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Economics > Intro > Flashcards

Intro Flashcards

1
Q

Change

A

“Everything Flows” - nothing remains constant and decisions have impacts.

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2
Q

Interdependence

A

In a global economy, any change may have impacts elsewhere.

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3
Q

Equity

A

Different than equality, this is the idea of being fair or just

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4
Q

Intervention

A

Taking action to assist markets or to remedy “market failure”

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5
Q

Economic well-being

A

The level of prosperity, economic satisfaction and living standards

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6
Q

Scarcity

A

Resources are insufficient to meet unlimited needs and wants

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7
Q

Choice

A

Due to the concept of scarcity, decisions must constantly be made

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8
Q

Sustainability

A

Long-term maintenance or viability of an activity or policy

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9
Q

Efficiency

A

Making the best use of scarce resources to avoid waste

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10
Q

Micro

A
  • like looking at the economic world through a microscope
  • consumers (households) and businesses (firms)
  • how they behave, make decisions and impacts of the decisions
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11
Q

Macro

A
  • like looking at the economic world through a telescope
  • the economy as a whole; aggregated industries, country-level views
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12
Q

Opportunity cost - choice and scarcity

A

the cost or value of an economic decision in terms of the next best option foregone

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13
Q

Free goods

A

Goods which are unlimited in supply have no opportunity cost. These goods have no economic value and at zero cost are still limitless. Category may depend on the situation (ex. fresh air, sea water in coastal areas, sand in the desert, etc.).

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14
Q

Economic goods

A

All goods which have a value, derived from the fact that they are limited in supply. Category may depend on the situation (ex. fresh air, sea water in coastal areas, sand in the desert, etc.).

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15
Q

Factors of production (FOP)

A

These are the resources that an economy can utilize in order to create goods and services. Economists consider four main FOP’s: land, labor, capital, and entrepreneurship (look, lad: cold eggs).

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16
Q

Land

A

Land includes the natural production resources of a country as well as the available farmland, factory space and office space.

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17
Q

Labor

A

Labour includes the number of workers as well as their skill level. It is the one that is easiest for a government to improve and sometimes considered the most important factor.

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18
Q

(Economic)* Capital

A

*as opposed to financial capital

Capital includes the factories, machinery and equipment owned by a business and used in production. Most wealthy nations have an abundance of capital.

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19
Q

Entrepreneurship

A

Entrepreneurship represents intellectual capability, the ideas and the action to put the FOP’s to productive use in new and better ways.

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20
Q

Production possibilities curve (PPC)/Frontier (PPF)

A

The Factors of Production are the resources in an economy that that are scarce. Choices must be made about how to utilize these resources. Every choice involves an opportunity cost; to make more of Product A, we must make less of Product B. The PPC show the maximum combinations of two types of output that can be produced in an economy in a given time period. A PPC is a graph showing the productive capacity of an economy in terms of two products it can produce; a simplified view (flawed, but a useful concept for illustrating economic principles).

Assumptions:
1. The economy only produces two goods or services
2. The resources/FOP’s (in quantity and quality) and state of technology are fixed
3. All resources in the economy are fully employed (used efficiently)

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21
Q

The basic economic question

A

Limited resources and unlimited wants

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22
Q

Market place

A

Where consumers and suppliers meet to exchange goods

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23
Q

Concave vs. straight PPC

A

When the products are dissimilar, the opportunity costs increase as you shift from one to another, resulting in a concave PPC curve (ex. to produce the first ex. 200 goods, some workers and other resources could be easily re-allocated, but to go on increasing production, the resources taken away from the other good would be less suitable and so the opportunity cost of re-allocating them would be higher).

If the factors of production used to make two types of goods are the same e.g. for basketballs and volleyballs, the opportunity cost would be constant and therefore the PPC would be a straight line.

24
Q

Moving towards PPC

A

Economic growth as an increase in actual output caused by reductions in unemployment and inefficiency in production.

25
Q

PPC expanding outward

A

Economic growth as an increase in production possibilities caused by increases in resource quantities/improvements in resource quality/technology improvements.

26
Q

PPC shrinking

A

Decrease in production possibilities

27
Q

Non-parallel shifts of the PPC

A

Bigger increase in potential for one product over another?

