Lecture 1 Flashcards
Opportunity cost
what you have to give up in order to get something
Opportunity cost formula
|Slope of PPF| which is |∆y/∆x of PPF|
inversed: 1/|∆y/∆x|
Deductible
amount of money you have to pay yourself until insurance covers the rest of the amount
Equilibrium
Situation where no people would be better off doing something else
Marginal cost
the additional cost it takes to make or do something extra than you’ve been already doing
Absolute advantage
Being able to produce more (higher amount) than others
Comparative advantage
Being able to produce a product at lower opportunity cost than others
PPF
Production possibility frontier.
All efficient possibilities of production between two products
Most common economics research type?
Empirical (Data work)
Economics definition
Study of how people and companies make choices. Consequences of those choices
Model
simplified description of reality, designed to generate hypotheses about economic behavior that can be tested
Positive analysis
Analysis in which objective “how things are” approach is used
Descriptive, objectively correct answer)
Normative analysis
Analysis in which (partly) subjective “how things should be” approach is used
(Prescriptive)
12 Principles of economics
- You must choose because there is a limit on resources
- True cost of things is its opportunity cost
- “How much” is a decision at the margin
- People usually react to incentives, exploiting opportunities to make themselves better off
- There are gains from trade
- Markets move toward equilibrium
- Resources should be used efficiently to achieve society’s goals
- Markets usually lead to efficiency
- When markets fail to achieve efficiency, government intervention can improve society’s welfare.
- One person’s spending is another person’s income
- Overall spending sometimes gets out of line with the economy’s productive capacity
- Government policies can change spending
Explain “You must choose because there is a limit on resources”
Principle of economics
There is scarcity of resources, therefore you cannot have everything and must choose what to give up in order to have something
Explain “True cost of things is its opportunity cost”
Principle of economics
We pay a cost for everything, even “free” stuff, the thing you could’ve bought or do if you didn’t have the item you have, that is the true cost of it (the opportunity cost)
Explain ““How much” is a decision at the margin”
Principle of economics
If you consider to do less or more of something (like how much to buy) before making a decision, that is a decision at the margin
Explain “People usually react to incentives, exploiting opportunities to make themselves better off”
Principle of economics
People usually make decision based on what they think is best for themselves or their surroundings they care for (children)
Explain “There are gains from trade”
Principle of economics
Specialization can benefit optimizing outcome and then exchanging goods due to comparative advantage
Explain “Markets move towards equilibrium”
Principle of economics
If there is higher demand or supply than the other, markets will come into balance due to actions of agents
Explain “Resources should be used efficiently to achieve society’s goals”
Principle of economics
Efficiently used resources result in greater economic growth and maximization of profit
Explain “Markets usually lead to efficiency”
Principle of economics
In markets by allowing agents to exchange freely, self-interest will drive agents to higher efficiency
Explain “When markets fail to achieve efficiency, government intervention can improve society’s welfare”
Principle of economics
in case of externalities, asymmetric information government can make taxes, policies, tariffs, etc. to combat it (or even inequity)
Externalities
Side-effects of an economic activity which affects other people than those involved in that activity
Marginal analysis
study of marginal decisions
Incentive
Opportunity to make oneself better off
Why markets move towards equilibrium
Because agents respond to incentives
Market failure
situation where allocation of goods and services by free market is not efficient
Explain “Overall Spending Sometimes Gets Out of Line with the Economy’s Productive Capacity “
People can spend more than the production supplies
Explain “One person’s spending is another person’s income”
If some group decides to spend less, the income of other groups will fall
Explain “Government policies can change spending”
Government can control tax rates and money circulation which can reduce or raise spending of the people
