Terms Flashcards
Economics
a social science directed at the satisfaction of needs and wants through the allocation of scarce resources which have alternative uses
Needs and wants
- things that are essential for human survival
- things we may desire
Goods and services
- items that are tangible
- activities provided by other people
- the output of an economic system
Scarcity
- Unlimited wants limited resources
- There exists only a finite amount of resources
- every product down to a pack of gum or a book of matches is scarce, since someone expended resources that could have been deployed elsewhere to produce it
Opportunity cost
- the cost of giving up the next best alternative
- the alternate forgone
Economic actors
the participants in economic activities in an economy
positive and normative statements
- can establish hypotheses that can be empirically tested
- based on opinion or subjective values & includes a value judgement
Utility
the benefit that is derived from consuming goods and services
factors of production
the inputs to create goods and services
production
a process, or set of processes, that converts inputs into output of goods
Capital good / Producer good
a good which is used in the production of other goods and services
Consumer good
a good which is consumed by individuals or households to satisfy their needs and wants
Interest rates
- The cost of borrowing and the reward for saving
Function of banks
A place for households and firms to
- Store money safely
- Borrow money safely
Provides a link between saver and borrower, allowing for better distribution of money, leading to more economic activity
How banks make money
- Collecting interest on loans
- Buy and sell shares
- Buy and sell bonds (government debt)
- Can save money with the BoE and get paid interest
How did Case, Karl, Fair, Ray (1997) define opportunity cost
Principles of Economics
the opportunity cost is what an agent is deprived of or renounces when making a choice
How does Varian (2014) define marginal benefit
the amount utility or satisfaction that a consumer receives with an additional portion or unit of a good or service.
Thinking at the margin in economics
Refers to the process of making decisions by considering the incremental or additional changes that result from a small, incremental change in a variable.
- This concept is fundamental to understanding how individuals, firms, and governments make choices and allocate resources.
- When thinking at the margin, individuals and decision-makers assess the costs and benefits of producing or consuming one more unit of a good or service. In other words, they evaluate the trade-offs of increasing or decreasing their current level of activity by a small amount.
- Helps to explain various economic concepts, such as consumer behavior, supply and demand, pricing decisions, and resource allocation.
Marginal Benefit (MB)
This refers to the additional benefit gained from producing or consuming one more unit of a good or service. It’s the positive impact of the incremental change.
- the change in total private benefit from one extra unit
- an incremental increase in total benefits
- an incremental increase in total costs
Marginal Cost (MC)
This represents the additional cost incurred from producing or consuming one more unit of a good or service. It’s the negative impact of the incremental change.
- the change in total private cost from one extra unit
Comparing Marginal Benefit and Marginal Cost:
ional decision-making occurs when individuals or entities compare the marginal benefit with the marginal cost. If the marginal benefit is greater than or equal to the marginal cost, it is generally considered beneficial to pursue the additional unit of production or consumption. Conversely, if the marginal cost outweighs the marginal benefit, it might be preferable to reduce production or consumption.
Optimal Decision-Making: MB & MC
To make efficient choices, individuals should continue producing or consuming units until the marginal benefit equals the marginal cost. At this point, they have maximized their overall satisfaction or utility.
Example of optimal decision making
Consider a factory deciding whether to produce one more unit of a product. If the revenue generated from selling that additional unit is higher than the cost of producing it, then the decision would likely be to produce the extra unit. On the other hand, if the cost of production is greater than the potential revenue, it might not be a wise decision to produce that additional unit.
