Intro to economics Flashcards
What is a market?
Anywhere where consumers and producers meet
What is the invisible hand?
Market forces of supply and demand
Which way does the demand curve slope?
Downwards
Why does the demand curve slope downwards?
- Substitution effect : As the price of the product decreases, it becomes more attractive compared to other similar products, meaning consumers are more likely to switch and increasing the quantity demanded
- Income effect : When the price of a product falls, purchasing power increases, allowing consumers top purchase more of the good or service, leading to an increases in QD
- Law of diminishing marginal utility : As consumption increases, the marginal utility from each additional unit decreases
What is a normative and positive statement?
Normative - Subjective statements that contain a value judgement e.g “Fossil fuels should be taxed higher than renewables”
Positive - Objective statements that can be tested using facts and evidence e.g “A reduction in income would increase the people shopping in pound shops”
What is the basic economic problem?
How can the available scarce resources be used to satisfy peoples unlimited needs and wants as effectively as possible
What does a PPF show?
Shows the maximum amount of 2 goods or services an economy can produce
Draw a PPF, what does a point on the curve, inside the curve, and outside the curve show?
On the point shows a productively efficient point as all resources are being used as efficiently as possible to produce the max possible output
Inside the curve shows a productively inefficient point, meaning some FOP’s may be sat idle e.g capital. With the current level of resources, you could build more of either good without making fewer of the other
Outside the curve shows a point that isn’t achievable with the current level of resources in the economy, more resources or better use of resources (e.g improvements in labour or technology) would be needed
What is opportunity cost?
The opportunity cost of a decision is the next best alternative that you give up in making a decision e.g if you build more houses, you give up the opportunity to build more vehicles
What is a trade off?
When you have to choose between conflicting objectives because you can’t achieve all of your objectives at the same time
What is market failure?
When markets result in undesirable outcomes
Mixed economies, free markets and command economy
Mixed economy = Public sector and private sector, government intervenes in the free market
Free markets = Economies with no government intervention and purely private sector, invisible hand
Command economy = Economies with purely public sectors
What is a rational individual assumed to have?
Total self control to maximise their utility
Economic objectives of different economic agents?
Producers - Maximise profit
Consumers - Maximise their utility (satisfaction)
Governments - Maximise the public interest
What are the 4 factors of production?
Land, Labour, Capital and Enterprise
Who are the economic agents?
Producers, Consumers, Government
What are the fundamental questions of economics?
What to produce, who to produce it for, how to produce it
1) Goods and services that can make a profit
2) Firms produce goods that consumers are willing to pay for those goods
3) Firms want to produce goods in the most efficient way in order to maximise profit
All points on a PPF are productively efficient but may not be allocatively efficient, why?
All points on a PPF are producing goods in the most efficient way, i.e all FOP’s are being fully utilised
However, the goods being produced may not match what consumers demand, meaning all points on a PPF may not be allocatively efficient
What is opportunity cost? + provide an example
The next best alternative given up when making a choice.
E.g. On a PPF, moving from one point along the curve involves an opportunity cost - for example to produce more cars you have to produce less houses. So the opportunity cost is the -x houses.
What is opportunity cost used for?
Producers - Profit foregone
Consumers - Where to spend their income
Governments - Lost value to society from the policies they chose not the implement
What’s a market?
Anywhere where consumers and producers meet
What is the concept of margin?
A change in a variable caused by an increase in one unit of another variable. e.g. The marginal cost of an ice cream is the additional cost of making one additional ice cream
At what point to rational consumers choose to consume at?
Marginal utility = price
Essentially, the point at which rational consumers choose to consume at is the point at which the satisfaction they derive from consumption of a good is equal to the price they are willing to pay for it.
What is the law of diminishing marginal utility and how does it explain the downward sloping demand curve?
For every additional good consumed, the marginal utility (satisfaction derived from consuming an additional good) diminishes.
So as price increases, rational consumers are less willing to pay the higher price and therefore demand less, explaining the downward sloping demand curve.
Economic objectives of a producer?
Maximise Profit - To survive, pay dividends or to reinvest
Greater market share - Increase monopsony power, attract more employees with greater human capital
Ethical objectives - E.g. buying locally sourced materials to support the local economy
Economic objectives of a consumer?
Maximise their utility
Maximise their income, consumers are also workers
Economic objectives of a government?
- Maximise the public interest - balancing the resources of an economy with a populations needs and wants i.e. the governments macroeconomic objectives
What do behavioural economists look at?
They look at the social, psychological and emotional factors that affect decision making
Why do behavioural economists believe consumers aren’t rational?
- Limited time to make decisions
- Not all info on a good is provided - e.g. asymmetric information
- Some may have a computational weakness - they may not be good at calculating the costs of alternatives
These are known as bounded rationality - therefore consumers satisfice (make a satisfactory decision) as opposed to making a decision that maximises utility
What biases stop individuals from acting in a rational way?
- Rule of thumb
- Anchoring
- Availability bias
- Social norms
- Habitual behaviour
- Some people act altruistically
How does the government use behavioural economics to develop policies?
- Default options
- Framing
- Nudging
- Restricted Choice
- Mandated Choices
What is economic methodology?
Developing theories and creating economic models
Use simplifying assumptions to limit variable numbers
Test theories against relevant facts
Use economic models to make predictions
What can economists not do that natural sciences can do + how do economists get around this?
Cannot conduct lab controlled experiments where only one variable is changed at a time
To fix this, economists use ceteris paribus, meaning all other things remain equal, e.g. when looking at the relationship between 2 factors, all other factors that could affect the result at kept constant, e.g. incomes
What is economic activity?
The production of goods and services and the consumption of goods and services
What are the 3 economic systems?
Command/Planned Economy
Mixed Economy
Free Market Economy
