Exam 1.1 Flashcards
(47 cards)
Why do incentives matter?
People respond to incentives in predictable ways
self-interest does not equal greed
What makes a good institution?
When they align self-interest with social interest
walmart making prices cheap to bring in customers
what is an opportunity cost
the true cost of a decision
e.g. what is the true cost of a college education
what’s the difference between positive and normative statements
normative - expresses a value judgement about whether or a situation is subjectively desirable or not
(normally involves the word “should”, or at least ways to dance around it)
positive - a statement that is in principle testable or than can be disproven. it does not express a value judgement
(almost scientific-like statement)
value judgement - judgement based on one’s values
what is the difference between positive and normative economics
positive - describing, explaining or predicting economic events
normative - recommendations and arguments about what public policy should and should not be
What does autarky mean
closed economy - no international trade
what is the difference between absolute and comparative advantage
Absolute advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time.
Comparative advantage considers the opportunity cost when assessing the viability of a product, accounting for alternative products
define opportunity cost
the loss of potential gain from other alternatives when one alternative is chosen.
how can countries earn money off their comparative advantages
countries specialise in the production and export of goods in which they have a comparative advantage, while they import goods in which they do not.
When comparing the production of two goods in two countries, when one nation has the CA in one good, then the other MUST have the CA in the other good
define arbitrage
buy low sell high
why can’t we buy low and sell high forever
because the prices will change as a result and then the low and high prices essentially become more equal
What did Adam Smith say about division of labour
The division of labour is limited by the extent of the market
define quantity demanded
amount of a good that consumers are willing to buy at any given price
(reflects preferences of all consumers in the market)
who is Alfred Marshall
wrote principles of economics
thought of the S/D graph
what is consumer surplus
opposite of producer surplus
for the individual: the difference between willingness to pay for a given unit of the good (point on the demand curve) and what they actually pay
for the market: the sum of CS for all individuals who purchase the good at the market price
(e.g. if you’re willing to pay $5 for a slice of pizza but they are charging $2, then the CS is $3)
How do you calculate total sales revenue from a SD graph
price x quantity
the triangle above this point is the market consumer surplus
How do you calculate the consumer surplus in a market
calculate the area of the triangle above the total sales revenue
half base times height
what’s the difference between change in demand and change in quantity demanded
change in quantity demanded - change in own price
change in demand - change in anything else
difference between normal good and inferior good
the adjective describes the product in itself
e.g. steak v ramen
difference between substitute and compliment goods
substitute: products whose demand curve goes up when another goes down, normally because of price changes
e. g. pura and paul’s milk
compliment: products whose markets move together because they are often paired together
e. g. peanut butter and jelly
what are the five key factors that can influence a change in the demand curve
income population prices of substitute or compliment goods expectations tastes
define quantity supplied
amount of a good that sellers will produce and bring to market at any given price
higher price - greater quantity supplied
(reflects aggregate behaviour of all producers in the market)
what is producer surplus
opposite of consumer surplus (the triangle below the meeting point of the SD graph)
what are some key factors that influence the supply curve’s movements
tech innovation
taxes and subsidies
expectations
entry or exit of producers
