The Economy and Tools of Economic Analysis Flashcards
What is the biggest problem in the world economy?
Scarcity
What are the causes of scarcity?
(1) Limited resources (e.g. land, labour and capital) which affects the Supply of Goods and Services produced in the economy
(2) Unlimited wants (general term to depict greed as human behaviour) and consumers’ demand (the small portion of unlimited wants)
The economy should mitigate the problem by addressing what questions?
(1) Who are you producing the goods for?
(2) How many goods and services can be produced given the scarcity in resources for production?
(3) What goods and services should be produced?
What’s the difference between wants and demand?
Wants: desire to have the goods but individual may not have the ability to pay
Demand: has the ability to pay
What will happen in a market if the demand is more than the supply?
(1) There will be excess demand
(2) The price will increase to choke off excess demand as people will buy less and demand eventually becomes equal to supply
What will happen in a market if the supply is more than the demand?
(1) There will be excess supply
(2) The price will decrease so as to stimulate demand as people will buy more and demand eventually becomes equal to supply
What does economics analyse?
What, how and for whom society produces
What is the key economic problem?
To reconcile the conflict between people’s virtually unlimited demands with society’s limited ability to produce goods and services to fulfil these demands
What is a market?
A place whereby a buyer and seller meet to conduct a transaction
What is an industrial country?
A country that engages in high level of production for their goods
What are examples of industrial countries?
China, Vietnam and India
How does the market resolve production and consumption decisions?
By adjustment in prices
What is a command economy?
An economy where decisions on what, how and for whom are made in a central planning office (the government)
1 example of a country with a command economy?
North Korea
What is a free market economy?
An economy (1) without government intervention, (2) whereby suppliers and consumers make the decisions and (3) resources are allocated solely through markets efficiently with the help of an ‘invisible hand’ AKA price where individuals pursue their own self-interest
What is positive economics?
A form of economics that studies how the economy realistically behaves based on evidence derived from sufficient research
What is normative economics?
A form of economics that recommends what should be done based on assumptions
What is an index number?
A number that expresses data relative to a given base value
What is an index number used for?
To compare numbers without emphasizing the units of measurement as well as analyse important macroeconomics variables (e.g. inflation)
What is the index number formula?
(Value at time t / Value in base year) x 100 = x%
What is a Production Possibility Frontier (PPF)?
An analytical economics model used to show the maximum amount of x and y good that can be produced given the scarce resources
Where is the PPF located?
In the line joining point A and B
What does the PPF depict?
The trade-off or menu of choices for society when it comes to deciding what to produce
How does the PPF line change?
According to the amount of resources used
The more resources used…
The more curved the PPF will be
Points outside the frontier are considered…
Unattainable due to the scarcity of resources
Points within the frontier are considered…
Inefficient due to not being at the frontier where PPF shows the maximum output that proves efficiency
Points on the frontier are considered…
Fully employed as the limited resource(s) given is being fully utilised
Resource constraint implies…
That you can use less or equal resource
What is the opportunity cost of a good?
The quantity of other goods sacrificed to make an additional unit of the good
Or, the showcasing of how many units of the other goods has to be given up in order to produce an additional unit of the good itself
What is opportunity cost of X?
It shows the amount of good Y that has to be sacrificed in order to produce 1 more unit of X
What is opportunity cost of Y?
It shows the amount of good X that has to be sacrificed in order to produce 1 more unit of Y
What is the relationship between opportunity cost of X and opportunity cost of Y?
Inversely related
What is efficiency?
An allocation of means of production that creates a combination of outputs where it is not possible to increase the output of one good without reducing the output of at least one other good
How do you measure point efficiency?
By creating a first point and making a second point that is closer to X and observing what happens to the Y on the second point
How do you know if the point is efficient?
The first point is efficient if the Y reduces as you move the point closer to X
How do you know if the point is inefficient?
The first point is inefficient if the Y doesn’t reduce or produces even greater amount than before when you move the point closer to X
What is productive efficiency?
An efficiency whereby production is unable to produce more of one tangible economic good without sacrificing production of another tangible economic good
What is a tangible economic good?
Physical goods that can be touched, felt, moved around and counted
What is allocative efficiency?
An efficiency where such tangible economic goods also includes intangible wellbeing of individuals (welfare)
What type of efficient production is PPF?
Productive Efficiency
What’s the allocative efficient allocation answer for point A in a PPF?
Unknown due to the intangible wellbeing of individuals not being given in the question
What are the conditions for trading to take place?
- Both economies have comparative advantage in producing at least one type of good
- Both economies must either (1) be better off after trading, or (2) one of the economy is better off trading is at least as well off as before trading
What are the ways to find international trading price?
- ITP clearly stated in the question
- Formula (seller’s opportunity cost of x <= ITP <= buyer’s opportunity cost of x)
- Question states specific amount of x and y that each economy must consume in the end (final consumption bundle), use final consumption bundle to find ITP
How do you check if an economy is better off after trading?
- Intitial production
- What comparative advantage does the economy have -> produce max output it has comparative advantage in
- Insert ITP
- Find trade output when they produce max comparative advantage good
- Compare if higher output after trading or if produced on its own
