Chapter 1 | Opportunity Cost, Scarcity, Trade Flashcards
What is Economics
Economics is how individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets.
What is Microeconomics?
analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets
What is Scarcity
The tension between infinite wants and finite resources
What is Opportunity Cost
WHATEVER YOU GIVE UP, TO DO SOMETHING
Opportunity cost is the value of the best alternative you give up when you make a choice, highlighting the trade-offs in resource allocation
What are incentives?
rewards and penalties for choices
You are more likely to choose actions with rewards (positive incentives), and avoid actions with penalties (negative incentives).
Trade
Gains from trade are the advantages and increased wealth achieved when parties specialize in what they’re best at and exchange their goods and services, leading to greater overall benefits and lower opportunity cost.
Absolute advantage
the ability to produce a product or service at a lower absolute cost than another producer
Comparative advantage
the ability to produce a product or service at a lower opportunity cost than another producer
Even if one individual has an absolute advantage in producing everything at lower cost, as long as there are differences in comparative advantage, there are mutually beneficial gains from specializing and trading.
Production Possibilities Frontier
Graph showing maximum combinations of products or services that can be produced with existing inputs
Specialization according to comparative advantage and trade allows each trader to consume outside her PPF, a combination that was impossible without trade. All arguments you will ever hear for freer trade are based on comparative advantage.
Economic Model
An economic model is simplified representation of the real world, focusing attention on what’s important for understanding
It helps you understand or predict the economic world around you (excluding unnecessary information)
Economic models, which assume all other things not in the model are unchanged, are the mental equivalent of controlled experiments in a laboratory.
Circular Flow Model of Economic Life
Circular flow model of economic life reduces complexity of the Canadian economy to 3 sets of players who interact in markets – households, businesses, and governments
Input Markets
In input markets, households are sellers and businesses are buyers.
Output Market
In output markets, households are buyers and businesses are sellers.
What are inputs?
Inputs are productive resources – labour, natural resources, capital equipment, and entrepreneurial ability – used to produce products and services
What is the role of the government in a circular flow model?
Governments set rules of the game and can choose to interact in any aspect of the economy
Positive Statements
about what exists in the real world; can be evaluated as true or false by checking the facts (ex: similar to scientists making hypothesis of the world and testing it)
Normative Statements
about what you believe should be; involve value judgements (ex: similar to a government policy that you think should improve something in the economy)
Cannot be factually checked
How do you calculate opportunity cost?
Opportunity Cost = Give up / Get
Why trade?
With voluntary trade, each person feels that what they get is of greater value than what they give up
Trade makes individuals better off when each:
Specializes in producing a product or service with comparative advantage (lower opportunity cost)
Trades for the other product or service
The 3 Keys Model to Smart Choices
- Choose only when additional benefits are greater than additional opportunity costs.
2.Count only additional benefits and additional opportunity costs.
3.Be sure to count all additional benefits and costs, including implicit costs and externalities.
Marginal
= Additional
Marginal benefits
additional benefits from the next choice.
Marginal opportunity costs
additional opportunity costs from the next choice.
Implicit costs
opportunity costs of investing your own money or time.
Negative (or positive) externalities
costs (or benefits) that affect others external to a choice or a trade.
Voluntary Trade
both parties end up with mutual benefits
