Introduction and Microeconomic Lessons Flashcards
definition: economics
the study of how society manages its scarce resources
definition: scarcity
society has limited resources and therefore cannot produce all the goods and services people want
north vs south korea
north korea’s government controls the allocation of resources
- struggles with food production and allocation while
having the 4th largest army in the world of 1.12M
- life expectancy is 70.7
- child mortality rate per 1000 is 22.1
- 6.40% paved roads
south korea maintains a normal, free market, allocation of food and other resources
- life expectancy is 82.5
- child mortality rate per 1000 is 3
- 74.50% paved roads
seven lessons from microeconomics
people face trade-offs
the cost of something is what you give up to get it
rational people think at the margin
people respond to incentives
trade can make everyone better off
markets are usually a good way to organise economic activity
governments can sometimes improve market outcomes
people face trade offs
to get one thing, we usually have to give up another thing
making decisions requires trading off one goal against another
e.g. efficiency vs equity trade-off
definition: efficiency
society gets the most that it can from its scarce resources
definition: equity
the benefits of those resources are distributed fairly among the members of society
the cost of something is what you give up to get it
making decisions requires comparing the costs and benefits of alternative courses of actions
knowing what the next best alternative is allows us to see whether we are using this resource in the best way
e.g. if you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else
definition: opportunity cost
the loss of other alternatives when one alternative is chosen
rational people think at the margin
economists assume that people are rational
individual consumers and firms use all the available information to weigh up the costs and benefits associated with any decision and choose the option that maximises the net benefit
people make decisions by comparing marginal costs and benefits = only makes a decision if benefits outweigh the costs
definition: rational people
people who systematically and purposefully do the best thing they can to achieve their objectives
definition: marginal changes
small incremental adjustments to an existing plan of action
used to calculate net benefit and therefore the benefit an extra unit of a good or service would yield
marginal benefit depends on how many units the person already has
people respond to incentives
an incentive is something that induces a person to act, for instance the prospect of reward or punishment
rational people respond to incentives because they make decisions comparing costs and benefits
the study of people’s incentives are a crucial part of economics, as it plays an important role in analysing how markets work and why some public policies are working or failing
e.g. carbon tax, oil prices, baby bonus
trade can make everyone better off
a fundamental principle in economics
people gain from their ability to trade with one another
allows people to specialise in what they do best and therefore they can access more goods and services
markets are good for organising activity
when resources are allocated in freely operating markets, price acts as an allocative mechanism
when we don’t use markets, and price is not used as an allocative mechanism, something or someone else has to do this job
