Week 1 Flashcards
What is SCARCITY?
A situation in which unlimited wants exceed the limited resources available to fulfil those wants.
WANTS > RESOURCES
What are RESOURCES?
Inputs used to produce goods/services
Aka: factors of production
What are FACTORS OF PROUDCTION?
Inputs used to produce goods/services
Aka: resources
What is ECONOMICS?
The study of choices people/societies make to attain their unlimited wants given scarce resources.
A social science that studies choices people/firms etc make as they copy with SARCITY.
What are the 3 ECONOMIC IDEAS?
- People are rational
- People respond to Incentives
- Optimal decisions are made at the margin
What are ECONOMIC MODELS?
Simplified versions/models of reality used to analyse real-world economic situations
They make behavioural assumptions about motives
The employ economic variables
What is a MARKET?
- a group of buyers and sellers of a good/service
AND - the institution/arrangment in which they come together
PEOPLE ARE RATIONAL means…
- economics assumes people are rational
- but not everyone knows everything
- and not everyone makes the best decision
ASSUMPTION: people use as much available in as they can to achieve their goals.
Rational individuals:
- weigh up benefits and costs
- cost action where benefits > costs
PEOPLE RESPOND TO ECONOMIC INCENTIVES means…
- People act from a variety of motives (e.g. religion, jealousy)
- People respond to economic incentives
OPTIMAL DECISIONS ARE MADE AT THE MARGIN means..
- most decisions are not all or nothing
- most decisions involve more or less
- economists refer to MARGINAL to refer to extra/additional benefit/cost of the decision
What does MARGINAL mean?
The extra/additional benefit or cost of decision
What is MARGINAL BENEFIT?
MB is… the benefit of an action/decision
What is MARGINAL COST?
MC is… the cost of an action/decision
What is MARGINAL ANAYLSIS?
Analysis involving a comparison of MB and MC
What is the OPTIMAL DECISION?
To continue any activity up to the point where MB = MC
What are TRADE OFFS?
The idea that because of SCARCITY, producing more of X means producing less of Y.
What is OPPORTUNITY COST?
A concept used to analyse decisions (when choosing between difference alternative options)
The HIGHEST VALUED ALTERNATIVE THAT MUST BE SACRIFICED TO ENGAGE IN AN ACTIVITY
What is a CENTRALLY PLANNED ECONOMY?
An economy where the government decides how economic resources will be allocated.
What is a MARKET ECONOMY?
An economy where the decisons of individuals/households interacting with the MARKET allocate economic resources
What is CONSUMER SOVERIEGNTY?
In a MARKET ECONOMY, consumers who decide what goods/services will be produced
- central feature of market economies
- concept that ultimately consumers decide what goods/services will be produced
What is a MIXED ECONOMY?
An economy where:
- mosts decisions result from the interaction of buyers and sellers in the market,
- the government also plays a significant role in the allocation of resources
What is PRODUCTIVE EFFICIENCY?
When a good/service is produced using the least amount of resource
What is ALLOCATIVE EFFICIENCY?
When production reflects consumer preferences meaning resources are allocated per consumer demands
MB = MC
What is DYNAMIC EFFICIENCY?
When new tech/innovation is adopted over time
Name 3 types of EFFICIENCY
PRODUCTIVE EFFICIENCY
ALLOCATIVE EFFICIENCY
DYNAMIC EFFICIENCY
Why are market economies more effiecent?
Because the promote:
- Competition
- Voluntary Exchange
What is VOLUNTARY EXCHANGE?
When both buyer and seller are better off by the market transaction
How is PRODUCTIVE EFFICIENCY acheived?
Its achieved through competition between firms in a market forcing them to produce goods/services
- using least resources
- at lowest cost
How is ALLOCATIVE EFFICIENCY acheived?
Its achieved through a combination of
- competition between firms
- voluntary exchange
What can lead to DYNAMIC EFFICIENCY? Why?
Competition
Because firms seek to adapt their product and use tech to secure their share of sales.
What does competition force firms to do?
Continue producing goods/services as long as the MB to consumers is > MC of production to the firm
What is a HYPOTHESIS?
A statement in an economic model about an economic variable that may be (in) correct
What are ECONOMIC VARIABLES?
Something measurable that relates to resource use and can have difference values (e.g. wages, prices, hours), used in models to anaylse economic performance/decisions
What is POSITIVE ANALYSIS?
Anaylsis that:
- is concerned with WHAT IS
- involves value-free statements
- can be checked by facts
…. A positive statement that can be confirmed or negated by facts
- Based on FACTS/data
- Cause and effect
- Objective
What is NEGATIVE ANALYSIS?
Anaylsis that:
- is concerned with WHAT OUGHT TO BE
- involves value judgments
- can’t be tested/ checked with facts
- Based on values/opinions
- Value conclusions
- Subjective
What type of analysis is economics concerned with and why?
POSITIVE ANALYSIS - because it measures the costs/benefits of different courses of action
What is a PRODUCTION POSSIBILITY FRONTIER?
A model that analyse trade offs.
It is a curve show the maximum attainable combinations of two products that may be produced with available resources / current tech
The boundary btw combinations of goods/services that CAN & CAN’T be produced given the available factors of production and state of technology
PRODUCTION POSSIBILITY FRONTIER - what is on the x and y axis?
