Theme 1 Unit 1 - Introduction Flashcards
Why do we use models
- Help illustrate theories
- Simplify analysis
What is ceteris paribus
“all other things remaining constant”
- allows us to examine effect of one variable
Main purposes of economic activity
- Allocation of scarce resources
- What to produce, how to produce it, and who gets it
What is the cost-benefit principle
- Rational agents will choose what gives them the largest marginal benefit
How do consumer welfare and rationality interact
- Rational agents will use their salary to maximise utility
- In reality, decisions are on incomplete information, causing welfare loss.
What’s behavioural economics
- Challenges rationality
- Uses psychology to explain decisions i.e. eating too much
What is opportunity cost
The next best alternative foregone
Opportunity cost examples
- Work vs leisure
- Government spending
- Investment into capital goods vs consumer goods now
Why do we have market systems and what are the 3 types
- The institutions and frameworks a society uses to allocate resources
- Free, mixed and command economy
Features of a free market economy
- Markets allocate via the price mechanism
- Little government, ideally property, law and currency only
Features of a mixed economy
- Resources are mix of public and privately owned
- Government supplies public + merit goods and corrects market failure
Features of a command economy
- The state owns all resources
- The state allocates and sets quotas independent of market prices
What is rationing and how can we ration
- Way of allocating scare resources
- Most often done via the price mechanism
- Need for product i.e. NHS
- All require some form of discrimination
What are the factors of production
- Land
- Labour
- Capital
- Entrepreneurship
Explain land as a resource
- All natural resources
- Could be land, climate or solar power
Explain labour as a resource
- Human input into production
- Vital to growth
Explain capital as a resource
- Capital goods are used to produce other products
- Can be fixed (factories) or working (semi-conductors)
Renewable vs non-renewable resources
- Self-replenishing, as long as extracted sensibly
- Finite resources, no way to replenish
Free goods
- Don’t use up any inputs i.e. air, sunlight
- No opportunity cost
What is a PPF
- Shows maximum output of goods in a 2-factor economy
- Curve due to increasing opportunity costs
Diagram of PPF
- Capital vs consumer goods
- Inside curve = not all utilised
- On curve = fully utilised
- Outside curve = unattainable
How to shift PPF out
- Increase in factors of production, productivity, or technology
- Trading allows us to reach beyond it
- Doesn’t always increase both axes equally
How to shift PPF in
- Natural disaster
- War or conflict
- Net migration or fall in productivity
What is resource depreciation and depletion
- Depreciation is the loss of quality of capital i.e. skills atrophy, infrastructure
- Depletion is the actual reduction of resources i.e. migration
