Topic 1: The Economic Problem and Lessons from Micro Economics Flashcards
Define economics
study of how society manages its scarce resource
Define scarcity
limited nature of societies resources
what does an efficient allocation of resources do to standard of living
improves (higher employment, health etc.)
What are two types of economy
- market based
2. centrally based
explain market based economy
resources allocated by firms
explain centrally based economy
resources allocated by small group
what the different between a market and a competitive market
market: group of buyers/sellers of a good
competitive: large number of buyers/ sellers so each has negligible impact on market price
What are two characteristics of a perfectly competitive market?
- goods offered exactly same
2. buyers/sellers numbers so no-one has influence of market price
what does tradeoffs confront
scarcity
name two common trade offs
guns v butter
efficiency v equity
Explain the efficiency v equity trade off (+ pie reference)
- Efficiency: getting most from its scarce resources
- Equity: distribution fairly among members
o i.e. efficiency is the size of the economic pie, equity is how the pie is divided up
define opportunity cost
highest value alternative given up to obtain an item - ‘next best alternative’
define incentive
something that induces a person to act
what does a rational decision maker take into account
if marginal benefit exceeds marginal cost
Explain invisible hand
buyers and sellers acting in own self-interest guiding an outcome that maximises welfare of society
