Topic 1 Flashcards
What is an incentive?
Something that encourages a choice or a consequence that discourages one.
What is economics?
‘An area which looks at the decisions made by individuals, businesses, governments and entire societies as they cope with scarcity and the incentives that influence these choices.’
What is the difference between Microeconomics and Macroeconomics?
Microeconomics = the decisions small companies and citizens make and how these are affected by governing bodies and other factors.
Macroeconomics = the study of ‘the national and global economy’.
What are goods and services?
Goods = physical items individuals want
Services = ‘tasks performed for people’ - phone service
What are the four factors of production?
Land, Labour, Capital & Entrepreneurship
What is land?
Land = earns rent
Classed as natural resources such as: land, oil, gas and water. Our land surface and water resources are renewable but the resources we use to create energy are non-renewable.
What is labour?
Labour = earns wages
The work time and work effort that people devote to producing goods and services. The quality depends on human capital (knowledge and skills people obtain from training) which expands over time.
What is capital?
Capital = earns interest
The equipment businesses use to produce products.
Financial Capital = used to enable companies to loan money they need to buy physical capital. It’s not a productive resource as it’s not used directly to produce goods/services.
What is entrepreneurship?
The human resource that organises labour, land and capital.
What is self-interest and social interest?
Self-Interest = a choice that is the best for you
Social Interest = a decision which leads to an outcome that is the best for society as a whole.
What is efficiency?
When available resources are used to produce goods and services at the lowest possible cost.
What is equity/fairness?
Being equal and fair to all individuals.
What are examples of social interest?
Globalisation - not in self-interest of low paid foreign workers
Information-Age Economy - is technology the best for our population?
Climate Change - affect the earth for future generations
Economic Instability - should banks allow people to loan money who won’t be able to repay it.
What are the six main principles of micro-economics?
1 = A choice is a trade-off 2 = People make rational decisions 3 = Benefit is what you gain from something 4 = Cost is what you must give up to get something 5 = Most choices are how-much choices made at the margin 6 = Consumers respond to incentives
Why are choices trade-offs?
You can’t do two activities at the same time, so you must do a trade-off and decide which one you give up to do the other.
What are rational choices?
One which compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.
What is the benefit?
The gain a product brings to the customer, which is affected by their personal preferences, and we measure it as the most that a person is willing to give up to get something.
What is opportunity cost?
The highest valued alternative that must be given up to get something.
What is a how-much choice?
Marginal Benefit = the benefit that arises from an increase in an activity.
Marginal Cost = the opportunity cost of an increase in an activity.
What is a positive statement?
It says about the opinions that are present about how the world works.
What is a normative statement?
Says about how the world should operate, it depends on values and can’t be tested.
What is an economic model?
A description of some aspect of the economic world that includes only those features that are needed for the purpose at hand.
Why are preferences transitive?
More is preferred to less.
What is efficiency in production and efficiency in consumption?
Efficiency In Production - Maximise profits, minimize costs.
Efficiency In Consumption - Maximise utility
What do markets allow us to do?
To trade and exchange of goods and services. They allow us to solve the economic problem of
allocating society’s scarce resources (Land, Labour and Capital) between (unlimited) competing wants.
Why does understanding demand conditions help a firm?
(1). Estimate their Sales/Revenues
(2). Determine Type and Quantity of output produced
(3). Determine the Price to Charge/Effect of Price
changes on sales and total revenue
(4). Estimate the likely effects of the launch of new
substitute products upon its own sales.
What is demand a function of?
Demand is a function of Price, Income, Tastes,
Substitutes, Complements & Expectations about the future.
What is a key assumption about consumers?
Consumers are RATIONAL ECONOMIC
AGENTS who aim to MAXIMISE their own personal
satisfaction (UTILITY).
What is choice?
Choice is a function of preferences and budget.
What do we use indifference curves and budget constraint to measure?
Indifference Curves - to analyse preferences
Budget Constraint - describes the range of choices affordable to the consumer
What happens along the indifference curve?
The consumer is equally satisfied and has constant utility.
What is the most favoured point on the production possibilities frontier?
The point of allocative efficiency.
What is the production possibilities frontier?
It describes the limit as to what we can produce. It’s the boundary between the combinations of goods and services that can be produced together, and those that can’t be.
What does the PPF show?
The scarcity because the points outside the frontier are unattainable.
How do we achieve production efficiency?
When we produce goods & services at the lowest possible cost, this outcome occurs at all points on the PPF.
What happens at points inside the PPF?
Production is inefficient because resources are unallocated or unused.
What does unallocated/unused resources mean?
Unallocated Resources = when resources are assigned to tasks for which they aren’t the best match.
Unused Resources = when resources are idle but could be working.
What is opportunity cost a ratio of?
The decrease in the quantity produced of one good divided by the increase in the quantity produced of another good, as we move along the PPF.
Are there trade-offs along the PPF?
Every choice along the PPF includes a trade-off, as we can only produce more of one type of good/service if we produce less of another.
What is the most favoured point on the PPF?
The point of allocative efficiency, where goods/services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit.
How do we calculate marginal cost?
From the slope of the PPF.
What do we use to show preferences?
Marginal Benefit Curve.
What is the general principal of marginal benefit curves?
The more we have of a good/service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it.
When is allocative efficiency reached?
When marginal cost = marginal benefit
What is economic growth?
The expansion of production possibilities.
What is technological change & capital accumulation?
Technological Change = The development of new goods and of better ways of producing goods/services.
Capital Accumulation = The growth of capital resources, including human capital.
What is specialisation?
Producing only one good or a few goods.
Comparative Advantage?
When a person can perform an activity at a lower opportunity cost than another.
Absolute Advantage?
When someone can outcompete others in a large no. of activities, so is more productive than others.
What are firms?
An economic unit that hires factors of production and organises those factors to produce and sell goods/services.
What are markets?
Markets are any arrangement that allows buyers and sellers to get info and do business with each other.
What are property rights?
The social arrangements that govern the ownership, use, and disposal of anything that people value.
Real Property, Financial Property and Intellectual Property
Real Property = land and buildings
Financial Property = stocks/bonds/money in bank
Intellectual Property = Product of creative effort.
What is money?
Money is an commodity or token that is generally accepted as a form of payment.
What is real income?
A household’s income expressed as a quantity of goods that the household can afford to buy.
What happens to the budget constraint if the quantity on the x-axis decreases in price?
It pivots outwards.
What happens to the budget constraint if the income increases?
Outwards parallel shift.
What happens to the budget constraint if the income decreases?
Inwards parallel shift.
What is the Marginal Rate of Substitution?
The MRS is the rate at which a person will give up the good measured on the y axis (for us beer) to get an additional unit of good x (cocktails) and at the same time remain indifferent (i.e. total utility is constant).
What causes the convex shape of the indifference curve?
Law of diminishing marginal utility
What do higher indifference curves mean?
Higher utility.
