Economic methodology, scarcity, choice and gains from trade Flashcards Preview

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Flashcards in Economic methodology, scarcity, choice and gains from trade Deck (41)
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1
Q

what is scarcity?

A

society has limited resources and cannot produce all the goods and services people want (unlimited wants)

2
Q

describe the efficiency vs equity trade-off

A

Efficiency: Society gets the most that it can from its scarce resources.

Equity: The benefits of those resources are distributed fairly among the members of society.

3
Q

Decisions require

A

comparing the costs and benefits of alternatives

4
Q

what is the opportunity cost?

A

value of the next best alternative foregone

5
Q

rational decision making consists of

A

weighing marginal benefits and costs

make decisions where marginal benefits > marginal costs

6
Q

how do marginal changes create an incentive for people to respond?

A

Marginal changes create an incentive for people to respond, as people choose an alternative over another on the basis that the marginal benefits outweigh its marginal costs

These incentives can cause people to respond in a predictable way whereby they react to changes in expected MBs and MCs

7
Q

Why is trade beneficial?

A

allows specialisation

increases competition, which is passed onto consumers in the form of better services and lower prices

8
Q

what is a market economy/ free market economy?

A

economy whereby resources are allocated through the interactions of firms and households in the market

i. e. firms decide who to hire, and what to produce
i. e. households determine what to purchase and who to work for

Individuals own resources and there is private property

9
Q

describe adam smith’s “invisible hand” metaphor in the 1700

A

market economy allows efficient allocation of resources via the price mechanism that operates to guide decisions of firms and households

10
Q

Why may the government intervene in the market?

A

To address market failure (when markets fail to take into externalities i.e. social costs and benefits from their actions)

11
Q

what is the ultimate source of improving living standards?

A

productivity

12
Q

The production possibilities frontier (PPF) is a graph that

A

shows the maximum combinations of two goods that are possible, given the economy’s resources and level of technology

13
Q

what concepts does the production possibility frontier illustrate?

A
14
Q

what does the circular flow diagram show?

A

shows how dollars flow through markets among households and firms in an economy

15
Q

distinguish between a curved and straight production possibility curve?

A

an increase in opportunity cost when curved and resources are different

constant opportunity cost and resources are similar

16
Q

what are 3 factors that may shift the production possibility curve?

A
  1. quantity and quality (better education –> better human capital) of resources
  2. technology (Improve in capital which is a factor of production)
  3. trade
17
Q

what is a command economy?

A

government owns resources and there is no command property

18
Q

what is comparative advantage?

A

where a person or country can produce one good more efficiently relative to another good (lower opportunity cost compared to another person or country)

19
Q

calculate the comparative advantage of both countries

A

US has a comparative advantage in producing cars

whereas canada has a comparative advantage in producing computers

20
Q

how does the production possibility frontier show scarcity?

A

cannot product output beyond the curve, it is impossible

21
Q

how does the production possibility frontier show opportunity cost?

A

shown by the specific number of Product A that has to be forgone to produce Product B

22
Q

how does the production possibility frontier show efficiency?

A

when the point is inside the curve, as resources are underutilised

if the point is on the PPC curve, efficient as then you are employing all factors of production

23
Q

is a point outside the production possibility frontier possible?

A

no

24
Q

describe how trade can shift the production possibility frontier

A

when a country trades, they are able to obtain products with lower opportunity cost (as the other country may have a comparative advantage in producing that particular product), than if they were to produce the product themselves. Thus, allowing the country to consume beyond their production possibilities

25
Q

what are capital goods?

A

they produce consumer goods (ready for direct consumption)

26
Q

why is high unemployment a point inside the curve?

A

as labour is underutilised, thus labour is not used efficiently

27
Q

find the comparative advantange

A
28
Q

when conducting marginal analysis, we look at the

A

additional benefit and additional cost

29
Q

what are product markets?

A

businesses produce goods and services that are sold at product markets

Product markets sell goods and services to individuals

individuals purchase goods and services from the product market

Revenue from product markets to go businesses

30
Q

who owns resources in free market economy, and what does this include?

A

individuals and businesses

these include, land, labour, capital and entrepreneurship

31
Q

describe how government intereacts with the product and factor markets

A

government purchase goods and services from the product market through government spending

Product market provides goods and services to the government

factor market provides resources to the government

government returns government spending to factor market eg. in form of income

32
Q

describe marginal analysis

A

individuals aim to maximise their own self benefit by analysing the marginal benefit and cost of their actions

33
Q

incentives can be

A

positive or negative

positive encourages production and consumption e.g. subsidy

negatives discourages production and consumption eg. tax

34
Q

heart of economics considers

A
  1. resources are finite
  2. wants are unlimited (wants more or better)
  3. choices must be made
35
Q

what is absolute advantage?

A

where a country or person is more efficient or productive at producing a good compared to another person or country

36
Q

what is a voluntary exchange?

A

An agreement between two free individuals and/or organizations to buy, sell or trade a good or service. A voluntary exchange contrasts with an exchange that is mandated, for example, by a government. Voluntaryexchanges are the basis of a free market economy.

37
Q

voluntary exchange is

A

mutually advantageous

no change in total qty of goods available, rather a reallocation of goods

38
Q

describe gains in trade

A

person or country should produce what they have a comparative advantage in, and trade what they don’t have comparative advantage in producing (don’t have low opportunity cost)

because the trade reallocates goods between two individual or the country in a way that they both prefer, making them both better off

39
Q

what is positive analysis?

A

descriptive statements of cause and effect

what happens in the economy and why, without making recommendations about economic policy.

e.g. low wages of workers will lead to an increase in demand for those workers

40
Q

what is normative analysis?

A

statements that embody judgements

economic analysis that makes recommendations about economic policy.

e.g. the government should lower wages for the poor

41
Q

why may the ppf be curved instead of linear?

A

Due to the law of increasing opportunity costs. The resources used to produce one good, may not be suitable to produce the other good.

Basically, what this means is that as an economy devotes more of its resources to one kind of product, it becomes less efficient.

if the economy is producing close to the maximum amount of butter produced, it’s already employed all of the resources that are better at producing butter than producing guns. In order to produce more butter, then, the economy has to shift some resources that are better at making guns to making butter. This results in a high opportunity cost of butter.