Economic Methodology And The Economic Problem - Class Notes Flashcards
Describe opportunity cost
Real cost of a decision
Sacrifice of next best alternative decision is made
What three questions make up the economic problem
What to make?
How to make?
How to distribute output?
Describe economics
Science of decision making
How to make rational decisions in the face of unlimited wants and needs with limited resources
What are the four types of efficiency
Allocative efficiency
Productive efficiency
Pareto efficiency
Dynamic efficiency
describe allocative efficiency
Firms output reflects consumer wants and needs. Links - what to make(economic problem)
Describe productive efficiency
Maximising output given resources used
Describe Pareto efficiency
Both allocative and productive efficiency at the same time. Also, nobody can be better of without someone else being worse off
Describe dynamic efficiency
Long term efficiency/ progress, growth, increased technology and investment. e.g. china
Describe distribution of income
Equality - fairness/social justice - incentives to work
Inequality - poverty
Describe factors of production
Resources uses to make goods and services
Land is natural wealth
Labour is workers
Capital is physical assets
Entrepreneurship
Describe specialisation
Division of labour
Countries step by step process. Specialise - then trade - import and export
Firms step by step process. Specialise - outsourcing/ contracting g out
Increased specialisation and different labour skills and practice(learning by doing) leads to a higher output and links to productive efficiency
Describe role of money
Swap - barter - ‘double coincidence of wants’
Money - makes trade easier as it is a common measure
Money helps saving
Describe a free market
Firms(suppliers) + consumers(demand) to set price and quantity and how allocate resources
These decision are free of government
America and Hong Kong live in a free market
What is the opposite of a free market
Planned economy - government set price, quantity, and allocation of free resources
What is a mixed economy
Price, quantity of resources is decided by market forces + government
