Lecture Notes Flashcards
Why do we enter into agreements/trade?
The expected marginal benefit was greater than the expected marginal cost.
What does trade create? How?
Wealth out of thin air - by rearranging the pattern to a higher order.
What does scarcity imply?
COMPETITION.
What do good decisions require?
Good information.
Is economics moral or amoral?
Amoral
- doesn’t try to distinguish between good and bad
- morality comes from the institutional framework in society
- we set the framework!
What is wealth?
It is subjective. Depends on what each individual person values.
What is the rationality assumption?
As a rule, people don’t deliberately harm themselves. On average, people are rational.
What is normal profit?
The return necessary to attract and maintain entrepreneurial participation in some economic activity.
What is pure profit/economic rent?
Any return greater than normal profit.
What are transaction costs?
The cost of a transaction.
- e.g. to withdraw money from an ATM, have to pay a fee.
- can be more than monetary value, e.g. your time.
What are the factors of production and their returns?
- Land - Rent
- Labor - Wages
- Capital - Interest
- Entrepreneurial Capacity - Profit
What is an entrepreneur’s job?
- Organizing the factors of production
2. Assuming risk
What three questions do we have to ask in an economic system?
- What to produce?
- How to produce that which is produced?
- How to distribute that which is produced?
What must we do to be profitable?
Produce something that consumers want and do so efficiently.
Labor-intensive production function
Using lots of labor when wages are low
Capital-intensive production function
Using less labor to be more efficient
Horizontal-production function
Grow horizontally - land is less expensive.
Vertical-production function
Minimize use of land - grow vertically - land is more expensive.
What is a positive sum game?
Everyone wins - e.g. markets.
What is a zero sum game?
One party wins, one party loses - e.g. poker.
What is a negative sum game?
Introducing something that makes everyone less wealthy.
What does capitalism punish?
Bad decisions.
What are the five foundations of economics?
- Incentives
- Trade-offs
- Opportunity cost
- Marginal thinking
- Trade creates value
Weltenschauung:
Worldview
-a comprehensive conception or apprehension of the world especially from a specific standpoint
What are the four postulates of behavior?
- People have preferences
- More of a good is preferred to less of a good.
- Substitution - there are substitutes for everything (sometimes imperfect)
- Diminishing marginal returns
Does free trade have transaction costs?
No
Portfolio Theory
Decisions about how we hold our wealth.
- can be material things
- not necessarily monetary
- different people hold wealth differently
MAD
Mutually Assured Destruction
- why we haven’t had a nuclear war
- we build up our stockpile and acquire enough to: sustain first strike and retaliate against enemy.
