CH1 - Economics Issues and Concepts Flashcards
What is the definition of economics?
the study of the use of scarce resources to satisfy unlimited human wants
What are three types of resources?
land - natural endowments
labour - mental + physical human effort, entrepreneurial capacity, managment skills
capital - tools, machinery, equipment
What are factors of production?
resources used to produce goods and services, divided into basic categories of land, labour and capital
What is tangible, and what is intangible?
Goods are tangible
Services are intangible
What is opportunity cost?
Value of the next best alternative that is forgone when one alternative is chosen = hvor meget er det, du giver op, værd?
Explain the assumption of scarcity in economics
- Scarce resources force a choice among competing alternatives
- Relative to our desires, existing resources are scarce
- Only enough resources to produce a fraction of goods/services we want
- Scarcity implies the need for choice, choice implies existence of choice
-More of one thing = less of another
What does a Production Possibility Boundary illustrate, and how is it reflected on a graph?
A production possibilities boundary illustrates three concepts: scarcity, choice, and opportunity cost
- Scarcity is indicated by the unattainable combinations outside the boundary
- Choice, by the need to choose among the alternative attainable points along the boundary
- Opportunity cost, by the negative slope of the boundary
The shape of the graph implies an increase in amount of consumption goods must be given up to achieve equal successive increases in production of investment goods
What is microeconomics?
The study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system.
What is macroeconomics?
study of the determination of economic aggregates such as total output, employment and growth
Describe the 4 key economics problems
- Allocation of scarce resources - what is produced and how?
- Distribution - what is consumed and by whom?
- Why are resources sometimes idle?
- Is productive capacity growing?
What effects does growth have on the PPB (production possibilites boundary)?
Growth shifts the PPB outwards, making it possible to produce more of all products
How can the government affects the 4 key economic problems?
- correct market failures resulting from misallocation of resources
- address fairness of distribution of consumption across individuals
- provide solutions to reduce idleness of nation’s resources
- promote economic growth
What is the definition of an economy?
system in which scarce resources—labour, land, and capital—are allocated among competing uses
What kind of economy has the following definition?
when individual consumers and producers act independently to pursue their own self-interests, the collective outcome is coordinated
Self-organising market economy
How are resources organised in market economy?
resources are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources.
Economics is a tradeoff between what and what?
Equity and efficiency
What theory did Adam Smith theorise?
‘The Invisible Hand’ - metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production and consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.
Define ‘efficiency’
resources available to the nation are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources.
Describe the role of incentives in economics
Individuals generally pursue their own self-interest, and they respond to incentives. Sellers usually want to sell more when prices are high and buyers usually want to buy more when prices are low.
What are the 3 decisionmakers operating in an economy?
- Consumers – what to buy and how much? earn income by selling labour
- Producers – what to produce and for whom?
- Government – how to channel resources to productive use?
What is a fundamental assumption when it comes to decision-making in economics?
People are assumed be maximizers and thus to take decisions that are
- utility maximising (consumers)
- profit maximising (producers)
What is a marginal decision
- need to weigh cost + benefits at the margin, then compare marginal cost to marginal benefit
- you buy the shirt only if you think marginal benefit exceeds marginal costs
What is a synonym to marginal cost?
incremental cost
What does marginal cost refer to?
It refers to the increase or decrease in the cost of producing one more unit or serving one more customer.
