Economics Flashcards
What is economics?
It is the science of production, distribution and consumption of wealth
Study of how societies make choices when dealing with the problem of scarcity
What is scarcity?
It means that we have limited resources to produce all the goods and services we desire
What is the key economic issue?
It is how to allocate these limited resources to produce goods and services in the most efficient way.
What are resources or factors of production?
Land: all natural resources
Labor: work force of the economy
Capital: machineries, factories, tools
Enterprise; risk takers and organizers of production
What is the importance of economics for a business?
Economics defines how a business creates, distributes and consumes wealth.
It helps to decide best ways to allocate factors
It helps to forecast demand and decide how much to supply
It helps to decide costs and revenues of production
It helps in pricing decisions and ways to maximize profits
How do we deal with scarcity?
3 basic Trade-offs
1.What goods and services to produce?
2. How to produce them?
3. For whom to produce them?
How can we decide what, how and for whom to produce?
Measure the costs, benefits of producing a product
and choose products of which its benefits outweighs the cost of producing
What are incentives?
They are rewards and penalties affecting individuals which can be monetary or non monetary
What do we mean by rational?
It is using all available information to achieve goals.
Rational consumers and firms weigh the benefits and costs of each action and try to make the best decision possible
What is marginal analysis?
Comparing marginal costs to marginal benefits
What is comparative advantage?
A country is said to have comparative advantage if they have a low opportunity cost in the production of a good
What is absolute advantage?
A country is said to have absolute advantage if they are more efficient in the production compared to other countries
What is PPF?
Production Possibility Frontier
What does the Production Possibility Frontier show?
The different combinations of economic goods which an economy is able to produce if all resources are fully and efficiently utilized
Generally it shows production and trade offs between two goods
It does not show the consumption of goods
What are markets?
It is a place where buyers and sellers trade goods and services
What are the 4 types of economic systems?
Traditional Economy
Planned/Command Economy
Market/Free/Capitalistic Economy
Mixed economy
What are the features of a traditional economy?
- Economic activities are centered around family, customs, beliefs
- Everyone knows their role and responsibility
- More sustainable than developed countries
- Vulnerable to changes in nature
- Resources allocated more towards labor intensive
- Low GDP
- eg: poor third world countries
What are the features of a planned/command economy?
- Government plans and allocates resources eg: China
- Involved stakeholders are government, consumers and workers
- Work is selfless and work for common good of public
- Problems: low incentives, more focused on quantity than quality, environmental costs are high, insufficient competition
What are the features of market/free/capitalistic economy?
- economic stakeholders (consumers, producers, owners, govt) work for self interest
- Economic decisions are based in the interest of society and private gain
- Government places few limits
- Decentralized decision making
- Markets are more efficient due to high competition
- Eg: Developed countries like USA & Japan
What are the features of a mixed economy?
- They lie between free and command economy
- Allow prices to be fixed in the economy both by government as well as individual self interest
- Social safety for people
What is Micro-economics?
Deals with the allocation of resources and decision making of individuals and firms
They are concerned with issues of market failure and ability of the market to produce efficient results
What is Macro-economicss?
Deals with the interactions of the economy as a whole.
Involved with issues like economic growth, national income and output, inflation, total consumptions and investments.
Involved in national policies like monetary and fiscal policy
What is positive analysis?
Describes economic programs, situations and conditions as they exist
Based on facts, empirically tested
What is normative analysis?
Concerned with what should happen or what ought to be
Subjective, values and opinions
