CL1 - Economics as a Discipline, Economics of Crime, CBA Flashcards
What is Economics?
The science of choice and efficiency because resources are finite.
Why study economics
Economics is at the heart of decision making at individual and societal level
What is GDP?
- Gross Domestic Product
- Measure of economic activity
indicator of a country’s economic performance - Goods and services a specific country produces in a given year
- Important for identifying economic trends, comparing economies, making policies and decisions
What is Supply & Demand?
Supply
- Based on needs and wants, and ability to sell
- Positive relationship between price and quantity shipped
Demand
- Based on need and wants, and the ability to pay
- Inverse relationship between price and quantity
What is Elasticity?
Measures change in quantity demanded of a good due to a change in price
High elasticity of demand: small changes in price cause a significant change in the quantity demanded
Low elasticity of demand: changes in price have a smaller effect on the quantity demanded
In simple terms, elasticity in economics refers to how much the quantity demanded or supplied of a good or service changes in response to a change in its price¹².
- Elastic: If a product is elastic, a small change in price leads to a large change in the quantity demanded or supplied. This usually happens with goods or services that are not necessary or can be easily replaced with a substitute.
- Inelastic: If a product is inelastic, a change in price does not significantly affect the quantity demanded or supplied. This is often the case for essential goods or services that people need regardless of the price.
- Unitary Elastic: If a product has unitary elasticity, a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.
Elasticity is an important measure in economics because it helps sellers understand how much of their good or service consumers will buy when the price changes¹. It also helps consumers understand how the quantity of goods or services supplied might change with price changes.
What is MC and MB
Marginal Cost (MC) = The cost of producing one more
Marginal Benefit (MB) = “Benefit of having one more”
Sure, let’s break it down:
- Marginal Cost: This is the change in the total cost when one additional unit of a product or service is produced¹. For example, if a bakery makes 100 loaves of bread at a total cost of $200, and then it makes one more loaf and the total cost goes up to $203, the marginal cost of that extra loaf is $3¹.
- Marginal Benefit: This is the maximum amount a consumer is willing to pay for an additional unit of a product or service¹². It’s also the additional satisfaction or utility that a consumer receives when they buy one more unit¹². For example, if you’re really thirsty, you might be willing to pay $2 for a bottle of water (the first bottle). But once you’re not as thirsty after that first bottle, you might only be willing to pay $1 for a second bottle. So, the marginal benefit of the first bottle of water was $2, and the marginal benefit of the second bottle was $1¹².
In economics, the optimal point of production or consumption is where the marginal cost equals the marginal benefit³. This means that the cost of producing one more unit is exactly equal to the benefit that consumers get from that additional unit³.
What is Rationality?
Rationality = Decision-making based on self-interest
Utility-maximising
What is CBA?
Cost Benefit Analysis
This is a process used by businesses and organizations to analyze decisions. The potential rewards (benefits) and costs of a situation or action are summed up. If the benefits outweigh the costs, the decision is considered good
What is Discount Rate?
Measure of impatience
Higher the discount rate, more impatient
People tend to value present benefits more highly than future benefits
This is the interest rate used to determine the present value of future cash flows. It reflects the idea that money available today is worth more than the same amount in the future due to its potential earning capacity
What is Opportunity Cost?
Cost of the next best alternative that must be foregone in order to pursue a certain choice, action, or decision
This is the benefit you miss out on when choosing one option over another. For example, if you spend time reading a book, the opportunity cost is the time you could have spent watching a movie
What is allocative efficiency?
This occurs when goods and services are distributed optimally in response to consumer demands. It’s achieved when the price of a product or service is equal to the marginal cost of production.
What is negative externalities?
These occur when the consumption or production of a good causes a harmful effect to a third part. For example, a factory that produces cars and dumps its waste into the river creates pollution that harms the local community
What is the law of deterrence?
Individuals are less likely to engage in illegal activities if
expected costs of committing crime > expected benefits
Individuals make rational decisions based on cost-benefit analysis
Expected Punishment = severity of sanction X probability
Law of Deterrence in Economics: This is a theory that suggests people will be discouraged from committing illegal or harmful actions if the potential punishment or cost outweighs the benefits
What are the key take-aways of Winters 2020 article?
- Hiring more police officers reduces crime, however reverse causation more police officer is more registered crime.
- Policing techcnology: tech and equipment available to police deter crime
- Manipulate the probability of conviction
How does deterrence work for traffic violation?
Situation:Fines for traffic violations such as speeding tickets
Drivers exceed the speed limit and receive a fine. They are required to pay
Creating a financial cost for violating traffic laws makes drivers think twice before engaging in risky driving.
Extra costs> increased insurance rates, marks on driver’s license
