Topic 1: Intro & Microeconomic Lessons Flashcards
<p>What is scarcity and why is it important?</p>
<p><em>scarcity</em>: means that society has limited resources and cannot produce all the goods and services people want</p>
<h3>Why is this important?</h3>
<p> the way a society decides to allocate its resources is a major factor in the standard of living its citizens enjoy (not ‘greed’ or money)</p>
<p>What are fundamental questions in resource allocation?</p>
<ol> <li>What goods and services will be produced?</li> <li>How will the goods and services be produced?</li> <li>Who will receive the goods and services produced?</li></ol>
What is scarcity and why is it important?
Scarcity is the concept that society has limited resources while people have unlimited wants. This requires people to make decisions on how to allocate resources efficiently.
Why do people face trade offs?
Since resources are scarce and our wants unlimited, we usually have to give up one thing for another. An example of this is the trade off between efficiency and equity: deciding how to make the most from resources and how to distribute the resources fairly among society.
What is an opportunity cost and why is it important?
The opportunity cost is the highest valued alternative that must be given up to engage with the activity under consideration. This can be your time. It is important because it allows us to see if we are using this resource in the most efficient way possible.
What are the traits of a rational consumer or firm?
Consumers or firms that consider all available information to weigh up the cost/benefit of any decision to be made and who choose the option that maximises net benefit.
What are marginal changes? What is an example of a firm utilising this concept?
Small incremental adjustments to an existing plan of action. Rational people make decisions by comparing cost/benefit at margin. An example could be a flight selling seats for very cheap because they were not going to be filled anyway: any amount of money would have been better than nothing.
What is a market economy?
An economy that allocates resources through decentralised decisions of many firms and households. Firms decide who to hire and what to produce. Households decide what to buy and who to work for.
What is the ‘invisible hand’ metaphor?
Adam Smith, in the Wealth of Nations, states that buyers and sellers who act in their own self interest, while subconsciously rationalising their choices, end up benefitting society as a whole.
How can market outcomes be improved, such as when markets fail or break down?
Governments can intervene to produce a socially efficient outcomes
The invisible hand needs government enforcement of rules and laws and also needs them to maintain institutions. For example, if we cannot rely on vendors to fulfil their contracts then less people will use them.
When there is a possibility of market failure, usually caused by issues of efficiency and equity, the government can intervene.
