Economic Imperialism Flashcards
(12 cards)
Correlation v Causation
Correlation refers to two or more things occurring or changing at the same time, but does not conclude causation. Causation is when one variable directly impacts another, and that one event is causal of another.
They can be distinguished using data collected from a range of sources and experiments.
Positive v Normative Economics
Positive statements consider measurable and observable facts of the economy, and they are testable with data, exploring what occurs in the economy. Normative statements make value judgements, consider how the economy should allocate goods and services, and are not necessarily reflective of the real world.
Constraints and scarcity
Decision makers, including individuals, firms, and governments, have goals and face constraints.
People maximise utility and firms maximise profit
All choices have an opportunity cost, including both implicit and explicit costs.
Maximisation
Maximisation assumes the goals of any individual, firm, or business is to maximise utility or profit with limited resources.
Individuals determine how to spend their money and time to maximise utility.
Firms decide what to produce, how to produce, how much to produce, and how to distribute, to maximise profits.
Governments decide how much tax, what to tax, and how to spend tax to maximise economic objectives.
Opportunity Cost
The opportunity cost of a decision is the benefit of the resources used in the next best alternative, the option forgone by the decision made. This includes explicit costs, such as the price, and the implicit cost, all other costs.
Markets
Buyers and sellers interact to determine market price and supply. This includes goods and services traded, location, consumers, and producers, and follows the demand and supply model.
Incentives
Incentives are payments or concessions that aim to motivate certain behaviors. They can incentivize efficiency through piece rates, incentivise purchasing through lower prices and lower search costs. Incentives can disincentivise certain behaviours through taxation, fines, or threats of retaliation.
As decision makers are national and calculating, they will make the best decision given scarcity.
Economics studies the choices of economic agents
Choices are driven by scarcity
Choices that are made reflect the constraints that an
economic agent faces
The relevant cost from an economics perspective is
opportunity cost
Decision makers respond and their behaviour is shaped by incentives
Supply and Demand
The demand curve shows the relationship between quantity demanded and price, holding all else equal showing how changes in price affect quantity demanded. Demand can shift with changes to demand, such as new research, income, complements and substitutes, and tastes.
The supply curve shows the relationship between price and quantity supplied, holding all else equal. Supply can shift with increased technology or decreased availability of inputs, etc.
Equilibrium
Market equilibrium is the point where supply and demand intersect and quantity demanded equals quantity supplied, with no excess supply or demand. THis is also known as market clearing price. It is a static prediction. Changes in demand or supply are comparative static analysis.
Taxes, subsidies, bans, and nudges
Taxes increase the price of a good or service and disincentivise them
Subsidies decrease the price of a good or service and incentive them
Regulation limits bad behaviour, directly intervening in markets
Nudges
Provide information and raise awareness of consequences
Guilt; psychological costs to harm
Social norms; physiological cost to conformity
Changing the default condition
Unintended consequences
Unexpected or unwanted outcomes of a policy change or decision. Policy needs to be well designed to avoid unintended consequences.
THis includes
Substitution (overestimation of effects) as positive outcomes in one area take away from positive outcomes in another
Complementaries and spillover (underestimation)
Other effects, such as virtue signalling and substitution
Lazear. (2000). Economic Imperialism. Quarterly Journal of Economics, 115(1):99-146
Three key distinguishing facts
Construct of rational individuals who engage in maximising behaviour
The importance of equilibrium in economic models
Important principals across contexts
Predictions
But leave out context
Efficiency
