Week 1 Flashcards
Economics
The science which studies human behaviour as a relationship between ends and scare means which have alternative uses. Economics uses a scientific method of enquiry. Economics studies the choices people make in allocating limited resources
involves trade-offs (opportunity cost of the next best alternative). Economics focuses on the overall welfare of society recommends policies to government to improve welfare.
Economics has many branches and sub-fields
normative vs. positive economics
empirical vs. theoretical economics
micro vs. macroeconomics
Economic method
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Science
The systematic, methodical investigation of cause and effect relationships
Data
Numerical representation of facts
Model
Simplified, abstract representation of a real life phenomenon
Assumption
A statement of fact taken as given, i.e. not subjected to further scrutiny
Variable
A component attribute or feature of a model which may change in magnitude
Hypothesis
A proposed relationship between model variables offered for testing
Theory
A system of ideas intended to explain phenomena using general principles independent of the explanandum. A statement of relationships between model variables with appropriate conclusions and policy recommendations
FOPs
The factors of production are those resources used to produce: capital (man-made resources), land (natural resources) and labour (the human resource)
The subsistence economy
A subsistence economy is a non-monetary economy which relies on natural resources to provide for basic needs, through hunting, gathering, and subsistence agriculture.
The allocation of scarce resources in the subsistence economy involves the following basic economic problems:
Problem #1: What to produce?
Problem #2: How to produce?
PPF
The production possibilities frontier shows the various combinations of output that the economy can produce given the available factors of production
Opportunity cost
Opportunity cost is the next best alternative that must be given up in order to obtain something
The opportunity cost is calculated as the number of units of one good you must give up to make one more unit of the other good.
Formula = good x divided by the good you want to produce one more of
PPF Example
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Absolute advantage
The ability to produce something with fewer inputs (lower cost).
Comparative advantage
The ability to produce something with something at lower opportunity cost.
Division of labour example
To produce 1 extra unit of shelter, Friday gives up 2 units of food but Robinson only gives up 1/2 unit. Robinson has comparative advantage in making shelter and specialises in this, while Friday specialises in producing food only. There is now a division of labour and together they produce (8,8).
Gains from trade
Specialised individuals need to exchange to get what they need. The mutual benefit is called the gains from trade. Each could get (4,4).
The allocation of scarce resources in the exchange economy involves the additional economic problem:
Problem #3: How to exchange?
Exchange economy
Exchange economy is technical term used in microeconomics research to describe interaction between several agents. Each agent brings his/her own endowment, and they can exchange products among them based on a price system.
Economic system
The which a society allocates its resources i.e. organises production and exchange (i.e. solves economic problems 1-3)
The free market economy
an idealized system in which the prices for goods and services are determined by the open market and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.
The command economy
an economy in which production, investment, prices, and incomes are determined centrally by the government.
FOP OWNERSHIP FREE MARKET
PRIVATE
DECISION MAKING FREE MARKET
INDIVIDUALLY AUTONOMOUS
COORDINATION FREE MARKET
MARKET
FOP OWNERSHIP COMMAND
PUBLIC
DECISION MAKING COMMAND
CENTRALISED AND HIERARCHICAL
COORDINATION COMMAND
CENTRAL PLANNING
Economic systems example
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Mixed economy
an economic system combining private and state enterprise.
The circular flow of resources in a mixed economy
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