28
Q

PPC and scarcity

A

There are only enough resources in the economy to produce a limited amount of goods

29
Q

PPC and choice

A

A choice has to be made between the two types of output

30
Q

PPC and opportunity cost

A

The opportunity cost of producing ex. 200 manufactured goods is 5kg of agricultural goods

31
Q

PPC and efficiency, unemployment of resources

A

If an economy is using all its resources to the fullest extent possible and operating on the PPC curve, it’s “productively efficient”

If resources are not being used efficiently and the economy is at a point within the PPC curve, resources are unemployed or underemployed

32
Q

PPC and actual growth

A

A fall in unemployment and inefficiency in the market leads to an increase in actual growth/output of an economy

33
Q

PPC and growth of production possibilities

A

A shift of the PPC curve outward represents actual “long-term” growth of the economy and an increase in production possibilities

34
Q

Note (abt scarcity)

A
  • Exists everywhere
  • Scarce things have value
  • Rationing systems are necessary
  • Fairness in rationing is in the eye of the beholder
  • Choices must be made and are complex
  • Consumer surplus
  • Equity vs. efficiency
35
Q

Who are the two key stakeholders in an economy? What do they demand from each other?

A

Firms and households. Firms demand FOP’s from households in return for costs of production (rent, wages, interest, profit): this takes place in the resource market.

Households demand output (goods and services) from firms in return for revenue/expenditure: this takes place in the product/goods market.

36
Q

Resource and income flow

A

Resources flow from households to firms, which are turned into goods and services, which then flow from firms to households.

Income flows in the opposite direction; first from firms to households in the form of wages, interest, rent and profit (the income payments for the four resources households own), then from households to firms in the form of expenditures on goods and services, which translate to revenues from firms.

37
Q

Closed circular flow of income assumption

A
  • There are only two decision makers in an economy
  • Households own all factors of production
  • Households spend all of their income on the product market
38
Q

How can we measure the performance/size of an economy?

A

National Income = National Output = National Product

*Three approaches?

GDP

The flow of new output produced by the economy in a particular period (e.g. a year)

Circular flow tells us that the value of output produced in an economy is equal to the total income generated to produce that output and equal to the total expenditures made to purchase that output

39
Q

Open economy (injections and withdrawals/leakages of financial institutions, governments, and other countries)

A

Financial institutions - investment (injection), savings (withdrawal)

Governments - government spending (injection), taxes (withdrawal)

Other countries - exports (injection), imports (withdrawal)

*Convention: injections are positive and leakages are negative

40
Q

Models (tradeoff [choice])

A

Because models are simplified, they highlight certain factors BUT also don’t take into consideration other factors.
Therefore, in order to simplify complex reality, economists make assumptions! Models are made to be questioned.

41
Q

Ceteris paribus

A

Is often used by economists when developing models and means “all other things being equal”

This means they assume there is no change in any other variable when constructing a model

42
Q

Positive vs. normative economics

A

There are two ways economists approach the world:

Positive Economics - Describes and analyses economic relationships, making factual and objective claims. They can be tested.

Normative Economics - Describes subjective value judgements based on opinions.

43
Q

Economic/Rationing system

A

The system of production, distribution and consumption in a country. System behind the decisions on the use of resources in a country. One major way in which the economic system of countries differs is the extent to which countries rely on markets and/or the government to allocate resources and make production, income, and price decisions.

44
Q

Command/Centrally planned economy

A

All decisions concerning what is produced, how it is produced, and for whom are made by the government or a central/local planning agency. Resources are owned by the state. They appoint planners to allocate resources, and they set prices, production targets and growth rates. Allocation is done according to the government’s view of wants; the signaling function of price plays little part. As prices and production are set, it is not possible for price changes to impact the use of resources.

45
Q

Free market economy

A

At the other extreme is the ‘pure’ or ‘free’ market economy. Here all economic decisions are made by the private sector: the interaction solely between households and firms. The resources are owned by households. Markets allocate resources through the price mechanism and income (= wage + interest + rent + profit) depends upon the value and productivity of resources owned by an individual. Producers will produce what consumers want to buy at the price they are able to buy the good or service. This will result in what is called consumer sovereignty.

