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economics hl > intro to econ > Flashcards

intro to econ Flashcards

1
Q

what is economics?

A

= 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

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2
Q

what is a social science?

A

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

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3
Q

smallest unit of study of economics

A

household

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4
Q

central concepts

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

what is scarcity?

A

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

central concept

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6
Q

choice as a central concept of economics

A

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

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7
Q

efficiency

A

= the ratio of useful output to total input

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8
Q

equity

A

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

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9
Q

equality

A

beings equal to other with respect to something

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10
Q

economic well-being

A

= 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

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11
Q

sustainability

A

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

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12
Q

change as a central concept

A

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

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13
Q

interdependence

A

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

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14
Q

intervention

A

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

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15
Q

microeconomics

A

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

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16
Q

macroeconomics

A

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

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17
Q

nominal vs real value

A

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

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18
Q

consumption vs capital goods

A

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

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19
Q

positive vs normative

A
  • 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
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20
Q

ceteris paribus

A

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

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21
Q

opportunity cost

A

= 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

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22
Q

explicit vs implicit costs

A

implicit costs ⇒ nonmonetary
explicit costs ⇒ monetary

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23
Q

the basic economic problem, the big microeconomic questions

A
  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?
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24
Q

factors of production

A
  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

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25
Q

the lorenz curve

A

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

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26
Q

economic systems

A

= 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
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27
Q

rationing

A

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

28
Q

traditional economic system

political system, factors of production, allocation, government, goal

A
  • 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
29
Q

free market economic system

factors of prod, allocation, government, examples

A
  • 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
30
Q

how the free market system answers the big Qs

A
  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
31
Q

centrally planned economic system

role of government, property, examples

A
  • 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
32
Q

how the centrally planned economic system answers the big Qs

A
  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
33
Q

what are economic models?

A

= 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

34
Q

ways of expressing economic models

A

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

35
Q

PPF/PPC

A

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

36
Q

assumptions of the PPF model

A
  • 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
37
Q

points on PPF

A
  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
  2. points under the curve ⇒ attainable, inefficient
  3. points over the curve ⇒ unattainable, inefficient
38
Q

why is the PPF a curve?

A
  • opportunity cost: the larger production of another good
  • specialization of workers and factors of production
39
Q

how does specialization of factors production affect PPF?

A

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

40
Q

actual vs potential output

A

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

41
Q

actual vs potential growth

A
  • 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)
42
Q

potential output can be increased with:

A
  • an increase in the quantity of factors of production
  • an increase in the quality of factors of production
  • technological advancements
43
Q

assumptions of the circular flow of income model

only households and firms

A
  • 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
44
Q

circular flow model of the circular flow of income model

between households and firms

A

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)

45
Q

assumptions of the circular flow of income

households, firms, government, foreign countries

A
  • 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
46
Q

circular flow of income

A

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)

47
Q

leakage

A

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

48
Q

injection

A

= 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

49
Q

leakages > injections
leakages < injections

A

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

50
Q

transfer payments

A

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

51
Q

neoclassical theory

A
  • consumers behave rationally
  • consumers seek to maximize their utility
  • all individuals have perfect information
52
Q

Richard Thaler’s theory

A
  • 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
53
Q

dual system model

A

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

54
Q

bias

A

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

55
Q

cognitive biases that affect decision making

A
  1. availability heuristic
  2. anchoring bias
  3. framing bias
  4. herd behaviour
  5. inertia bias (status quo)
  6. loss aversion bias
  7. hyperbolic discounting
56
Q

availability heuristic

A

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

57
Q

anchoring bias

A

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

58
Q

framing bias

A

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

59
Q

herd behaviour

A

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

60
Q

status quo, inertia bias

A

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

61
Q

loss aversion bias

A

loss feels more significant than gains

62
Q

hyperbolic discounting

A

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

63
Q

choice architecture

A

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

64
Q

default vs mandated choices

A

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

65
Q

nudge

A

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

economics hl (2 decks)

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