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microeconomics > the economic methodology and the economic problem notes & classwork flashcards > Flashcards

the economic methodology and the economic problem notes & classwork flashcards

1
Q

What do economic studies show?

A

how humans make decisions under scarcity

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2
Q

what do economic agents make decisions on?

A

Political judgments
Short-term outcomes
Moral judgments
Normative statements

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3
Q

societal decisions

A

decisions that aim to maximise the welfare of a society

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4
Q

scarcity

A

when human needs and wants are greater than the amount of resources available

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5
Q

The economic methodology similarities to that of social sciences:

A
  • Models and theories are used to explain real world evidence using real life data
  • Statistics analytics can be used to test hypotheses against evidence
  • Nearly all models rely on assumptions and simplifications
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6
Q

The economic methodology differences to that of social sciences:

A
  • controlled Labatory tests aren’t possible as economists can’t keep variables constant
  • Economists rely on the ceteris paribus assumption. Meaning ‘everything else remains equal’
  • When economists study the relationship between two factors, they’ll assume that one factor changes while the rest stays constant
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7
Q

what are positive statements?

A
  • Positive statements describe the world as it is
  • They are objective statements that can be proven
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8
Q

examples of positive statements

A
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9
Q

what are normative statements?

A
  • Describe how the world should be
  • They are opinions that contain value judgements

Value judgements are often found in normative statements. They are judgements about society that cannot be quantified and tested

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10
Q

what are value judgments?

A

Statements that are subjective and based on opinion rather than factual
evidence

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11
Q

what is the purpose of economic activity?

A

to produce goods and services to satisfy consumers wants and needs

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12
Q

needs

A

: Something necessary for human survival, e.g. food, shelter.

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13
Q

wants

A

Something desirable, yet not necessary for human survival.

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14
Q

what are the foundation of economic decision making?
what questions to economists have to ask?

A

What goods/services we produce?
How we produce these goods/services?
Who we produce those goods/services for?

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15
Q

The classification of economic resources:
Acronym: CELL

A

C - capital
E - enterprise
L - labour
L - land

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16
Q

capital

A

the equipment used to generate goods and services within the production process
- producer goods
- Capital must be made before it can be use

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17
Q

Enterprise

A

the Entreprenurial actions that individuals take to try and make a profit

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18
Q

land

A

natural resources

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19
Q

what is human capital ?
what is labour force ?

A
  • Human capital – the value human labour brings to the production process
  • Labour force – the population that can work
    People who are more useful in the workplace have greater human capital
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20
Q

What are the three main economic agents?
define them

A

Producers – people/firms that produce goods or supply services
Consumers – people/firms who purchase the good/services
Governments – establishes rules for economies

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21
Q

opportunity cost

A

the next best alternative forgone

Opportunity cost can sometimes be referred to as price, if you buy a new bag for £300, then £300 measures the amount of consumption you have given up

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22
Q

list four issues with opportunity cost

A

Not all factors have alternatives
Some alternatives are unknown
Agents may lack information on alternatives
It can be difficult to switch some factors to another use

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23
Q

labour

A

workers with human capital

24
Q

People face a trade-off when they make a choice
e.g., if you choose to buy a video game, you cannot spend that income on movies

In some cases, opportunity cost exceeds the monetary cost:

give an example

A

e.g. attending university
As well as the financial cost of tuition, you are giving up time that could be spent earning money at a paying job. So therefore, the total opportunity cost is greater than the financial cost of university because of the lost potential earnings

25
Q

what does a production possibility frontier (PPF) show?

A

A curve displaying the various possible combinations of two
products that can be produced with finite resources.

26
Q

what does the slope of the PPF show ?

A

the opportunity cost

27
Q

The PPF is curved because of the law of diminishing returns
what is the law of diminishing returns?

A

As you increase units of one resource and keep other factors constant, the marginal benefit from the extra units will eventually start to decline

28
Q

when does the PPF shift outwards?
what does it mean in detail

A

when there is economic growth

This is because the productive capacity of the economy has increased
e.g., this could be caused from improvements in technology
But this improvement isn’t necessarily equal across all products
e.g., an improvement in the technology to produce cars isn’t necessarily going to affect the ability to produce butter

29
Q

how can you tell there is economic growth using the PPF diagram?

