Understanding Markets Flashcards
_______________ is the study of how society resolves the problem of scarcity
Economics
What is equilibrium?
Situation where there is no reason to change
Why does equilibrium exist?
- Every decision-maker takes best action available given environment
- Incentive is required to change decision/move to new equilibirium
What does a budget line show?
Compares consumption between two goods
What is marginal change?
A change in consumption of one good which affects consumption of another
How do you work out production output?
production function (Labour * Capital) Technology
What does the production possibility frontier show?
The possible combinations of two goods that people in an economy can make given the resources they have
What does the PPF slope indicate?
Opportunity cost of [X]
What is a planned economy?
Government decides which final products should be made and in what quantities
Planners work out what intermediate goods are needed to make final products
As well as if/where new factories needed
What is a market economy?
firms decide what they want to produce and try to sell, individuals decide what they want to buy, while the government sets the rules
What happens to production incentive when a product becomes scarce?
Increases - since producers will make more money per unit
What is an absolute advantage
When a country can produce something more
cheaply than others
3 main reasons to trade
- Implied more efficient use of world’s resources
- Efficiency within the economy
- Allows individuals to specialise in areas of activity where they have an absolute advantage
What is comparative advantage?
Advantage relative to other products/trading partner performance
Are gains from trade evenly distributed?
Not always - need to take
within-country
distributional aspects into consideration
What are Terms of Trade’s?
the weighted average of the country’s export prices to its import prices: Pexport/Pimport
What does an increase in ToT do?
Give the country more purchasing power
Why do we build models?
- simplify real world
- concentrate on important factors
- assess effect of one variable
Why do we test models?
- Find out if their prediction is accurate
- Find out if they predict something new
- Find out how much they rely on assumptions
What are the different types of economic data?
Cross section data, times series data, panel data, real versus nominal prices, index numbers
What is cross section data used for?
Analysing differences between countries e.g. GDP and capital per worker
What is time series data useful for?
Analysing changes over time; one series may follow another which may help identify causation
What is panel data useful for?
See what is changing
for each company while controlling for (taking account of) things that do not change
Positive statements deal with
Objective explanation
Normative statements
Offer prescriptions based on value judgements
Economics can be used to prove normative judgements
False - these are based on preferences or priorities rather than economics
