Microeconomics 1.2 Flashcards
What is resource allocation?
How the factors of production are shared out amongst different uses.
Capitalism
A system of production where there is private ownership of productive resources. Individuals can pursue their preferences. Government doesn’t interfere.
Also known as the free-market economy.
Adam Smith
1723-1790
Economist and Philosopher known as the father of Economics. He wrote the Wealth of Nations in 1776 and is seen as the founder of classical economics.
‘Invisible hand’
Concept introduced by Adam Smith that by acting in self interest, agents help to allocate resource efficiently through the market mechanism.
Free market economy
Market forces between consumers and firms guide the allocation within a society. Government has role of protecting property rights.
Command Economy
Also known as a centrally planned economy
Where the government decided what is produced, how much is produced and the price. Government departments set targets for firms.
Communist Russia (USSR) is an example of this between 1920s and 1990.
Karl Marx
Historian 1818-1883
Historian who developed the idea of Communism. He criticised private ownership of productive resources. His ideas resulted in centrally planned economies.
Mixed economy
An economy which has some free market forces and government intervention.
Government intervention
When the government passes laws to tax or spend to provide goods, influence a market or regulate behaviours.
Behavioural Economics
A field of economics which has developed since the 1970s looking at the psychology of decision making.
Rational agent
This is the belief in classical economics that agents will make decisions to maximise utility, profit or social welfare.
Rational decision making
based on perfect information, stable preferences, independent choices, maximising objectives.
Bounded rationality
Economic agents are restricted by bias, lack of information, heuristics, cognitive processes so make the best decision they can.
Heuristics
Short cuts economic agents use to find the ‘good enough’ outcome.
Advantages of free market systems
Efficient allocation of resources, high quality goods, range of goods, innovation.