Microeconomics Part I Flashcards
(46 cards)
Positive statement
Objective - can be tested against facts
Normative statement
Subjective - value judgement
What is economics?
- Study of how world’s scarce resources are allocated to competing uses to satisfy society’s wants (which are infinite)
Why is economics a social science?
Scientific methodology observes the behaviour of individuals and groups and then makes predications based on these observations
Define opportunity cost
- The costs of the next best alternative forgone - to do something you’ve govt to loose the next best thing
Define PPF
PPF - shows the maximum possible output combinations of two goods in an economy, assuming full and efficiency employment of resources
Points on the PPF are productively efficient (all FOP are fully employed)
Inside PPF = productive inefficiency
Factors causing outward PPF shift
- Technical improvement
- New resources
- Education and training
- Increasing in working population, immigration and raise retirement age
Factors causing inside PPF shift
- Natural disasters
- Wars
- Climate change
- Prolonged recession
What does the PPF show?
- Concept of opportunity cost - more capital goods produced means more consumers goods must be given up
- Can show economic growth (outward shift = increased productive capacity)
Productive efficiency
Maximum output produced when available FOP and when it is not possible to produce more of one good or service without producing less of another
Allocative efficiency
- An economy’s FOP are used to produce combination of goods and services that maximises society’s welfare
Define diminishing marginal utility
- As individuals consume more units of a good or service, the additional units give successively smaller increases in total satisfaction
Downward sloping demand curve
Define choice architecture
- Influencing consumer choices by the way choices are presented e.g. govt requiring people to opt out of organ donation (general has significantly higher % of pop. willing to donate)
Define framing
- Influencing consumer choices by the way words and numbers are used - e.g., presenting life insurance payments as less than £3 per day rather than £1000 per year
Define nudges
- Influencing consumer behaviour via the use of gentle suggestions and positive reinforcement e.g., the 5-a-day campaign to encourage greater consumption of fruit and veg can change behaviour in a sociably desirable manner
Can be more cost effective rather than laws, bans or regulation
Can compliment rational policy methods (e.g. using adverts to reinforce social norm)
Define default choice
Influencing consumer behaviour by setting socially desirable choices as default options e.g. organ donation and pension enrolment
Define mandated choice
People legally required to make a choice e.g., many countries there is a required choice to make about organ donation as part of driving license/passport application
Define restricted choice
- Giving consumers a limited number of options recognising that too much choice can sometimes paralyse individuals from making an effective choice with savings
Determinants of demand
PASIFIC
Population Advertising Substitutes Income Fashion and taste Income tax Compliments
PED equation
%change Qd/% change P
YED equation
% change Qd/% change Y
XED equation
% change in Q of good X/% change in P of good Y
Define normal good
Rise in income leads to increase in demand.
Define inferior good
Rise in income leads to fall in demand
