Key definitions Flashcards
Master basic economic principles
Scarcity
Unlimited wants, limited resources. Much of classical economics is about finding the optimal way to allocate scarce resources
Assumptions of rational decision making
- They don’t make mistakes
- They have perfect calculation
- They don’t have self control issues
Opportunity cost
Value of the next best alternative lost by taking an action
Sunk cost
A sunk cost is a cost that is not recoverable at the moment a decision is made.
Market
Consists of all buyers and sellers.
Consumers are aiming to utility maximise, Producers are aiming to profit maximise.
Substitution effect
When the price of a good increases, consumers can switch to a substitute good.
Income effect
When the price of a good rises, consumers become effectively poorer, they may purchase less.
Price elasticity of demand
How reactive the demand of a good is to price changes.
if PED > 1, elastic
if PED < 1, inelastic
if PED = 1, unitary elastic
Cross price elasticity of demand
Used to determine if 2 goods are complements, substitutes or unrelated.
if XED > 0 , substitutes
if XED < 0, complements
Income elasticity of demand
Describes how responsive demand is to income changes.
Positive = normal goods/luxury goods
Negative = inferior goods
Price elasticity of supply
Seller’s sensitivity to changes in price.
Always positive as curve is upward sloping.
Positive statements
Objective, factual statements, with no ethical value system
Normative statements
Consists of statements that reflect or are based on ethical values. Value judgement of economic policies
Consumer surplus
Difference between consumers reservation price and the price paid for all buyers in a market.
Producer surplus
Difference between seller’s reservation price and price receieved.
