Chapter 1 - Foundations & Models Flashcards
Scarcity
Although our wants are endless, our resources are limited. This can also drive up price.
Economics
Is the study of the choices people make to attain their goals with limited resources.
Resources
Inputs used to produce a good or service. E.g. minerals, water, labour. Also known as factors of production.
Economic Models
Simplified versions of reality used to analyse real world economic situations.
The Three Key Economic Ideas
- People are rational. They use as much information as possible to weigh up the benefit and costs.
- People respond to Economic Incentives. Pharmaceutical Benefits Scheme.
- Optimal decisions are made at the margin. MB=MC
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
Optimal Decision
MB=MC
Marginal
The extra additional benefit or cost of a decision
Marginal Analysis
Analysis that involved comparing marginal benefit and marginal cost.
Trade-offs
The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.
What goods and services will be produced
Consumers, firms and government face the problem of scarcity by trading off one good or service for another.
Opportunity cost
The highest valued alternative that must be given up to engage in an activity. I.E. Open own business or work for $80k a year in a job.
How will the goods and services be produced
In many cases, firms face a trade off between using more workers or more machines.
Who will receive the goods and services produced.
Depends on how income is distributed. People donate to charities and forego some income for goods. Taxes try and distribute wealth more evenly.
Centrally planned economy
An economy in which the government decides how economic resources will be allocated. I.e. former soviet union, Brazil
Market economy
An economy in which the decisions of individuals and businesses interacting in markets allocate economic resources.
Consumer sovereignty
The concept that in a market economy it is ultimately consumers who decide what goods and services will be produced. This occurs because firms must produce goods and services that meet the wants of consumers or the firms will go out of business.
Mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources.
Productive efficiency
When a good or service is produced using the least amount of resources.
Allocative efficiency
When production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
Dynamic Efficiency
When technology and innovation are adopted over time.
Voluntary exchange
Occurs in markets where both the buyer and the seller of the product are better off by the transaction.
Equity
The fair distribution of economic benefits between individuals and between societies. There is often a trade off between efficiency and equity.
To develop an economic model
- Decide on the assumptions
- Formulate a testable hypothesis.
- Use economic data to test the hypothesis.
- revise the model, If it fails to explain the data well
- Retain the revised model to help answer similar questions.
Economic variable
Something measurable that relates to resource use that can have different values. E.g wages, prices or hours worked.
Positive analysis
Analysis concerned with ‘what is’ and involves value free statements that can be checked by using facts.
Normative analysis
Analysis concerned with what ought to be and involves making value judgements, which cannot be tested. I.e. The PBS is wrong and disadvantages lower incomes.
Microeconomics
The study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices.
Macroecomics
The study of the economy as a whole, including topics like inflation, unemployment and economic growth.
