Economics Flashcards
Five key concepts
Scarcity
Trade offs
Incenstives
Marginal Analysis
Optimising choices and their outcome (equilibrium)
What is Scarcity
the desire for something exceeds what is available so we have to choose where they go
Trade Offs
Due to scarcity we have to make trade offs
oppurtunity cost
The benefit you give up when you choose one option over another
Marginalism
Focuses on the effects of small changes in economics variables such as price quality or time
Efficient Market
A market in which profit opportunities are eliminated almost instantaneously
Slope Equation
change in Y / change in X = (y2-y1) / (m2-m1)
production
the process of transforming scarce reosurces into useful goods or services
inputs
the reousrces or facors of production that go into the process of production
outputs
goods and services of value to households that come out of production
Theory of competitive advantage
Specialization and free trade will benefit all trading parties even those that may be absolutely more efficient producers
Absolute advantage
A producer has an absolute advantage in the production of a good or service if he or she can produce that product using fewer resources
Comparative advantage
A country should specialize in producing goods and services in which it has a lower opportunity cost compared to other countries.
Consumer goods
goods produced for presetn consumption
The marginal transformation
The slope of the production possibility frontier
Consumer Soverignty
The idea that consumers ultimately dictate what will be produced or not by choosing what to buy and what not to
equillibirum (in perfect comeptition market)
where price = marginal cost
choice set or oppurtunity set
the set of options that is defined and limited by the budget constraint
Budget Constraint
Price of good x quantity of good x + price of y and quantity of y = household income
Utility
The satisfaction a product gives
law of diminishing marginal
utility
The more of any one
good consumed in a given
period, the less satisfaction
(utility) generated by consuming
each additional (marginal) unit
of the same good.
Marginal Utility
The additional satisfaction gained by the consumption or use of one more unit of a good or service
the utility-maximizing rule
Marginal utility of good x / price of good x = marginal utility of good y / price of good y
The income effect
The change in consumption of an output that occurs when a consumers income changes, holding prices constant
the labour supply curve
A graph
that illustrates the amount of
labor that households want to
supply at each given wage rate.
indifference curves
A set of points each point representing a combination of goods x and y all of which have the same utility
utility maximising rule
Marginal utility of x / price of x = marhinal utility of y / price of y
what happens to a graph when the price of a good is lowered
lowering the price of a good expands the oppurtunity set and expands the budget constraint to the right
The marginal rate of transfromation
that measures the rate at which one good must be sacrificed to produce an additional unit of another good
Marginal Rate of transformation equation
change in the quantity of good y / change in quantity of good x
marginal analysis
weighing the costs and benefits that change as a result of choice
marginal benefit
the additional satisfaction or utility a consumer derives from consuming one more unit of a good or service
sunk costs
irreversible
cost that have already been incurred
Diamond water paradox
the things that have the greatest value in use have frequently little or no value in exchange.
and those that have greatest value in exchange have little use
e.g diamond and water
economic models
simplified variables of reality used to analyse real-world economic situations
economic variables
something measurable that relates to resources that can have different values
Property rights
the right to use the good
the right to earn income from the good
the right to transfer the good to others who can use
what makes a market the most efficent
all information, including private information is reflected in current prices (insider trading is ineffective)
price mechanism
the system in the free market where price changes lead to producers changing production in accordance with the level of consumer demand
free market
individuals and businesses have the freedom to make their own economic decisions with minimla government interaction
perfect market
an idealised theoretical market that assumes certain conditions are met
competitve market
many firms, selling identical products to many consumers
perfectly competitive market
also have free entry/exist abd particpants who have perfect information
pareto efficency
economy is operating at a point wher no one can be made better off without harming someone else
fallacy of composition
when on assumes that what is true for a part as also true for a whole
fallacy of inductive reasoning
when a conclusion is drawn from limited number of observations also known as overgeneralisation
normative economics
subjective/judgement about what the economy should look like. making value judgements about economic policies and outcomes often based on thical moral beliefs
post hoc ergo promoter hoc fallacy
when someone assumes that because one event follows another the first event must have caused the second
positive economics
describes economic phenomena without making value judgements
development economics
looks at the development of devloping countries
experimental economics
uses experiments to test economic theories
normal good
when your income increases you demand more
inferior good
when your income increases you demand less
income effect
as the price of a good rise the purchasing power of the consumer’s real income becomes less
subsititution effect
if price goes up you buy less of the good in favour for cheaper alternatives
complementary good
When the price of one complementary good increases, the demand for the other good decreases.
when is a price ceiling effective
when it is set below the equilibrium
