Theme 1 -Micro (1.1 - 1.1.4 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.
