T1.1- 1.1.4 -Models, PPF, Statements, Assumptions, FOP Flashcards
Behavioural economics
Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.
Example sentence: Behavioral economics explores how psychological factors influence economic decisions.
Ceteris paribus
the relationship between two variables by assuming ceteris paribus - i.e. all other influencing factors are constant.
Example sentence: Ceteris paribus, if the price of a good increases, the quantity demanded decreases.
Economic assumptions
Milton Friedman explained why economists need to make assumptions to provide useful predictions.
- economists rely on ‘uncontrolled experience rather than on controlled experiment.’
Example sentence: Economic assumptions help economists simplify complex economic systems for analysis.
Economic model
A simplified representation of economic processes. This representation can be used to gain a better understanding of the theory.
Example sentence: Economists use economic models to simulate real-world economic scenarios.
Microeconomics
Study of economics at the level of the individual firm, industry or consumer/household.
Example sentence: Microeconomics analyzes the behavior of individual consumers and producers.
Unintended consequences
Outcomes that are not intended by a purposeful action.
- In government intervention in markets unintended consequences occur because we cannot predict how consumers react.
Example sentence: The implementation of a new tax law led to unintended consequences that negatively impacted small businesses.
Normative statements
Normative statements express an opinion about what ought to be. They are subjective statements - i.e. they carry value judgments. For example, the level of duty on petrol is unfair and unfairly penalizes motorists.
Example sentence: Normative statements often involve ethical considerations and personal beliefs.
Positive statement
Objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation. For example: ‘A rise in consumer incomes will lead to a rise in the demand for new cars.’ Or ‘A fall in the exchange rate will lead to an increase in exports overseas.’
Example sentence: Positive statements are based on verifiable facts and data.
Value judgement
A view of the rightness or wrongness of something, based on a personal view.
Example sentence: Value judgments play a role in shaping individual perspectives on economic policies.
Barter
The practice of exchanging one good or service for another without using money.
Example sentence: Barter was a common method of trade before the introduction of currency.
Basic economic problem
There are infinite wants but finite factor resources with which to satisfy them.
Example sentence: The basic economic problem arises from the scarcity of resources relative to unlimited human wants.
Capital goods
Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from ‘financial capital’, meaning funds which are available to finance the production or acquisition of real capital.
Example: Investing in new machinery to increase production capacity.
Constraints
Limits to what we can afford to consume - we have to operate within a budget and therefore must make choices. There is always a set of conceivable things that are actually available, and another set of that aren’t
Example: Budgeting for household expenses.
Economic agent
A participant in an economic system
Example: consumer, business or the government.
Entrepreneur
An individual who seeks to supply products to a market for a rate of return (i.e. a profit).
- often invest their own financial capital in a business
- take on the risks associated with a business investment.
Example: Starting a new business venture.
Factor incomes
Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.
Example: Receiving a salary for work done.
Factors of production
The inputs available to supply goods and services:
- Land: Natural resources available
- Labour: The human input into production
- Capital: Goods used in the supply of other products e.g. technology and machinery
- Enterprise: Entrepreneurs organise factors of production and take risks
- Know-how: Information required to develop, produce and bring products to the market.
Example: Using labor and capital to produce goods.
Finite resources
There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an ever-increasing population, we may destroy the natural resources of the planet.
Example: Depletion of natural resources due to overexploitation.
Free goods
Free goods do not use up any factor inputs when supplied. Free goods have a zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good is zero.
Example: Air and sunlight.
Interest
Interest is the reward to the ownership of capital.
Example: Earning interest on savings in a bank account.
Land
Natural resources available for production.
Example: Farmland used for agricultural purposes.
Labour
Physical and mental effort by humans.
1.1.1
Manufacturing
The use of machines, tools and labour to make things for use or sale.
1.1.2
Needs
Humans have many different types of wants and needs - economic, social and even basic necessities.
1.1.3
Non-renewable resources
Resources which are finite and cannot be replaced.
1.1.4
Opportunity cost
The cost of any choice in terms of the next best alternative foregone.
1.1.5
Rationing
A way of allocating scarce goods and services when market demand exceeds available supply.
1.1.6
Rent
Income typically associated with the ownership of land, but which can also include rental income from leasing out other assets.
1.1.7
Renewable resources
Resources that are replaceable if the rate of extraction is less than the natural rate at which the resource renews.
1.1.8
Scarce
Means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
1.1.9
Production possibility frontiers
A boundary that shows the combinations of goods and services that can be produced using all available factor resources efficiently.
1.1.10
Allocative efficiency
Occurs when the value that consumers place on a good or service equals the cost of the resources used up in production.
1.1.11
Producer or capital goods
Useful not in themselves but for the goods and services they can help produce in the future.
1.1.12
Concave production possibility frontier
A PPF that is ‘bowed outwards’, showing a rising marginal opportunity cost as more of one good is produced.
1.1.13
Consumer goods
Goods bought and used by consumers and households. They are the end result of manufacturing.
1.1.14
Economic efficiency
About making best use of scarce resources among competing ends to maximize economic and social welfare over time.
1.1.15
Economic growth
An increase in the productive potential of a country, shown by an outward shift of the production possibility frontier.
1.1.16
Pareto efficiency
In neoclassical economics, an action that harms no one and helps at least one person.
1.1.17
Productive potential
The amount of output an economy could produce if all resources were fully and efficiently employed.
1.1.18
Trade-off
Choices that have to be made between different objectives.
1.1.19
