Lesson 2 - What Is Economics? Flashcards
What is economics and what is it concerned with?
- a social science that looks at human behaviour
- focused on economic welfare
How is economics a social science?
It has hypotheses that can be tested in the real world, but not definite laws
Define ceteris paribus
- when we model a change, we assume that everything else remains constant
Give 5 factors affecting economic welfare
- income
- education
- health
- environment
- inequality
What is a positive statement?
A statement that is factual, so it can be proven correct or incorrect
What is a normative statement?
An opinion, and a statement that cannot be proven
Explain the concept of rationality in economics
The idea that everyone acts rationally (people make decisions that maximise their welfare and utility)
What is utility?
The satisfaction gained from consuming a good or service
What is behavioural economics focused on?
Human behaviour and decision making
What is nudging?
Encouraging someone to take a particular course of action by tailoring how they make those choices (choice architecture)
Explain the concept of bounded rationality
- people can only make rational decisions with perfect information and logic
- however, this is not the case in real life, so decisions are made with bounded rationality
Name and explain the 6 types of biases
- current moment = people prefer pleasure now over pleasure later
- status quo = we want things to stay the same
- negativity = we tend to focus on negative information
- anchoring = we compare everything to the first piece of information recieved
- availability = we expect future events to happen because similar ones have happened in the past
- memory = we remember events associated with emotions
What is choice architecture?
Making it easy for people to make certain decisions
Explain the 2008 financial crisis
- banks gave out loans to sub prime borrowers to buy houses
- house prices went up rapidly (they were valued to be worth much more than they actually are)
- people couldn’t repay their mortgages, so banks took back the houses
- house prices then crashed rapidly, leaving people with homes worth less than their mortgage
what is the economic problem?
unlimited wants, but limited resources
what is interest?
the price of money
give an example of nudging
social norms
what is a speculative bubble?
- when people buy something, because they think that it will go up in value
- this causes the price to increase rapidly as demand rises
- people then realise that what they bought isnt that valuable, so they sell it
- this causes the price to crash rapidly
