Semester 1 Flashcards
Define economics…
Economics is a Social Science that
studies the choices that individuals, businesses, governments and entire societies make
as they
cope with scarcity
and
the incentives that influence and reconcile those choices.
Define the 2 areas of economics…
Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.
Macroeconomics is the study of the performance of the national and global economies.
What are the 2 big economic questions?
- How do choices end up determining what, how and for whom goods and services get produced?
- When do choices made in the pursuit of self interest also promote the social interest?
Break down big question 1 into what, how and for whom goods and services get produced…
- What is produced e.g. services, production, construction, agriculture.
- How its produced by factors of production e.g. Land, Labour, Capital, Entrepreneurship.
- For whom is who gets the goods and services, depends on the income that factors of production earn… e.g. Land earns rent, labour earns wages, capital earns interest, entrepreneurship earns profit.
Explain big question 2 how the pursuit of self interest promotes social interest…
- Self Interest: choices that you think are best for you.
- Social Interest: choices that are best for society as a whole.
- Social Interest has two dimensions:
Efficiency.
Equity.
Example: globalisation, monopolies.
What are the 6 key ideas of the economic way of thinking ?
6 Key Ideas:
- A choice is a trade-off.
- People make rational choices by comparing benefits and costs.
- A benefit is what you gain.
- A cost is what you give up.
- Most choices are “how-much” decisions made at the margin.
- Choices respond to incentives.
What are positive statements ?
- A statement that can be tested.
Example: Global warming is the result of burning fossil fuels.
What are normative statements ?
- What should be.
Example: We should abolish tuition fees.
How can we distinguish between correlation and causation ?
- Models allow us link cause and effect by focusing on a specific issue.
Application: experiments, statistical analysis.
What is the PPF ?
- The Production Possibilities Frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot.
- Illustrates scarcity, opportunity cost, (in)efficiencies, trade-offs.
What is production efficiency ?
- When goods and services are produced at lowest cost.
What is production inefficiency ?
- Resources unused or badly used.
- Combination inside PPF.
What is the opportunity cost ?
- Highest valued alternative foregone.
How does a concave shaped PPF impact the opportunity costs ?
From A to B:
- PPF is flat.
- Increase in pizza costs a small amount of cola.
From E to F:
- PPF is steep.
- Increase in pizza costs a large amount of cola.
How do you find the point which is allocatively efficient on the PPF ?
- Produce at lowest cost and is most valued.
- Is allocatively efficient.
- All points on PPF achieve production efficiency.
How can we find the optimal combination on the PPF ?
- Compare Marginal Cost with Marginal Benefit.
- Marginal implies ONE more UNIT of production/consumption.
How does the opportunity cost impact marginal cost ?
- Increasing opportunity cost of a pizza…
- Means increasing marginal cost of a pizza.
Define the marginal benefit…
- The benefit received from consuming one more unit of it.
- Linked to willingness to pay.
- Dependant on preference of organisation/individual.
- Curve is downward sloping
*How can you find the point of allocative efficiency ?
- The point where the marginal cost line overlaps with the marginal benefit.
- Therefore meaning that MC = MB
What is economic growth in relation to PPF ?
The expansion of the PPF and an increase in the standard of living is called economic growth.
What 2 key factors influence economic growth ?
- Technological Change
2. Capital Accumulation
What is the opportunity cost of economic growth ?
- Decreasing current production of consumption goods and services.
Define a market…
- A market is any arrangement that enables buyers and sellers to get information and trade with each other.
7 key points which define a competitive market…
- Many buyers and sellers.
- No entry barriers.
- Suppliers are price takers.
- The market price is low and is equal to marginal cost.
- Profits are zero in the long run.
- Goods are identical.
- Consumers have perfect information.