Chapter 1 Flashcards
General equilibrium
Analysis of all markets simultaneously.
Five Factors of Production
- Capital - Plant, Equip, Inventory, Residential Constant (PIER)
- Land - natural resource, natural capital
- Labour - human resource, human capital
- Technology - change in the productive process
- Entrepreneurship - innovation, invention
Scarcity
Scarcity implies the need for choice, and choice implies the existent of cost.
Opportunity Cost (OC)
The value of the next best alternative that is foregone when one alternative is chosen. Every time a choice os made, opportunity costs are incurred.
4 elements of Opportunity Cost
- Value - subjective, benefit
- Next-best - what you could have chosen
- Foregone - what you give up
- Alternative - choice
Production possibility curve/boundary/frontier
Shows all possible combinations of production, if all inputs are fully and efficiently employed.
Marginal rate of transformation (MRT)
The slope of change in opportunity cost. (Curved PPC)
Efficiency
The resources available being organized to produce various goods and services that people want to buy with the least possible amount of resources. EFFICIENCY IS BETTER THAN INEFFICIENCY
Law of Increasing Marginal Opportunity Cost
OC increases of X as production of X increases, as to increase production of X, one must give up ever increasing amounts of Y.
Incentives
Are subjective and driven by self-interest. People respond to incentives when making decisions about what to buy or sell at what prices. Provides motive for actions taken by individuals
3 decision makers
- Consumers
- Producers
- Government
Maximizing
Individuals prefer happiness over unhappiness
Why is PPC concave?
High comparative advantage inputs used first. (Eff first, most inefficient switched out first)
Society equates MC=MB
Marginal Cost = Marginal Benefit
Self-organizing economy
Free market: Individuals consumers and producers act independently to pursue their own self-interest, and the collective outcome is coordinated (spontaneous economic order) MARKET AUTOMATICALLY COORDINATES
Adam Smith
Founder of free market idea, developed the idea of the invisible hand and how individuals act in self-interest.
What are markets governed by?
“Rules of the Game”, Rule of Law, property rights, Freedom of Contract, Institutions, manners, customs, conventions
Marginal Decisions
Making decisions at the margin, to buy or sell one more unit. You weight costs and benefits at the margin (MC=MB)
Marginal Cost
The actual price of a product
Marginal benefit
Extra satisfaction received
When extra benefits exceed extra costs
Take action!
Factor markets
Where individuals sell the services of the factor that they own in what are collectively called factor markets
Good markets
Producers sell their outputs of goods and services in goods markets
Distribution of income
How the nation’s total income is distributed among utilities
Specialization of labour
The specialization of individual workers in production of one product, as this is efficient, as specialization allows individuals to do what they do relatively well and quickly. Economy’s total production is then greater *COMPARATIVE ADVANTAGE
Division of labour
The breaking up of a production process into a series of specialized tasks, each done by a different worker. This increases efficiency. (Ex. production lines)
Money and trade
Money facilitates specialization and trade (originally stemmed from self-sufficiency)
What does the specialization of labour require?
Requires trades and markets
Comparative advantage
Individual specialization advantage which leads to goods.
Absolute advantange
Advantage to those who produce the most
Globalization
Caused by advancements in transportation and communication. Leads to globalization of demand (markets) and supply (transnational corporations)
Traditional economy
Behaviour is based on customs and traditions
- beneficial in unchanging environment
Command economy
An economy where most economic decisions are made by central planning authority
- requires forecasting future trends
Free market
An economy in which most economic decisions are made by private households and firms.
- Basic economic decisions are decentralized (not by gov’t)
- Price system coordinates with buyers and sellers
Mixed economy
Some economic decisions are made by firms/households and some are by gov’t (private and public sectors)
Market failures
Situations in which free markets don’t work well, leads to gov’t intervention
Gov’t in mixed economy
Sometimes, government can improved on market outcomes
Positive statement
A statement about what actually is, was, or will be (facts)
- not based on a value/judgement
- matter-of-fact statement
- testable with evidence
Normative statement
A statement about what ought to be (what should be done)
- Based on value judgements
- Tells others what they should do
- not testable
Why do economists disagree?
Big egos, failure to define terms/establish argument, different values/normative views, short vs. long run perspective
Law of Large Numbers
Random of movements of individuals offset one another
- Group behaviour is often easier to predict than individual behaviour
Variable
Any defined item that can take on various specific values
Endogenous variable
Induced/dependent variable (value determined IN theory)
Exogenous variable
Autonomous/independent
- Influences endogenous variable
- Determined OUTside the theory
