intro to econ

Question 1

what is economics?

Answer 1

= the study of the choices that people make in overcoming the problems that arise as a result of scarcity, finite resources and infinite wants
a social science

Question 2

what is a social science?

Answer 2

the study of people in society and how they interact with each other
deal with subjectivity

Question 3

smallest unit of study of economics

Answer 3

household

Question 4

central concepts

Answer 4

1. scarcity
2. choice
3. efficiency
4. equity
5. economic well-being
6. sustainability
7. change
8. interdependence
9. intervention

Question 5

what is scarcity?

Answer 5

= the limited availability of economic resources relative to society’s unlimited demand for goods and services

central concept

Question 6

choice as a central concept of economics

Answer 6

⇒ economic decision makers continually have to make choices between competing alternatives, economics studies the consequences of these choices

Question 7

efficiency

Answer 7

= the ratio of useful output to total input

Question 8

equity

Answer 8

= the construct, concept or idea of fairness in economics and justice in the distribution of wealth, resources, and taxation within a society

Question 9

equality

Answer 9

beings equal to other with respect to something

Question 10

economic well-being

Answer 10

= the level of prosperity and the quality of living standards enjoyed by members of society, including: future and present financial security, the ability to meet basic needs, the ability to make economic choices permitting achievement of personal satisfaction, the ability to maintain adequate income levels over the long term

Question 11

sustainability

Answer 11

= the ability of the present generation to meet its needs without compromising the ability of future generations to meet its own needs

Question 12

change as a central concept

Answer 12

⇒ the economic world is in a continual state of flux, to which thinking must be adapted

Question 13

interdependence

Answer 13

= economic actors interact with each other in order to achieve economic goals

Question 14

intervention

Answer 14

= government involvement in the workings of markets due to failure in achieving societal goals (equity, economic well being, sustainability, …)

Question 15

microeconomics

Answer 15

deals with the behaviour of smaller economic units, i.e. individual economic agents (markets, individuals, households, businesses)
individual choices and how they’re influenced by economic factors
individual parts of an economy

Question 16

macroeconomics

Answer 16

relates to the economy as a whole
anything on and above the national level
ignores the fine details, focuses on the big picture

Question 17

nominal vs real value

Answer 17

Nominal ⇒ sum, what you get (20£)
Real ⇒ purchasing power (8 coffees)

Question 18

consumption vs capital goods

Answer 18

Consumption goods ⇒ bought by individuals
Capital goods ⇒ bought by firms

Question 19

positive vs normative

Answer 19

• Positive statements ⇒ objective analysis, statements about how the economy works (true or not), but can be tested
• Normative statements ⇒ subjective analysis, statements suggest what the goals of an economy should be

Question 20

ceteris paribus

Answer 20

= other things equal (lat)
⇒ when observing a variable, everything else must be held constant

Question 21

opportunity cost

Answer 21

= the benefit foregone of the next best alternative when an economic decision is made by an economic agent concerning the use of its resources
not expressed only in monetary terms
total opportunity cost = total explicit cost + total implicit cost

Question 22

explicit vs implicit costs

Answer 22

implicit costs ⇒ nonmonetary
explicit costs ⇒ monetary

Question 23

the basic economic problem, the big microeconomic questions

Answer 23

1. What should be produced and in what quantities? (depends on available resources, the needs of the population)
2. How should things be produced? (depends on technological development)
3. For whom should things be produced?

Question 24

factors of production

Answer 24

1. Land ⇒ natural resources (earns wages)
2. Labour ⇒ work, time and effort people devote to production (earns rent)
3. Capital ⇒ man-made assets used to produce goods and services – machines, factories, roads (earns interest)
4. Entrepreneurship (management) ⇒ human skill of organizing and risk-taking (earns profit)

resources for the production of goods and services

Question 25

the lorenz curve

Answer 25

graph showing how evenly total income is spread line of perfect equality ⇒ ⅕ of income for each 20% segment

