ECON Term 1 Flashcards
Economics
The social science that studies the choices made by economic players to cope with scarcity.
Difference between Microeconomics & Macroeconomics
Microeconomics: the study of choices that producers and consumers make, how they interact in markets and the influence of governments
Macroeconomics: the study of the performance and interaction of the national and global economies
Scarcity
The shortage and inability to satisfy all our wants, continuously created by the fact that we want more than we can get.
Economic Players
Consumers, producers, government and society.
Two Big Questions
- How do choices determine what, how, for whom goods & services get produced?
- When do choices made in the pursuit of self-interest also promote social interest?
First Big Question + Examples
- How do choices determine what, how, for whom goods & services get produced?
-What: depending on time, technology, resources of region
- How: land; gifts of nature to produce goods & services, labor; work time & effort that people devote to produce goods & services (Quality=Human Capital), capital: tools, instruments, machines buildings & other constructions businesses use to produce goods & services (Financial Capital=money used to buy capital), entrepreneurship: human resource that organizes land, labor & capital
- Who: depending on incomes that people earn: land earns rent, labor earns wages, capital earns interest through investment, entrepreneurship earns profit
Second Big Question + Examples
When do choices made in the pursuit of self-interest also promote social interest?
- Necessity: Do we produce the right things in the right quantity?
- Efficiency? Do we use our factors of production in the best way?
- Equity? Do the goods and services go to those who benefit more from them?
- Self-Interest: choices that you think are best for you = you are most economically benefited
- Social-Interest: choices that are best for society as a whole = resources are used efficiently and goods & services are distributed fairly
Tradeoff
Every choice has a tradeoff; get something=lose something
Opportunity Cost & Marginal Cost
Opportunity Cost: the value of the option not taken to get something; the highest-valued alternative given up to get something. (note: the opportunity cost of one good is the inverse in terms of the other)
Marginal Cost: opportunity cost of producing one more unit of it, represented by boxes
What influences choice?
Choices, what/how/for whom goods and services get produced, change over time, place and quality of our economic lives.
Draw + Explain PPF
- Production Possibilities Frontier (PPF) is the boundary between attainable (inside) and unattainable production (outside) of a combination of goods and services
- Production Efficiency (on PPF): if we cannot produce more of one good without producing less of some other good
- Scarcity illustrated by downward slope
- Production Inefficiency (inside PPF): if we can produce more of one good without producing less of the other good due to misallocated or unemployed resources
- TradeOff: in order to produce more of one good, the production of the other will decrease due to limited factors of production.
Illustrated by the downward trend of PPF, for every pizza made cola production decreases - Opportunity Cost (slope): the forgone goods used to produce more of the other good (note: the opportunity cost of one good is the inverse in terms of the other)
- Marginal Cost: opportunity cost of producing one more unit of it, represented by boxes (rise time run)
- As production increases, opportunity cost increases because skill level decreases and the transfer of factors of production increase
(PPF bows outward– is concave, largening boxes, second derivative is a linear positive trend). Resources are not equally productive in all activities, more workers are removed from the production of their original good and are required in order to achieve the same initial high level of skill.
Draw + Explain Marginal Cost & Benefit Graph
GOAL: how to use resources efficiently, Allocative Efficiency (point of intersection): cannot produce more of any one good without giving up some other good that provides greater benefit.
- Shows most efficient quantity of goods produced to satisfy both producer and consumer + increase/decrease production of good
- Marginal Benefit: benefit/satisfaction received from consuming one more unit of a good/ willingness to pay.
- Principle of Decreasing Marginal Benefit (downward slope): as the units of goods increases the consumer satisfaction/their willingness to pay decreases
- Marginal Cost: opportunity cost of producing one more unit of it, represented by boxes (rise time run)
- Principle of Increasing Marginal Cost: as production increases, opportunity cost increases because skill level decreases & more workers are transferred to reach same initial high level of skill
- Describing Points: Before/After that point, benefit falls short of benefit you could get from pizza/cola, as well as marginal benefit exceeds/falls short of marginal cost, so we get more value from our resources by increasing/decreasing production of pizza
Draw + Explain Economic Coordination Circle
The first economic system was subsistence, producing for oneself, until people realised they excelled at different skills and started to specialise transitioning to commercial based production with these 4 core components
- Firm: economic unit that hires and organises factors of production to produce and sell goods & services
- Market: social arrangement that enables buyers and sellers to get information and do business with each other
- Property Rights: social arrangements that govern ownership, use, and disposal of resources, goods or services, incentive to specialise and produce goods
- Money: any commodity or token that is generally acceptable as means of efficient payment, durable, portable, interchangeable, easily divisible and gives a universally accepted unit value to goods
- Factors of production and goods & services flow in one direction
- Money flows in opposite direction
- Markets incentivize/inform individual decisions through price adjustments
Why Trade + Advantages ?
- All parties benefit and encourages specialisation for faster rate of production so society can consume more
- Absolute Advantage: a person that is more productive than others
- Comparative Advantage: person that can perform activity at a lower opportunity cost than anyone else
Joe can produce 6 smoothies (sm) or 30 salads (sal) in 60 min. Liz can produce 30 smoothies or 30 salads.
Joe spends 50 min sm and 10 min sal.
Liz spends 30 min sm and 30 min sal
Who should specialize in what + Trading Price + Gains in Trade
Liz specializes in smoothies.
Joe specializes in salads.
Trading Price: Price of 1 smoothie = 1-5 salads
Gains From Trade:
Total Gain = 10 Salads, 10 Smoothies
Individual Gains:
- Liz: 5 sm, 5 sal
- Joe: 5 sm, 5 sal
