Microeconomics : Chapter 1 - Economic Methodology And The Economic Problem Flashcards
What are 3 assumptions microeconomists make?
What does it mean?
Ceteris Paribus.
The assumption that other things remain constant.
Rationality.
The assumption that each economic agent acts in their best interest.
Market efficiency.
The assumption that markets tend to move toward equilibrium where supply equals demand, allocating resources efficiently.
What is a positive statement?
Objective statements, they can be tested with factual evidence. Often contain words like ‘will’ or ‘is’.
What is a normative statement?
Value judgements, subjective and opinion based. Often contain words like ‘should’.
What are the 3 questions Economists ask when making decisions about how to use scarce resources?
What is to be produced?
How should it be produced?
Who will benefit from the goods and services produced?
What is the purpose of economic activity?
To produce goods and services which satisfy customer needs and wants.
What are the factors of production?
Capital
Land
Labour
Entrepreneurship
What is Economics as a social science?
Economics as a social science studies how individuals, firms, and governments allocate scarce resources to satisfy unlimited wants. It analyses human behavior, decision-making, and interactions in the production, distribution, and consumption of goods and services.
What will rational agents want to gain from their choices?
Consumers = maximising their utility
Producers = maximising their profits
Workers = maximising their wages and work environment
Governments = maximise welfare of citizens
What are some differences in methodology from natural/other sciences?
Human behaviour = deals with unpredictable human actions, which are influenced by emotions, culture, and irrationality, unlike the predictable laws of natural sciences.
Value Judgments = Economic analysis can involve normative statements (opinions on what “should” happen), whereas natural sciences focus purely on objective facts.
What are some similarities in methodology from natural/other sciences?
Use of Models and Theories = economics also uses models to simplify complex realities and make predictions.
Empirical Evidence = economists collect data, test hypotheses, and use statistical methods to analyse relationships.
What is meant by ‘Land’?
What is the reward?
The scarce physical natural resources available for production.
Its reward is rent.
What is meant by ‘Labour’?
What is the reward?
Labour is the human input.
It’s reward is wages.
What is meant by ‘Enterprise’?
What is the reward?
Enterprise is the entrepreneurship ability that organises the other factors of production, Entrepreneurs take risks.
The reward may be profit.
What is meant by ‘Capital’?
What is the reward?
Goods that are used to make and manufacture consumer goods and services.
The reward is interest.
What does Economics study?
The choices people take under conditions of scarcity and uncertainty.
What is the study of microeconomics?
Economics at the individual, industry or household level.
What is meant by opportunity cost?
It measures the cost of a choice compared to the next best option.
What are three types of consumer goods?
Consumer durables
Consumer non-durables
Consumer services
Give an example of consumer durable.
Washing machine
Give an example of consumer non-durable
Latte
Turning on the heating
Give an example of consumer service.
Haircut
What does the rate of extraction of finite resources depend on?
Current market price
(Free market economy) that extract resources such as oil have a greater incentive to do so
What are the 2 main economies?
Free market and Planned
Mixed economy (both)
What are the principles of a free market?
Market allocates resources to people
Little government intervention
Profit motivated businesses
Competition
Private ownership
What are the principles of a planned economy?
Public ownership (government owned firms)
Governments set prices
Equal distribution of resources
What are the advantages of a free market economy?
Efficient allocation of resources (resources tend to go where market return is highest)
Consumer sovereignty (consumers determine what’s produced by their preferences)
Variety and choice (no gov intervention = firms produce wider range of goods and services)
What is the role of the state in a mixed economy?
Mix of public and private sectors
Redistribution of income and wealth (tax, welfare programmes)
Gov invests in public goods and infrastructure that are not efficient;y provided by the private sector.
What is a need?
Something people must have (water food etc)
What is a want?
A desirable, something people would like to have.
What is welfare?
Human happiness
How can economic welfare be unevenly distributed?
Regional disparities (uneven economic development e.g rural/urban)
Unemployment (gender pay gaps, discrimination, lack of training opportunities)
Access to public services (private funded services exclude low-income)
What is an economic system?
The set of institutions within a community that decides what, how and whom to produce.
What are the two forms of economic mechanisms?
Command mechanism
Price mechanism
What does command mechanism lead to?
Planned economy
What does price mechanism lead to?
Free market
What does a pure market economy do? (Allocation of resources)
Prices their goods and services based on their value to society
What is a circular economy’s key principles?
Designed to have a long lifespan
Closed-loop systems (recycle)
Renewable Energy
What does the rate of extraction of non-renewable resources depend on?
Market price.
Higher prices = Faster extraction = Higher profits for organisations
What are features non-renewable sources have?
Finite in supply
No mechanisms now to replenish them
They will run out if we continue to use them at our current rate
What is resources depletion?
Give an example.
Decline in stock of resources available.
Happens when we use natural resources faster than they’re made
E.g Overfishing
What is resource depreciation?
Give an example.
When a resource loses its value or usefulness overtime.
E.g infrastructure ages or Skills of labour decline
What are common pool resources?
Give an example.
Natural or manmade resources everyone can use
E.g Clean air
What is plotted on the axis of a PPF diagram?
Good x and Good y
What does a point beyond the PPF curve represent?
Impossible to create, insufficient resources at the moment
What does a point on the PPF curve represent?
Efficient/Productive efficiency (no resources are wasted)
What is ‘resource scarcity’?
What is it caused by?
Demand exceeds the supply of natural resources, may lead to inequality.
May, be cause by no effective/affordable substitutes or mismanagement of the resource.
What does producing more of both goods with the same resources represent in a PPF curve?
An improvement in welfare
A gain in allocative efficiency
What does a point inside the PPF curve represent?
Possible but inefficient
How is economic growth presented?
What are some reasons for economic growth?
When the PPF curve shifts outwards.
Higher productivity/efficiency inputs
Innovation/invention
Better management of the factors of production
What can be a real life application for demand/PPF/scarcity/allocation of resources?
Demand for Covid tests went up and supply couldn’t keep up with it because the creation of Covid tests required finite resources.
To tackle this issue they rationed the Covid tests by first come first serve and people could only use one test every 6 months.
