Introduction to Economics Flashcards
Explain the Social Nature of Economics
Economics is a social science because it deals with human society and behavior and does so through the scientific method.
Distinguish between Micro and Macroeconomics
Microeconomics examines the behavior of individual decision-makers, whilst Macroeconomics examines the economy as a whole.
What are the Concepts of Economics?
1) Scarcity
2) Choice
3) Interdependence
4) Equity
5) Economic well-being
6) Change
7) Sustainability
8) Efficiency
9) Intervention
Explain the meaning of Scarcity
The economy is scarce because resources are limited and therefore unable to satisfy the unlimited human wants and needs.
Identify the Factors of Production
1) Land
2) Labor
3) Capital
4) Entrepreneurship
Explain the meaning of Opportunity Cost in relation to Choice and Free Goods
Opportunity cost represents the value of the next best alternative that is sacrificed to obtain something else. Free goods do not have opportunity cost as they are unlimited.
Explain the difference between Free Goods and Economic Goods
Free goods are unlimited and do not have opportunity cost, economic goods are limited and have opportunity cost.
What are the three economic questions?
1) What/how much to produce
2) How to produce
3) For whom to produce
What methods can be used to answer the economic questions?
Either the market method (based on the forces of demand and supply) or the command method (based on market intervention).
State three types of Economic Systems
1) Free-market economy
2) Planned (command) economy
3) Mixed economy
Explain the relationship illustrated in the PPC model
The PPC model represents all the combinations of the maximum amounts of two goods that can be produced by an economy when there is full employment of resources and efficiency in production.
Distinguish between increasing and constant Opportunity Cost in the PPC model
Increasing opportunity cost will be shown with a curved PPC model, constant opportunity cost will be shown as a straight line. When opportunity cost is constant it does not change as the production is equally suited for both goods.
Explain the Circular flow of Income Model
The Circular Flow of Income Model shows that in any given time period the value of output produced is equal to the total income generated and equal to the expenditures.
State the leakages of the Circular Flow of Income Model
1) Taxes
2) Savings
3) Imports
State the injections of the Circular Flow of Income Model
1) Government expenditure
2) Investment
3) Exports
Distinguish between a Closed Economy and an Open Economy
A closed economy does not have leakages and injections as the government, foreign countries, banks or the financial market are not included within the system. This is opposite to an open economy.
Distinguish between Positive and Normative Economics
Positive economics describes, explains and predicts economic events. Normative economics is based on beliefs of what should happen.
What is Ceteris Paribus?
Ceteris paribus translates to “other things equal” and assumes that all factors are constant or unchanging.
Explain the role of Empirical Evidence and Refutation
Empirical evidence refers to real-world information, observations and data that we acquire through our experiences. Empirical evidence is used to test hypotheses; if a hypothesis cannot be refuted by empirical testing then it is not scientific.
Explain the role of Value Judgements in Policy-Making
Value judgements in normative economics are important for policy-making as they identify the important economic problems and recommend policies to solve them.
What is the difference between Equality and Equity?
Equity means fairness whilst equality means being the same.
Explain the major Schools of Thought from the 18th Century to the Present
18th C: Adam Smith
19th C: classical (says + marx + utility)
20th C: Keynes + monetarist
21st C: behavioral
Explain Adam Smith’s School of Thought
Adam Smith introduced the concept of the “invisible hand” which is based on the idea that self-interested behavior of decision-makers without government intervention will give rise to efficiency and competition. This is also known as a “laissez faire” economy.
Explain the Classical Economics School of Thought
Classical economists believed in utilitarianism (an action is correct if it promotes the most happiness). This gave rise to the concepts of utility and Say’s Law (theory that claims the economy tends toward full employment without government intervention). Theories were also influenced by Marx (Communist Manifesto).
Explain the Keynesian School of Thought
Introduced by economist Keynes, it argued that government intervention was essential in order to ensure that full employment will be achieved. This also gave emergence to macroeconomic policy.
Explain Behavioral Economics School of Thought
Behavioral economics considers the field of psychology together with economics offering alternative ways of understanding consumer behavior. Furthermore it developed new models regarding sustainability within the economy.
