What is economics? Flashcards
Why does economics exist?
Because of scarcity
What is scarcity?
Scarcity means limited resources are used to satisfy our unlimited wants and needs. There is an imbalance.
Give an example of a resource
Time
What does scarcity mean we must do?
Scarcity means we must make a choice on what wants and needs to satisfy.
What is opportunity cost?
The value of the second best alternative forgone. It is the goods and services you gave up to do/buy the best thing.
How can we claim we always choose the best? What does this mean?
We are rational. Rational means a person who always chooses the best option.
How do we measure opportunity cost?
Not with money, but with goods and services.
What are you actually asking when you ask the price of something?
What is the opportunity cost?
What is external cost?
When a person/place/thing is doing something and someone else suffers the consequences.
What are the four types of resources?
Land, Labour, Capital and Entrepreneurship.
What is land?
Land = R (rent). Land is a resource used in the production of goods and services to satisfy wants and needs.
What resources are included in ‘land’?
The seas, what’s on the land and what’s in the land.
What is labour?
Labour = W (wages). Labour is the time and effort we use for production of goods and services to satisfy wants and needs.
What is capital?
Capital = i (interest). Capital is resources that were produces previously. There is physical capital and human capital.
Examples of physical capital?
Machinery, factories, bridges for production of goods and services to satisfy wants and needs.
Examples of human capital?
Knowledge and intellect.
What are entrepreneurs as resources?
They are the risk takers. They are willing to take the risk of managing land, labour and capital to make profit.
What is profit?
profit is the total revenue minus the total cost of land, labour and capital.
What are the two types of goods and services?
Capital goods and consumer goods.
What are capital goods?
Goods to invest for the future.
What are consumer goods?
Goods to make use of today.
What is effected by the two types of goods and services that are chosen to be produced?
Sustainability and economic growth.
All economic choices come down to what five big questions?
What? How? Who? Where? When?
The ‘what’ questions asks what?
What goods and services are produced and in what quantities. E.g. Do we produce houses or camping vehicles? How many?
The ‘how’ questions asks what?
How are goods and services produced? E.g. Do people or machines produce the goods?
The ‘who’ questions asks what?
Who consumes the goods and services that are produced? For whom?
The ‘where’ questions asks what?
Literally just where are the goods and services produced? Pretty self explanatory but e.g. do we produce the goods in Mexico or in the US?
The ‘when’ questions asks what?
Just when are the goods and services produced. Production varies over time: seasonal factors, business cycles.
What are the five economic systems?
- Traditional
- Capitalist or Voluntary Exchange
- Social
- Mix
- Transitional
What is capitalism?
Also known as a ‘free market system’. Capitalism must have a coordinator, the ‘invisible hand’. This coordinator is a price mechanism or price adjustment.
Who thought up capitalism?
Adam Smith
What was Adam Smith’s approach to capitalism?
He thought the market should be left alone and it would be efficient.
What does efficient mean?
Everyone is happy. Another way to define it is that markets send resources to the place where they are valued most highly. The ‘invisible hand’ tells you what people value most highly.
What does happiness mean in capitalism?
A seller can find a buyer and a buyer can find a seller
Why did Smith think that capitalism would be successful?
Because of self interest - if it’s good for you it’s good for the economy.
When do monopolies exist?
When there are a lack of substitutes.
What lead to the great depression?
According to Keyne there was no spending. Consumer confidence was down, leading to a shift to socialism.
What is socialism?
Socialism means the government owns property and they answer the five questions. The government is the ‘visible hand’.
Another word for socialism?
Centrally planned market
Why is socialism not successful?
There is no incentive. We like to own and be promoted.
In which countries is there pure capitalism/socialism?
None. Everywhere is mixed but some countries lean more toward different systems.
What are traditional systems?
Ones that are based on traditions rather than economic analysis. You are likely to take up the job your parents had.
How do the five questions get answered in capitalism?
Market research is done by the buyers and sellers. The costs and benefits, you are willing to undertake the activity only if the benefits outweigh the costs.
How do you see if the benefits outweigh the costs? What is this called?
You don’t look at all or nothing. You take small steps. This is called marginal. So you see if the marginal benefit outweighs the marginal cost. This is called marginal analysis.
What does marginal mean?
It means extra or additional.
What is marginal benefit?
It is the additional benefit you will receive when you undertake one extra unit of the activity.
What is marginal cost?
It is the additional unit you have to pay when you undertake one extra unit of the activity.
When do we stop the marginal analysis?
When the last unit done of the activity gives me exactly equal to the cost.
What do you do if the opportunity cost of an activity increases?
You look for a substitute.
What do you do if the marginal cost of an activity changes?
You change your action.
How many ideas define the economic way of thinking?
Eight
What is the idea that involves every choice?
Every choice involves a cost. This relates to opportunity cost.
What is idea that involves how we make a choice?
We make choices in small steps. It is not all or nothing. This relates to marginal analysis.
What is idea that involves voluntary exchange?
Voluntary exchange makes both buyers and sellers better off and markets are generally an efficient way to organise exchange.
What is idea the efficiency of markets?
The market does not always work efficiently and sometimes government intervention is necessary to make the use of resources efficient.
What is it called when government intervention is needed?
Market failure.
Four market failure examples?
Monopolies. Externalities. Income redistribution. Publiv goods - free rider problems.
What is idea involving expenditure?
For the economy as a whole, expenditure equals the value of production.
Where does expenditure go?
Land, as rent. Labour as wages. Capital as interest and entrepreneurship as profit.
How do you come up with the price of something?
You figure out the value of production. To do this you add up the cost of rent, wages, interest and profit.
What is idea involving standard of living?
Living Standards improve when production per person increases.
What is the GDP per capita?
The GDP divided by the population
What happens when GDP increases?