Question 26

economic systems

Answer 26

= ways of answering the big economic questions = ways in which societies allocate relatively scarce resources 1. traditional economic system 2. free market economic system 3. centrally planned economic sytem

Question 27

rationing

Answer 27

= a method used to divide something up between the interested users

Question 28

traditional economic system | political system, factors of production, allocation, government, goal

Answer 28

* political system: **tribal organizations** * all productive resources are owned by **families** * allocation of factors of production is based on **customs and traditions** within the tribe * **non-price rationing** * tribes (government) play **some role** in making economic decisions * customs and traditions are passed down through family lineage ⇒ children follow in parent’s footsteps, **lack of economic growth** * **goal**: keep things as they always have been * large portion of labor force in **agriculture** * Chad, Mongolia, Guinea-Bisau

Question 29

free market economic system | factors of prod, allocation, government, examples

Answer 29

* ownership of factors of production: **private** individuals, firms * allocation of resources: based on demand and supply of products through the **price mechanism** * role of government: none * Singapore, New Zealand, US

Question 30

how the free market system answers the big Qs

Answer 30

1. What to produce ⇒ consumers drive the market with demand 2. How to produce ⇒ the profit motive of firms and changing preferences of consumers determine the allocation of resources (how factors of production are used, producing as efficiently as possible 3. For whom ⇒ the ones who can pay for the goods are the ones who consume them

Question 31

centrally planned economic system | role of government, property, examples

Answer 31

* **role of government**: makes all economic decisions (manufacturing, distribution), owns all factors of production * **no private property** * **everybody (in)directly works for the same government** ⇒ everyone is paid similar salaries ⇒ all have the same opportunity to buy goods and services * Cuba, North Korea, USSR

Question 32

how the centrally planned economic system answers the big Qs

Answer 32

1. What ⇒ the **government** decides based on what they believe society needs 2. How? ⇒ **government planners** decide how all resources are to be used, where people should work 3. For whom? ⇒ the **government** decides on the distribution of produced goods and services

Question 33

what are economic models?

Answer 33

= simplified abstractions of the real world show a particular aspect of a complex reality focus on a selected group of variables that are relevant to the topic, excluding many others

Question 34

ways of expressing economic models

Answer 34

pictorially ⇒ pictures graphically ⇒ graphs algebraically ⇒ mathematical equations verbally ⇒ words

Question 35

PPF/PPC

Answer 35

= production possibility frontiers (curve) => show the boundaries between the combinations of goods and services that can be produced and those that cannot

Question 36

assumptions of the PPF model

Answer 36

* all resources are used * only 2 goods are produced * resources are fixed in quantity but can be shifted around (closed economy = no trading or migration) * state of technology is fixed

Question 37

points on PPF

Answer 37

1. points on the curve = points of production efficiency (all resources are being used, no more goods and services are able to be produced) — we cannot produce more of one good without producing less of the other 1. points under the curve ⇒ attainable, inefficient 1. points over the curve ⇒ unattainable, inefficient

Question 38

why is the PPF a curve?

Answer 38

* opportunity cost: the larger production of another good * specialization of workers and factors of production

Question 39

how does specialization of factors production affect PPF?

Answer 39

increasing the production of one good means the transfer of the least efficient makers of the other good to the former, therefore the production of the latter is not as affected not all factors of production are equally well suited to production of both goods

Question 40

actual vs potential output

Answer 40

Actual output = total amount of goods and services produced in an economy at a certain point in time (any point on and under PPF) Potential output = total amount of goods and services produced in an economy when all of its available resources are being used efficiently

Question 41

actual vs potential growth

Answer 41

* **Actual** growth ⇒ an economy produces a greater amount of goods and services in one period of time than in a previous one (an economy makes its output more efficient ⇒ comes closer to the curve) * **Potential** growth ⇒ the production capacity of an economy increases from one period of time to another (moving outside of the current curve, a shift of the curve outwards)

Question 42

potential output can be increased with:

Answer 42

* an increase in the quantity of factors of production * an increase in the quality of factors of production * technological advancements