46
Q

Mixed economy

A

In reality, no economy is either a completely planned or completely free economy. All economies are mixed. The mixture of government and markets varies from one economy to another. In short, it is the degree and form of government intervention that distinguishes one type of economy from another.

47
Q

Early concepts (feudalism, mercantilism)

A

Feudalism - nobles own the lands and peasants work them

Mercantilism - an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, tariffs and subsidies on traded goods to achieve that goal.

48
Q

18th century - Adam Smith (1723-1790)

A
  • ‘Father of Economics’
  • Scottish Moral Philosopher
  • Context: authoritarian governments and colonization was a way to gain wealth
  • 1776: The Wealth of Nations - first known theory of how an economy can sustain itself and grow
  • The “Invisible hand”
  • Self-interest = benefits for everyone
  • Laissez Faire (without intervention)
  • Specialization and the division of labour
  • Free Trade - absolute advantage
  • Gov’t role; provide justice system, social security, national defense, public infrastructure
49
Q

19th century - classical economics

A

Adam Smith’s ideas were modified and refined—mainly in areas concerned with economic growth and the distribution of income

Utilitarianism: an action is right if it promotes the most happiness for the largest number of people

Utility theory evolved to become a central concept that underlies economic theory today

Jeremy Bentham (1748-1832) - “It is the greatest happiness of the greatest number that is the measure of right and wrong”

John Stuart Mill (1806-1873) - “Actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness”

50
Q

Say’s Law

A
  • Supply creates its own demand
  • We can see from the circular flow of income model that the output that firms produce provides households with the income they need to buy that output
  • Workers will keep on working to produce that output and there will be full employment; in a free market there will be full employment without any government intervention
  • This was questioned during the great depression of the 1930s which saw falling output and high unemployment on many countries
  • This gave rise to ‘macroeconomics’ as a separate branch of economics and new theories to explain unemployment

*Jean-Baptiste Say (1767-1832)

51
Q

Concept of margin

A

Classical economists were concerned about the concept of ‘value’—what gives things value and determines their price?

Three economists, separately, used the concept of utility to come up with a theory for how prices are determined
They agreed:
1. The concept of utility/the pleasure derived from consuming something is central to the idea that value helps determine prices
2. What matters is not the total utility of consuming something but the marginal utility (extra utility of consuming one extra unit of the good)

In the early 20th century Alfred Marshall used these ideas to come up with the law of demand and the demand curve that we use today

*Carl Menger (1840-1921), Leon Walras (1834-1910), Stanley Jevons (1835-1882)

52
Q

Marxist critique

A
  • Das Kapital (Capital: Critique of Political Economy)
  • Karl Marx developed a theory according to which capitalism would be eventually replaced by communism because of the market system’s internal contradictions that would lead to its collapse. While this has not materialized, Marx is still highly regarded for his numerous insights into how capitalism works
  • What developments in the world around him influenced Marx’s thinking

*Karl Marx (1818-1883)

53
Q

Keynesian Revolution

A
  • Keynes’s theory entirely replaced the classical theory and Say’s Law
  • The General Theory of Employment, Interest and Money (1936)
  • Written after the Great Depression
  • During a period of high unemployment, wages were ‘sticky downwards’, so they could not fall easily for firms to then hire more labour at a cheaper price, demand would also remain low and thus government intervention would be needed in the form of government spending in order to boost the economy

*John Maynard Keynes (1883-1946)

54
Q

Macroeconomic policy

A
  • Inspired by Keynes
  • The term ‘Macroeconomic Policy’ was coined by Jacob Marschak in 1945
  • Prior to this, according to classical economists, the economy was assumed to correct itself and so there was no need for government intervention and ‘macroeconomic policies’

*Jacob Marschak (1898-1977)

55
Q

Monetarist/Neo classical counter-revolution

A
  • In the early 1970s, the global economy experienced cost-push inflation (stagflation), on account of the first oil price crisis
  • Keynesian economics did not provide a solution to inflation of this type
  • This led to the emergence of monetarism and new classical economics
  • These have inspired market-based supply-side policies

*Milton Friedman (1912-2006), Robert Lucas
(1937- )

Economics (9 decks)

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