A

the PPF shifts outwards

30
Q

what is efficiency in economics ?

A

refers to lack of waste

31
Q

what is static efficiency ?

A

refers to the efficiency at a point in time

32
Q

pareto efficiency

A

State of resource allocation, where in order to make an economic agent
better off, another agent is made worse off

33
Q

allocative efficiency

A

When economic resources are utilised to produce the combination of
goods and services that maximise economic welfare.

34
Q

what does an inward shift on a PPF diagram show?

A

negative economic growth

35
Q

what does shifting along the PPF reflect

A

the reallocation of resources when there is a fixed amount of resources

36
Q

When the total level of resources changes, the PPF shifts:

increasing resources:
decreasing resources ?

When resources are fixed but output increases:

A

When the total level of resources changes, the PPF shifts
- Increasing resources – PPF shifts outwards as output increases (economic growth)
- Decreasing resources – PPF shifts inward as output decreases (negative economic growth)

When resources are fixed but output increases
- When resources are fixed but output increases (e.g. through improving labour or technology), the PPF shifts outwards.
So an outward shift reflects economic growth.

37
Q

what is the reward/incentive for:
capital
enterprise
land
labour

A

capital- interest from the investment
enterprise - profit - an incentive to take risks
land - rent
labour - wages

38
Q

capital goods

A

goods which can be used to produce other goods, such as
machinery.

39
Q

consumer goods

A

goods which cannot be used to produce other goods, such as
clothing.

40
Q

Ceteris paribus:

A

All other things being held constant

41
Q

what does the demand curve illustrate

A

the relationship between quantity demanded and price

42
Q

willingness to pay

A

desire to pay based on tastes and preferences

43
Q

ability to pay

A

factors in a person’s income, and whether they can afford the good or services or not

44
Q

Substitute goods

A

an increase in the price of one good will increase the quantity demanded of the other e.g. Persil and Ariel washing pods

45
Q

Complement goods

A

an increase in the price of one good will cause a decrease in the quantity demanded of the other e.g. flights to Spain and suncream

46
Q

give an example of substitute goods

A

Persil and Ariel
coca cola and pepsi

47
Q

give an example of complement goods

A

cereal and milk
cookies and cream

48
Q

price

A

what the buyer pays for a specific good or service

49
Q

quantity demanded

A

– the total number of units purchased at the price

50
Q

explain image 2

A

The demanded curve is downward sloping and shows the relationship between price and quantity

-this means that the higher the price is , the lower demand is

the law of demand shows the inverse relationship between price and quantity, assuming all other variables are constant

51
Q

income effect

A

when prices fall, consumers can afford a greater quantity of goods and services (assuming income is fixed) .

So demand for these good and services increases

52
Q

substitution effect

A

when the price of one good falls, consumers will buy more of the cheaper good or service and less of the more costly good or service .

So demand for the cheaper good will increase; demand for the costlier good decreases

53
Q

what are the Two theories that explain the relationship between price and quantity are:

A

income effect
substitution effect

54
Q

describe the effects of a change in demand

A

The demand curve will shift right when there is an increase in demand for the good at each price level

-e.g. if a product were to suddenly become more popular, the demand curve would shift right

  • the demand curve will shift left when there is a decrease in demand for the good at each price level
55
Q

describe the effects of a change in income

A

The effect of a change in income depends on the type of good

For a normal good, increased income will lead to an increase in quantity demanded e.g. New cars

For an inferior good, increased income may lead to a reduction in quantity demanded e.g., rice (if more expensive products like meat can be afforded)

56
Q

describe the effects of change in price

A

Movement along the curve happen in response to a price change

A rise In price will lead to a demand contraction

A fall in price will lead to a demand extension

57
Q

elasticity

A

Elasticity measures the responsiveness of one variable to the change in another variable

microeconomics (3 decks)

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