost of good (b)

  • If PPF straighht slope–> means constant slope–> constant opportunity cost
  • if bowed out curve insted straightline–> increasing opportunity cost
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29
Q

economic growth (PPF)

A

when economic growth occurs–> more can be produced of everything–> so outward shift of the frontier

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30
Q

2 sources of economic growth

A
  • increase in economy’s factors of production
  • progress in technology
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31
Q

factors of production

A

resources used to produce goods+services–> refers to resources that are NOT used up in production: land, labour, physical capital (machines, buildings), hunman capital (education, skills of labour force–> enhance productivity)

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32
Q

comparative advantage (definition)

A

country/person has comparative advantage in producing good/service if its opportunity cost of producing is lower that the other country’s/person’s cost–> voluntarily willing to trade if price of product each country obtains in the trade is less than own opportunity cost if would produce the product themselves domestically

NOTE: everyone has a comparitive advantage+disadvantage in something!!!!

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33
Q

absolute advantage (definition)

A

country/individual can produce more output per worker for certain production than other countries/individuals

NOTE: what matter in trade is opportunity cost–> if other country’s opportunity cost is lower even though you have an absolute advantage, still beneficial to trade with them because they have the comparative advantage!!!

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34
Q

The Circular flow diagram

A

diagram that represents the transactions in an economy by two kinds of flow around in a circle:
1. flows of physical things like goods/services/labour/raw material in one direction
2. flow of money to pay for these physical things in the opposite direction

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35
Q

income distribution

A

how total income that is created in an economy is divided among less/high skilled workers, aowners of capital/land etc

36
Q

households

A

individual, family etc

37
Q

firm

A

organisation that produces goods/services for sale and that employs members out of households

38
Q

markets for goods+services

A

where househol buys goods/services they want from firms

39
Q

Criticism CFD and its ignoring of real world complications with it’s simplicity:

A
  • distinctions between firms+households not always clear cut–> family run business–> is it a firm or a household?
  • many sales firms make goes to other firms–> intermediate goods–> more complete would be to include flows of goods, services and money within the business sector
  • doesn’t show government–> does divert lot of moeny out of CFD–> think of taxes+government spending–> thus taking money in+out of the flow
40
Q

positive economics

A

economic analysis that tries to answer questions about the way world actually works–> has definite right and wrong answers
–> models play a big role

41
Q

normative economics

A

makes prescriptions about how the world should work
–> economists engage+give policy advice but may be no “right” answer –> economic analysis can be used to show objectively that some policies clearly better than others

42
Q

competitive market

A

market in which many buyers+sellers of same good/service
Key feature: no individuals action can influence price good/service is sold at

43
Q

supply&demand model (function)

A

model that shows how a competitive market behaves

44
Q

5 key elemenyts supply+demand model:

A
  1. demand curve
  2. supply curve
  3. the set of factors that cause the demand curve+supply curve to shift
  4. market equilibrium–> includes equilibrium price+quantity
  5. way market equilibrium changes when supply/demand curve shifts
45
Q

demand curve

A

shows relationship between quantity demanded+price
x-axis: shows amount of quantity
y-axis: shows price

46
Q

quantity demanded

A

actual amount good/service consumers willing to buy at specific price:
- falls when price rises
- rises when price falls

47
Q

law of demand

A

as price rises–> quantity of goods demanded falls
as price falls–> rise in quantity demanded
–> therefore demand curve downwards sloping

48
Q

shift of demand curve

A

change in quantity demanded at any given price–> represented by shift of original demand curve to a new position

NOTE: not the same as movement along!!!!

49
Q

movement along the demand curve

A

moving down from one point to another point on the demand curve–> results of fall in price of good+rise of quantity at that price

NOTE: not the same as shift!!!

