Week 1 Flashcards
Define Economics
Economics refers to the science of studying how scare resources are utilised to satisfy the wants and needs of people.
Economics is concerned with the essential operations f production, distribution and consumption of goods, and the institutions that facilitate these.
Explain the concept of scarcity and the three types.
Scarcity refers to the fact that the availability of an item is limited relative to its desired uses.
- Scarcity of wealth (budget constraint)
- Scarcity of time (time constraint)
- Scarcity of productive resources and technological limitations (production possibilities constraint).
Why does choice arise?
Scarcity means that people are forced to make choices, since resources are not unlimited people must choose how to spend their income, use their time etc.
Define the opportunity cost
Opportunity cost refers to the value of the most preferred option that is sacrificed when a choice is made.
What types of interactions are important in economics?
- output markets
- input markets
- institutions
Define efficiency
Efficiency is the property of society getting the most from its scarce resources.
Define equity
Equity is the property of distributing economic prosperity fairly. One way this can be achieve is through taxes to redistribute wealth.
Most societies value both equity and efficiency, however, there is often a trade-off. For example, funding health care required taxes, which reduce the rewards for work.
Define marginal change
Marginal change is a small incremental adjustment to a plan of action. Rational people ‘think at the margin’.
Define marginal benefit
Refers to the benefit created by a marginal change.
The marginal benefit depends of how many units a person already has (law of diminishing returns). This is why diamonds are more expensive than water - water is plentiful so the marginal benefit is low while diamonds are scare and, while not useful, the marginal benefit is large.
Define marginal cost
Refers to the cost created by a marginal change.
What does a market economy do?
Markets are usually a good way to organise economic activity. A market economy allocates resources through the decentralised decisions of firms and households. This means that resources are distributed to those most able and willing to pay.
Explain the invisible hand
Adam Smith in the Wealth of Nations introduced the idea of the Invisible Hand. The concept is that buyers and sellers freely interacting in the market creates an outcome where resources are allocated to those who value them most.
The invisible hand can only function if the government enforces rules than maintain the key institutions to a market economy. For example, the government provides police and maintains the judicial system to enforce property rights.
When is government intervention useful?
Government intervention can sometimes improve market outcomes
- Maintain institutions central to a market economy
- Essential for equality and to redistribute wealth
- In cases of market failure (situation where a market fails to allocate resources efficiently)
- In the presence of externalities (uncompensated impact of one’s actions on a bystander)
Define productivity
Productivity refers to the quantity of goods or services produced in an hour of a worker’s time
What happens when too much money is printed?
Inflation occurs when too much money is printed as the output of an economy does not change despite the increase in money supply. Therefore, prices rise as too much money is chasing too few goods.
