Week 1: Introduction & Core Concepts Flashcards
Economics is
- How societies react to scarcity and solve economic questions
- Study of markets (demand and supply)
- Allocation of scarce resources
- The distribution of incomes and wealth across competing groups and nations
The ultimate aim of economics is
human welfare.
Economic models are used
to describe and explain economic facts and observations, and to make predictions. They are abstractions to focus. (Example of Cyclone Yasi, destroying all banana crops and surging in price).
Macroeconomics
Economy Wide Phenomena:
- Economic growth
- Inflation
- Unemployment
- Exchange rates
- monetary and fiscal policy
Microeconomics
Individuals:
- Families/households
- Businesses
- Industries
- Government intervention
In economics, we measure costs using the concept of opportunity costs. Opportunity costs are
the benefits an individual, investor or business misses out on when choosing one alternative over another.
Scarcity means that
the real costs of any action are the resources that are used when that action is taken.
Sunk costs refers to
money that has already been spent and which cannot be recovered.
Mutual Gains From Trade:
- The baker doesn’t sell you bread out of the goodness and kindness of her heart
- The baker sells bread to you to make profit; the baker gains
- And, you gain from buying it from the baker
Gains From Trade:
• Individuals, firms, countries gain from voluntary exchange of goods and services
• Gains from interdependence (restrictions to trade are welfare reducing)
• Trade is not a zero-sum game: both parties can gain. Mutually beneficial to all
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• Raises production and consumption possibilities
Production Possibilities for the Economy:
- Maximum amount that can be produced by the available resources (including technology)
- Shows what is attainable and what is not
Shape of PPFs:
- Linear = Constant Opportunity Cost
* Curved = Increasing Opportunity Cost
