Introduction Flashcards
What is a rational individual?
A rational individual is someone who takes full
account of all information available to make the best choice for his own interest.
Rationality in making
choices implies that a given activity should be undertaken only if its benefits are
larger than its costs.
Scarcity
A resource is scarce if the demand of that resource at a zero price would exceed
the available supply.
How do we define benefit of something , as economists
Economists define the benefits of a given
action as the willingness to pay for that action. The willingness to pay for
something is the maximum amount of money we are willing to pay for it.
opportunity cost?
the opportunity cost of an activity is the value (net benefit) of the best alternative you must
sacrifice.
(need to take this into account along with explicit cost)
What is a reason that could explain why people may not be rational?
The assumption of rationality implies that people take full account of all
information available to make their decisions
fixed cost of either acquiring information or of taking the
time to make a decision. This leads to bounded rationality. It is no longer
optimal to examine every possible decision in great detail – you would incur
too many fixed cost
So instead you make decisions based on a rule of thumb.
Law of diminishing marginal returns
The output you receive from an additional unit of a input (for example computers) (when other inputs e.g workers remain fixed) becomes smaller over time.
(this example here is marginal productivity of capital)
What is production efficiency?
The only possible way to increase production of good A, is by reducing production of good B
comparative advantage
An individual has a comparative advantage compared to another in the
production of a good if she has a lower opportunity cost than them in producing it (pg 65 of begg)
Absolute advantage
|f this person produces the good in fewer hours than the other person
command economy
Where there is abscence of markets, the government decide how much of each good will be produced (opposite of a free market)
free market economy
Markets in which governments do not intervene are called free markets.
Mixed Economy
In between lies the mixed
economy, where market forces play a large role but the government intervenes extensively (e.g. redistributing income with taxes and providing public services like police and school.
positive vs normative economics
Positive economics studies objective explanations of how the
economy works. e.g. The elderly
have very high medical expenses,
Normative economics offers recommendations based on personal value
judgements. the government should subsidize old people’s health
bills. ’
Aggregate price level
aggregate price level measures the average price of goods and services
labour force
people of working age who have a job or want one. Some of the
rich, the sick and the lazy are of working age but not looking for work. They are not
in the labour force and not counted within the unemployment rate.
