First Three Lecture Flashcards
Economics
The social science that studies production and trade
Spontaneous Order
Order that is the production of human action, not human design
Positive V. Normative
Positive analysis attempts to describe the way things are in reality
Normative analysis describes a value judgement
Theory
An abstract explanation of some phenomenon
Society
A group of people who have moral, political, or economic relationships with each other
Social System
A set of rules that determines the role of physical force in human relationships
Market Economy
A social system in which resources are privately owned and controlled
Property RIght
A moral and legal right to control a resource, and to exclude others from using it
Command Economy
A social system in which resources are collectively owned or controlled (typically through a government)
Four Points of Economics
Scarcity: The amount of goods available is not sufficient to satisy all human desires
Unlimited Desires: No matter what one’s current circumstances, it is always possible to imagine and achieve a more desireable state of affairs
Methodological Individualism: The principle that the individual human being is the basic unit of research in the sicial sciences (think people as individuals but not groups)
Rational Choice: People pursue their values (self-interested, respond to incentive)
Price System
a network of interrelated prices of goods and services
Exchange of Equivalents and why is it wrong?
Theory that people exchange one good for another when both parties value the goods equally
But if valued equally, there will be no need trade things.
Just Price Theory and why is it wrong?
There is a single just price at which each good should be sold
Sellers always want the price to be higher and buyers always want the price to be lower. As long as it’s voluntary, the price is just. If not, one side would complain.
Mercantilists belief and why are they wrong
Social order requires government planning
Money constitutes real wealth for the nation
Trade is a zero-sum game
Wrong because more money means more nominal value but less real value - inflation
Trade benefits both sides so it is a positive sum game
Nominal Value V. Real Value
The face value of a certain amount of money V. how much the money can buy
Invisible hand
Adam Smith’s metaphor for the power of individual self-interest to create spontaneous order
Utility
Usefulness in satisfying human desires
Subject Theory of Price
The theory that price of a good is determined by its utility - rejected by classical economists
Water-Diamonds Paradox
Water is very useful but has a low price. Diamonds is not very useful but has a high price
Labor Theory of Value
The price of a good is determined by its cost of production and amount of labor used to produce it
Four problems of Labor Theory of Value
- How do you measure labor?
- Labor has a price
- It’s a theory of intrinsic value - the value is inherent in the object itself
- it ignores the context of the exchange - price depend on the seller/buyer
Iron Law of Wages
Price of labor is determined by the cost of human subsistence and reproduction (but led to labor - food - labor cycle)
Marginal Revolution
The discovery of the theory of marginal utility in early 1870s
A Good and its four requirements
A useful thing that is subject to human control
1. A human need must exist
2. The object must have properties that allow it to satisfy this need
3. Humans must know of this causal connection
4. Humans must have sufficient control over it
Consumer Good (First order good)
A good that serves our desires directly
Producer Good (Higher Order Good)
A good that is used in production of other good
Structure of Production
Set of steps to make consumer good with producer goods
Theory of Derived Demand
The value of goods of higher order is derived from that of the corresponding goods of lower order (from bottom up)
Marginal Unit
The next unit gained or given up
Marginal Utility
The additional utility that a person gets from having one more unit of a good, or loses from having less unit of a good
Theory of Marginal Utility
The Theory that the price of a good is determined by its marginal utility
Opportunity Cost
The best alternative given up when making a choice
Principle of Diminishing Marginal Utility
As a person acquires more units of a good, the satisfaction they derive from each new unit is lower than the previous unit
Increasing Marginal Opportunity Cost
As a person gives up more units of a good the satisfaction they give up with each new unit is higher than the previous
Four condition for trade to take place
- The parties have reversed values
- Both recognize the opportunity for exchange
- Both have the power to transact
- The benefits of the transaction must outweigh the costs
The Range of Indeterminacy
The range of potential prices
Market Clearing Price
A price at which anyone who wants to buy or sell can find a willing trade partner
Implications of Price Determination model
- Buyers willing to pay more exclude ones willing to pay less
- Sellers willing to sell less exclude ones willing to sell more
- Price for all traders is set by marginal traders - maximum buying price and minimum selling price
- As more parties enter the market, the range of indeterminacy tends to shrink