Question 43

assumptions of the circular flow of income model | only households and firms

Answer 43

* households own all factors of production * firms produce all goods and services * closed economy (national income and output do not change ⇒ no economic growth) * no banks or commercial institutions * no government

Question 44

circular flow model of the circular flow of income model | between households and firms

Answer 44

In exchange for for the services and factors of production households offer firms, they receive payment, which makes up their income (resource market) Households use this money to buy goods and services from firms ⇒ consumer expenditure goes back into firms in exchange for goods and services (product market)

Question 45

assumptions of the circular flow of income | households, firms, government, foreign countries

Answer 45

* households own factors of production * firms produce goods and services * government collects taxes to provide public and merit goods to society * foreign countries produce goods and services, import from other countries * financial institutions exist where households can save income, take out loans and investments

Question 46

circular flow of income

Answer 46

households and firms give banks savings, inerest, receiving loans in return households and firms give the government taxes, they return subsidies to firms or transfer payments to households firms trade with the capital goods market households trade with consumer goods market capital and consumer goods markets trade with the world (import, export)

Question 47

leakage

Answer 47

= a flow of money that leaves the economy as savings, taxes and imports income not spent by domestic households on domestic products

Question 48

injection

Answer 48

= a flow of money that enters the economy as a result of exports, government spending and investment income received by domestic firms coming from foreign sources

Question 49

leakages > injections leakages < injections

Answer 49

Leakages > injections ⇒ national income falls, less income circulating, economy shrinks Leakages < injections ⇒ national income rises, more income circulating, economy grows

Question 50

transfer payments

Answer 50

= government expenditure that is not in exchange for goods and services and used to redistribute income, not considered an injection

Question 51

neoclassical theory

Answer 51

* consumers behave rationally * consumers seek to maximize their utility * all individuals have perfect information

Question 52

Richard Thaler’s theory

Answer 52

* the real world is based on **imperfect information** * **bounded rationality** ⇒ rationality of consumers is limited by information they have * **bounded selfishness** ⇒ humans do not always act in their own self-interest, we care about others * **bounded self-control** ⇒ humans do not demonstrate perfect willpower and do not always act in their own self-interest; humans have the natural tendency to to give into temptation

Question 53

dual system model

Answer 53

System 1 ⇒ the automatic system fast decisions that are essentially subconscious System 2 ⇒ the reflective system slow decisions that are more controlled neoclassicists ⇒ all rational consumers make decisions using reflective thinking

Question 54

bias

Answer 54

= systematic errors in thinking or evaluating, departures from normal standards of thought or judgement

Question 55

cognitive biases that affect decision making

Answer 55

1. availability heuristic 2. anchoring bias 3. framing bias 4. herd behaviour 5. inertia bias (status quo) 6. loss aversion bias 7. hyperbolic discounting

Question 56

availability heuristic

Answer 56

information that is most recently available that people rely on more heavily, even if there is no reason to expect for that information to be any more reliable than other information

Question 57

anchoring bias

Answer 57

use of irrelevant information to make decisions (often the first piece of information a consumer comes across)

Question 58

framing bias

Answer 58

how choices are presented to decision makers has a large influence on them

Question 59

herd behaviour

Answer 59

the behaviour of others has a powerful influence on our own choices

Question 60

status quo, inertia bias

Answer 60

if faced with many choices, consumers opt to maintain the status quo

Question 61

loss aversion bias

Answer 61

loss feels more significant than gains

Question 62

hyperbolic discounting

Answer 62

humans prefer smaller short-term rewards over larger long-term rewards

Question 63

choice architecture

Answer 63

decisions we make are heavily influenced by the ways the choices are presented to us, often offering different kinds of choices: default and mandated choices

Question 64

default vs mandated choices

Answer 64

**default choice** ⇒ choice made when one does not do anything (based on habit, lack of interest) **mandated choice** ⇒ people are required by law to make a choice in advance

Question 65

nudge

Answer 65

= a method designed to influence a consumers’ choice in a predictable way without financial incentives or sanctions