The Nature Of Economics Flashcards
What is economics?
A social science that studies human behaviour and develops theories to explain and predict. Focused on the causes and consequences of key decision making by key participants in an economy.
Who are the key participants?
Businesses (employers, produce goods and serving), households ( employees, and consumers), financial sector (banks), government (taxation, public goods/sevices), overseas (imports/exports).
What is the economic problem?
How best to produce goods services to satisfy unlimited wants/needs with limited/scarce resources such as time, money, and resources.
4 key questions
- What to produce?
- How much to produce?
- How to produce it?
- Who to produce it for?
Key economic resources
- Land
- Labour
- Capital
- Enterprise
Opportunity lost
Value of next best alternative foregone by making a choice.
Production possibility frontier assumptions
Simple model to simplify real world
1. Only two goods are produced
2. Technology is constant
3. Resources are constant
4. All resources are fully employed
Production possibility frontier
Graphical representation showing all possible optionsfor production for two products. Helps discover most efficiat use of resources
Straight PPF
Opportunity cost remains the same. Resources are substitutable
Curved PPF
Concaved to the origin, increasing opportunity cost, resources aren’t substitutable.
As get closer to full production of 1 good the opportunity cost increases as resources are not fully suitable.
A good economy finds the optimal area. When at either end of the curve and transitioning to the other product there are large productivity gains.
Points on PPF
- To the left of the line = unemployed resources, not at full capacity
- On the line = using all resources, possible combination, not enough resources
- To the right of the line = impossible, not enough resources
Marginal rate of substitution
Measures opportunity cost
= change in what you don’t want / change in what you do want to produce
Relaxing assumptions in the model
- Technological progress = one end of the curve increases
- New resources discovered = curve moves outwards
- Wastage or unemployed resources = point inside the curve
Future implications of current choices
Inter temporal budget constraints
Economics = capital goods verse consumer goods
Individual = spending verse saving, education verse working
Business = retain verse dividends, investing in new technology
Government = spending on public services, deficit verse surplus
Economic decisions underlying decision making
Consumers = spending and saving, work, education, retirement, voting,
Business = profit maximisation, pricing, resource use, industrial relations
Government = collect taxes to finance spending commitments, influence decisions of stakeholders through allocation of resources policies,
Allocative efficiency
A state in an economy where production is the best mix of goods/ services that represent the combination that society most desires