50
Q

rightward shift of demand curve when:

A

increase in demand–> at any given price, consumers demand larger quantity of good/service than before

51
Q

leftward shift of the demand curve when:

A

decrease in demand–> at any given price, consumer demands less quantity of good/service than before

52
Q

changes in demand

A

shift of demand curve

53
Q

changes in Quantity of demand

A

movement along demand curve

54
Q

5 factors that shift demand curve for a good/service

A
  1. changes in prices of related goods/services
  2. changes in income
  3. chnages in taste
  4. changes in expectations
  5. changes number of consumers
55
Q

substitutes

A

if rise in price of one good leads to increased demand other good
–> substitutes are alternative goods that serve in a similar function

56
Q

complements

A

if a rise of price of one good leads to decrease in demand other good
–> because consumers like to consume good and its complement together, so if one falls in demand, so does the other

57
Q

normal goods

A

demand for these goods increases when consumer income rises

58
Q

inferior goods

A

goods which demand decreases when income rises–> usually considered less desirable than more expensive alternatives–> example: bus vs taxi

59
Q

individual demand curve

A

shows relationship between quantity demanded+price for individual customer (market) demand curve

60
Q

quantity supplied

A

amount of good/service people willing to sell at a specific price

61
Q

supply curve

A

shows relationship between quantity supplied and price–> higher price leads to higher quantity supplied–> naturally slopes upward

62
Q

shift of the supply curve

A

change in quantity supplied good/service at any given price

63
Q

rightward shift supply cirve

A

increase in supply

64
Q

leftward shift supply curve

A

decrease in supply

65
Q

5 factors of shift supply curve

A
  1. changes in input prices
  2. changes in prices of related goods/services
  3. changes in technology
  4. changes in expectations
  5. changes in number of producers
66
Q

input

A

any good/service that is used to produce other good/service

67
Q

individual supply curve

A

shows relationship between quantity supplied and price for individual producer

68
Q

competitive market is in equilibiurm when:

A

price has moved to level where quantity demanded=quantity supplied

69
Q

equilibrium price

A

price that matches quantity supplied+quantity demanded

70
Q

market-clearing price

A

price that clears the market by ensuring every buyer willing to pay that price, finds a seller willing to sell at that price and vice versa

71
Q

equilibrium quantity

A

quantity bought+sold at equilibrium price

72
Q

3 reasons sure market will arrive at equilibrium price:

A
  1. all sales and purchases in market take place at same price–> aka the market price
  2. market price fall if its above the quilibrium price
  3. the market price rises if below equilibirum price
73
Q

surplus

A

when quantity supplied exceeds quantity demanded–> happens when price is above equilibrium level

74
Q

shortage

A

when quantity demanded exceeds quantity supplied–> occurs when price is below equilibiurm level

75
Q

when demand good/service increase (right shift) the equilibrium…

A

equilibrium price +quantity of good/service both rise

76
Q

when demand for good/service decreases (left shift) the equilibrium…

A

the equilibrium price+quantity of good/service both fall

77
Q

when supply of good/service increases (right shift) equilibrium…

A

equilibrium price of good falls and equilibrium quantity good rises

78
Q

when supply good/service decreases (shift left) the equilibrium…

A

equilibrium price of good rises and equilibrium quantity falls

79
Q

When demand decreases+supply increases (2 shift in opposite direction)

A

equilibrium price falls but change in equilibrium quantity is ambigious (not clearly decided)

80
Q

When demand increases+supply decreases (2 shift in opposite direction)

A

equilibrium price rises but change in equilibrium quantity is ambigious (not clearly decided)

81
Q

Commparitive advantage model (illustrates…)

A
  • there are gains from trade
  • each country has a comparative advantage in producing something, and everyone has a comparative disadvantage in something
82
Q

increase/decrease in demand means

A

shift of demand curve to left or right!!!

83
Q

why does the supply slope upwards?

A

because the higher the price, the higher the quantity supplied is

84
Q

why does the demand curve slope downwards?

A

because the higher the price, the less demanded quantity

85
Q

changes in prices related goods/services supply (explanation)

A
  • When goods complements of production: higher price of one good, more willing to supply other good at any given price
  • when goods substitutes of production:
    if one price falls, more willing to supply other product at any price given
86
Q

which curve shifted if both quantity sold+price shift in the same direction?

A

the demand curve

87
Q

which curve shifted if quantity+price move opposite directions?

A

supply

Principle of economics (7 decks)

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