Quantity of product X
Quantity of product Y
PRODUCTION POSSIBILITY FRONTIER - what points/combinations are ATTAINABLE?
Points/combinations ON and BELOW the PPF
Because firm has available resources to produce these combinations.
PRODUCTION POSSIBILITY FRONTIER - what points/combinations are EFFICIENT?
Points/combinations ON the PPF
Because the firm is using all available resources to full potential, + fewest possible resources are used to produce given output
Max output obtained from available resources
PRODUCTION POSSIBILITY FRONTIER - what points/combinations are INEFFICIENT? Why?
Points/combinations BELOW the PPF
Because the firm is not operating at capacity - not all available resources are being used
PRODUCTION POSSIBILITY FRONTIER - what points/combinations are UNATTAINABLE?
Points/combinations ABOVE the PPF
Because the firm does not have the available resources to produce that combination of outputs
Why is the PPF bowed outwards from origin?
Because CONCAVE, the opportunity cost of producing X in terms of Y depend on where the firm is on the PPF.
Meaning that the PPF can be used to calculate MARGINAL OPPORTUNITY COSTS.
In terms of the PPF, what represents economic growth?
An outward shift of the PPF curve because economy increases production of goods/services thus raising living standards.
What is ECOMOMIC GROWTH?
Ability of the economy to produce more goods/services
Expansion of society’s production potential.
- As economy grows - better tech, better labour, increased capital,
- As economic resources increase - production possibilities increase and PPF shifts outwards
Is it possible for the PPF curve to shift inwards?
Yes - if the economy experienced a reduction in its productive resources thus causing output to fall.
What 2 economic concepts are used to understand TRADE?
PPF
Opportunity Cost
What is TRADE?
The act of buying/selling a good/service in a market
What is ABSOULUTE ADVANTAGE?
The ability to produce more of a good/service than other producers with the same amount of resources
Can produce MORE goods/services
What is COMPARATIVE/COMPETITIVE ADVANTAGE?
The ability to produce a good/service at a lower opportunity cost than other producers.
Can produce goods/services at LOWER OPPORTUNITY COST
What is the basis for trade - ABSOLUTE OR COMPARATIVE /COMPETITIVE ADVANTAGE?
COMPARATIVE ADVANTAGE/COMPETITIVE
Because individuals/firms are better off if they
(I) specialise in producing goods/services for which they have a competitive advantage, and
(II) gain other goods/services through trade.
What is the PRODUCTS MARKET?
Markets for goods/services, which households are the demanders and firms the suppliers
What are FACTOR MARKETS?
Market for FACTORS OF PRODUCTION, where households are the suppliers and firms the demanders
What are the 4 FACTORS OF PRODUCTION?
Labour
Captial
Natural Resources
Entrepreneurial Ability
What is Entrepreneurial Ability?
The ability to combine other factors to produce goods/services
What is the FREE MARKET?
A market with there are few government restrictions on
- how a good/services is produced/sold
- how a factor of production is employed
What is PRICE MECHANISM?
The system in the free market where price changes lead producers to change production in accordance with consumer demand.
What is EQUITY?
The FAIR distribution of economic benefits btw individuals/societies.
What is CORRELATION?
The appearance of a relationship - appearance that 2 things are related
What is CAUSATION?
Direct measurable impact - the direct impact/effect of X on Y.
What are MACRO ECONOMICS?
Study of the economy as a whole - eg. inflation, unemployment, e/growth
What are MICRO ECONOMICS?
Study of how households/firms make choices - their interaction with markets
What are the key assumptions of a PPF?
- Fixed resources
- Full employment of resources
- Fixed technology
- Two products
PPF - when does a company face a trade-off?
When it is ON the PPF curve and it wants to produce more of an item.
PPF - what is a FREE LUNCH?
When a firm is INSIDE the PPF curve and it wants to produce more of an item
What does the bowed out curve of the PPF represent?
- Increasing Marginal Opportunity Costs
- Diminishing returns
Because the more resources already devoted to an activity the smaller the payout of devoting more resources
What are CAPITAL GOODS?
Goods that are produced/manufactured FACTOR OF PRODUCTION used to produce other goods/services (e.g. building, machines, tools)
What are CONSUMPTION GOODS?
Goods that are used by consumers and have no future productive used (e.g. food, clothing, cars)
When is a country’s future rate of growth likely to be higher? Think PPF, type of goods
When ON the PPF curve, the firm is producing more capital goods than consumer goods.
Because more resources devoted to producing goods that have future productive value.
Why does production of more captial goods (vs. consumption goods) lead to economic growth?
Investment in captial goods (through devotion of more resources);
- increased capital stock
- enables the firm to increase future output and expand production possiblities
What is CONSTANT OPPORTUNITY COST?
Where the opportunity costs remains the same when production of one item is increased.
Opportunity cost may be constant when input resources to produce two products are easily adaptable and therefore can be easily transferred from one product to the other (e.g. pizza vs. calzone)
What is INCREASING OPPORTUNITY COST?
Where the opportunity cost reflects the req’ment for a firm to sacrifice more and more of one product to increase production of another product.
Evident by the outwardly bowed PPF curve
