Rational Decision Making - Chapter 1 (R) Flashcards
Difference between micro and macroeconomics
Microeconomics studies an individual or business market while macroeconomics analyzes decisions made by countries and governments
Definition: Rational decision making
When consumers act on self-interest
The formula for Net Benefits
Net Benefit = Total Benefits - Total Costs
What does Self-interest lead to
Inefficient allocation
Definition: Marginal Benefits
MB is the additional benefit of producing an extra good or service
Example of Marginal Benefits
Doctors
What does PPF stand for
The Production Possibilities Frontier
What is PPF
It illustrates the maximum possible output combinations of goods that can be produced with a fixed amount of resources
How many assumptions does the PPF have
4
What is the assumptions
- The state of technology does not change
- All resources are fully employed
- All available resources are fixed
- That there are only two goods, or groups of goods produced in the economy
What doe the straight graph mean
Straight line curve means constant opportunity cost
What does the Curved graph Mean
A curved graph means increasing in opportunity cost
What is the most transferable resource
Labour
As we transfer resources there is a…
Increase in opportunity cost
The hardest transferable resource is
Capital
Definition: Opportunity cost
It is the loss of other alternatives when one alternative is chosen.
What is the importance of Economic Models?
It is a simplified representation of economic reality showing the relationship between certain economic variables.
What are the characteristics of a market economy
- private property
- freedom of choice
- competition
- limited government
- system of markets and prices
- motive of self interest
Ceteris paribus
All things being equal
Positive statements
Objective statements that can be checked or tested.
Normative statements
Subjective statements contain a value judgement.
What type of statement is this? - (Positive or Normative)
“Australia spends $45 billion on defence”.
Positive
Definition: The Economic Problem
Even though we try to use these scarce resources we are so limited as we have unlimited wants we are forced to make choices which is the economic problem.
What is assumed with the basic economic problem?
People are rational and choose the options which maximises utility
Consumers seek to maximise…
Utility
Firms seek to maximise…
Profit
Governments seek to maximise…
Welfare
