week 1 Flashcards
what is the scarcity principle
having more of one thing means having less of something else
all economic decisions have costs
what is the cost-benefit principle
a rational decision maker should take an action if and only if the benefit outweighs the cost
what are the three decision pitfalls to avoid
measuring money and benefits as proportions rather than absolute money amounts
ignoring opportunity costs
failing to think at the margin - when taking on an activity, the focus should be on the cost and opportunity of each additional unit of activity
what is an opportunity cost
the value of the next best alternative that is forgone by taking a particular action
what is a sunk cost
a cost that is not recoverable the moment a decision is made
the only costs that should influence a decision are those we can avoid by not taking the action
what is microeconomics
the study of individual choices under scarcity and its implications for the behaviour of prices and quantities in individual markets
what is macroeconomics
the study of the performance of national economies and the policies that governments use to try improve that performance
what is positive economics
independent of the ethical value system of the economist
what is normative economics
consists of statements in economics that reflect or are based on the ethical value system of the economist, implicitly, explicitly or by omission
what is the market
the market for any good/service consists of all the buyers and sellers for that good/service
what is the goal of consumers
utility maximisation
what is the goal of producers
profit maximisation
what is a demand curve
shows the relationship between how much of a good/service buyers wish to buy and the price of that good/service
downward sloping - as price of a good/service decreases the buyer wishes to buy moe
what is the substitution effect
when the price of a good rises, consumers will switch to other substitute goods
what is the income effect
when the price of a good rises, consumers become effectively poorer, as a result they may purchase less of that good
what is the buyers reservation price
the largest amount a consumer is willing to pay for that good
equal to the benefit they receive from that good
is the demand curve always downward sloping
Giffen good - upward sloping demand curve
example non luxury goods eg bread
what is the supply curve
the relationship between how much of a good/service sellers wish to sell and the price
as the price of a good/service increases the sellers wish to sell more
why do supply curves slope upwards
sellers reservation price - the minimum price required by a seller to sell a unit of a good
as market price decreases, sellers with high reservation prices drop out the market
what is the market equilibrium
a state in which there is no pressure on price/quantities to change
what is excess demand
buyers want to buy but cannot, offer a higher price
upward pressure on prices, market is out of equilibrium
what is excess supply
sellers want to sell but cannot, offer lower price
downward pressure on market, market is out of equilibrium
what is a price floor
lowest legal price a good can sold for
can cause excess supply
what is a price ceiling
highest legal price a good can be sold for
can cause excess demand
