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
