lesson 1-2 Flashcards
the economic problem
wants are unlimited and resources are limited
what is the difference between macro and micro economics?
macro- focused on the economy as a whole and how it behaves
micro- is concerned with the actions of individuals and businesses
ceteris paribus
when we model a change we assume everything else stays constant and we only focus on that ONE SPECIFIC change and its effect of it
what is interest rate?
price of money
who controls interest rates?
the bank of England
the bank may raise interest rates because they wish to stop house prices from rising
what is a mortgage?
a big loan to buy a house
how would the law of demand work as a chain when mortgage prices increase?
- cost of a mortgage increase
- demand to buy houses goes down
- house prices will either stop rising or drop
positive statements
something which can be proven
normative statements
based on opinions so hold a certain bias
what is a demerit good?
something that does not benefit society/ bad for the consumers
what is at the heart of traditional economic theory?
that consumers always act rationally. this means people try to make decisions to maximise their personal benefit so the best alternative is chosen and they are left with an opportunity cost
what is rational behaviour?
attempting to maximise utility gained from the goods and services consumed
what is utility?
pleasure/satisfaction
what does behavioural economics do?
it observes behaviour and real world making decisions
includes ideas of nudging, bounded rationality, bounded self-control, thinking fast and slow and bias in decision making
what are the ideas included when thinking about behavioural economics?
includes ideas of nudging, bounded rationality, bounded self-control, thinking fast and slow and bias in decision making
what is nudging?
influencing citizens into making more beneficial, easier choices
what is the reality of bounded rationality?
we’re not fully rational which leads to suboptimal decisions which do not lead to the best outcomes.
what is cognitive bias?
holding onto your own personal preferences and beliefs regardless of contrary opinion
what is status-quo bias?
we like things to stay the same
what is conformation bias?
listening to opinions that back up your pre-existing views
what is negative bias?
we pay more attention to bad news
what is availability bias?
expecting future events because we can recall examples of similar events
what is memory bias?
remembering events associated with emotions
what is current moment bias?
when we prefer pleasure now compared to pleasure later
what is anchoring bias?
when we compare and contrast only a limited set of items and tend to rely on the first piece of information (the first piece of information is the anchor)
the 8 types of bias
- cognitive
- status-quo
- confirmation
- negative
- availability
- memory
- current moment
- anchoring
what is choice architecture?
choices presented to consumers so they’re nudged to opt for choices that are in their best interest to achieve a socially desirable outcome
what is economic welfare?
the differences in living quality, infrastructure, education, average life expectancy, crime rates, environment, housing quality and average hours a week of work you do
what is productive efficiency?
maximising output from the resource used
(an economy is productively efficient if it operates on its production possibility curve, it has no spare capacity and is average costs are minimised)
