Lecture 1 Flashcards
Why modelling is used in economics?
“Models are wrong but some are useful” (Box)
- World is complex
- Models simplify representations of reality
- Models provide a framework to address the problem
- Based in assumptions
Explain the concept of “homo oeconomicus”
Theoretical human being who acts as a rational economic agent
What is a positive statements?
They are a descriptive statements how the world works.
* Can be tested and validated using evidence (scientist work)
Example: “An increase in the minimum wage leads to a decrease in employment”
What is a prescriptive statements?
Suggest what should be done. They involve value judgements and are subjective.
Example: “If the State aims to reduce petrol consumption, it should increase the petrol tax”
What is a normative statements?
They are value judgements about what ought to be. They are subjective and cannot be tested or validated.
Example: “Income inequality
What happened if the market is not in equilibrium?
If the price is above the equilibrium, there will be a surplus - Suppliers are producing more than consumers are willing to buy.
If the price is below the equilibrium, there will be scarcity because consumers are willing to buy more than producers are willing to supply.
What is the role of CBA?
To help to decide whether we should spend society’s scarce resources on a certain project or for other purposes
Characteristics of the Homo Oeconomicus
- Rationality
- Self-interest
- Consistency
- Utility maximization
What is scarcity?
- Finite supply of resources
What is marginal utility?
The additional satisfaction or benefit that a person gets from consuming one more unit of a good or service
- Decreases as you consume more of the good
What is an indifference curve analysis?
It is a tool used in economics to understand how people make choices between differetn combinations of goods/services
What does indifferent mean?
They don’t have preference for one over the other option
What is a budget constraint?
Shows all the possibles combinations of goods and services that someone can afford given their income and the prices of those goods.