Economic growth
How can you measure GDP?
The sum of price times by quantity
How can GDP increase?
GDP can increase if the price or quantity increases.
Is it good when the price increases? As this will mean the GDP increases.
No! You can’t just increase the price, this is inflation. You want your GDP to increase because productivity increases. So you want it to increase by the quantity.
What is real GDP?
The sum of the fixed price times by the quantity.
Why do we have ‘real’ GDP?
Because when the real GDP increases it means that it is due to an increase in quantity. This increase in output per person will enable more people to own goods and services.
What is idea involving inflation?
Inflation occurs when the quantity of money increases faster than production.
What is real income?
The amount of goods and services you can you can buy. Otherwise known as the purchasing power of income, or y/p (where y=income).
What do you always do when something is ‘real’?
You divide by the price
What is the main reason behind inflation?
Expectation.
Why does expectation cause inflation?
Because when inflation is expected, labourers ask for raises. The employers agree as they raise their prices and thus inflation occurs.
Who suffers from inflation?
Anyone who lives on a fixed income?
What is a solution for inflation? What is this?
Indexing. This means wages increase proportionately to inflation.
Is deflation always bad?
No. Deflation can occur because there is low demand, in which case it is bad, but can also occur because of advancements in tecnology.
What country used expectation to their advantage and how?
Canada as they put out rumours of low inflation rates to lower inflation.
What is the idea related to unemployment?
Unemployment can result from market failure but ome unemployment is productive.
What is unemployment?
When you are actively searching for a job
Why is this the definition of unemployment?
So the government knows that those receiving unemployment benefits are trying to better themselves and become employed.
Why is unemployment bad?
Because it is a waste of scarce resources. It means the people have a lower standard of living and the country has a lower GDP.
What is underemployment?
When someone accepts a job unrelated to their skills, or they are very overqualified.
How can unemployment be productive?
Structural employment means that someone is taking the time off to better themselves, investing in themselves. This happens when the structure of the economy is changing.
What is full employment?
Full employment means none accelerating inflation rate of unemployment (NAIRU). It is the natural rate of unemployment. IT DOES NOT MEAN 0 UNEMPLOYMENT. People are always going to be looking for a job.
Difference between micro and macro economics?
Micro is about individuals the interactions between these individuals and businesses. It relates to supply and demand and helps us to understand macro economics. It is the smaller picture where as macro is the bigger picture, nationwide. To do with average price.
What are the two main sections economics is divided into?
Positive and normative
What is positive economics?
‘What is’
It is factual and can be proved
What is normative economics?
‘Ought to be’
Judgement and opinion, cannot be proved
What are the two headers under which economists summarize their work?
Economic science and economic policy
What is economic science?
The attempt to understand the economic world and make predictions.
What is economic policy?
It tries to improve the economy and offer solutions
What is the major task of economics?
To understand how the world works.
How can economists understand how the world works?
- Observation and measurement
- Model building
- Testing models
What is the law of demand?
The negative relationship between price and demand. As price increases, demand decreases.
What is observation and measurement?
The activity of collecting data about economic activity/
What is an economic model?
A description of some aspects of the economic world that include only the features that are needed for the purpose at hand. It is based on assumptions about what is essential and what can be ignored and the implications of assumptions.
How do we develop a theory?
By comparing the model’s predictions with the facts, we are able to test the model and thus develop a theory.
What is an economic theory?
A generalization that summarises what we think we understand about the economic choices that people and firms make. It is a bridge between an economic model and the whole economy.
What is ceteris paribus and why is it put in place? What does it mean?
Progress in economics works slowly and economists must be careful how they proceed. It means everything else remaining the same.
What are fallacies?
Errors of reasoning that lead to a wrong conclusion.
What are two common fallacies that economists try to avoid?
Fallacy of composition and and the false cause fallacy
What is the fallacy of composition? When does this arise?
The statement that what is true of the parts is true of the whole, or what is true of the whole is true of the parts. It mainly arises in macro economics.
What is the false cause fallacy? Other name?
Also called the post hoc fallacy. It is the error of reasoning that a first event causes a second event because the first occurred before the second.
What two distinct roles do economists play in the formation of economic policy?
- They try to predict the consequences of alternative policies.
- They evaluate the alternative policies from better to worse.
Economic policy objectives:
- Economic efficiency
- Equity
- Economic growth
- Economic stability
What are the three types of economic efficiency?
Efficient production, efficient consumption and efficient exchange.
What is efficient production?
The least cost, without wasting resources
How is efficient consumption achieved?
it is achieved when you buy the goods and services that make you as well off as possible.
How is efficient exchange achieved?
When everyone specialises to earn a living by doing the job that gives them maximum possible economic benefit. This is called specialisation.
What is equity?
Economic justice of fairness. A trade-off existing between efficiency and fairness.
What happens when all of economic efficiency is achieved?
We have Paretto efficiency. This means we cannot make someone better off without making someone else worse off.
What is economic growth?
The increase in income and production per person.
When does economic growth happen?
It results from ongoing advances in tecnology and education and the accumulation of more capital/
What is economic stability?
The absence of wide fluctuation in the economic growth rate, the level of employment and average prices.
What is a market?
An arrangement that enables buyers and sellers to get information to do business with each other.
How do you measure inflation?
CPI - consumer prive index. This uses a basket of goods and measures the price.
What are economic agents?
Governments firms households
What economic agents does the economy consist of?
Decision makers - households, firms, governments
Markets
What are the two types of markets?
Goods markets - for goods and services
Factor markets - for labour, land, capital, entrepreneurial activity.
What do economic agents compete for?
The allocation of scarce resources.
for the economy as a whole GDP =?
Expenditure/income/value of production
What is inflation?
General increase in price level across all products
