Micro Mod 1 Flashcards
Micro starts with the idea of scarcity, we have unlimited wants and…
limited resources.
What is economics?
The study of the allocation of our limited resources to satisfy our unlimited wants.
Focuses on…
-Production
-Consumption
-Distribution
…of income and wealth in society.
What are ‘Factors of Production”?
Land, labour, capital
What is opportunity cost?
The loss of potential gain from other alternatives when one alternative is chosen.
“The value of the best forgone alternative that was not chosen”
-Scarcity forces us to make choices
-To get more of anything that is desirable, you must accept less of something else
Absolute Advantage
The producer that can produce the most output with the least amount of resources.
Comparative Advantage
The producer with the lowest opportunity cost.
What is the Law of Diminishing Returns?
A theory in economics that after an optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.
Eg. A restaurant hires another waiter and it brings them in more money because they truly needed another. They bring in a 3rd expecting the same increase in profit, but it actually causes profit to decrease because at this point theres too many waiters and they just bump into each other.
What is the Production Possibilities Model and what are the 3 assumptions.
An example of a highly simplified model of an economy.
The assumptions of this model are:
(1) An economy makes only 2 products.
(2) Resources and technology are fixed
(3) All resources are employed to their fullest capacity
It highlights the scarcity of resources and demonstrates the law of diminishing returns which leads to increasing opportunity costs (provided the production possibilities curve is concave in shape).
What is positive economics and normative economics?
Positive economics is what the world actually looks like.
Normative economics is the study of what we might desire
Explain how economic goals can be complimentary or conflicting
Some economic goals go in the same direction, for example full employment and economic growth, when one goes up the other typically goes up too. Some are conflicting, where if one goes up generally the other will have the opposite effect.
What is ceteris parabis
Latin for “holding everything else constant”
- Isolating a variable to assess its effect
Correlation vs causation?
Correlation are events that usually occur together (eg. icy roads=more accidents)
Causation is when one event causes another event to occur.
What is fallacy of composition?
An incorrect view, that what is true for the individual is also true for the group.
eg. standing up at a concert is only beneficial if not everyone is doing it.
What is “Positive analysis”
An objective, testable statement
eg. “Average income is 30,000”
What is “Normative analysis”
A subjective, non-testable item about what should be.
eg. “Incomes should be more equally distributed”
