Topic 1 Flashcards
(25 cards)
What are the factors of production?
Natural, Human, Capital
Natural includes resources like water and oil; Human refers to labor; Capital includes machines and factories.
What is the main economic problem in microeconomics?
How to allocate finite resources amongst infinite needs and wants most efficiently.
What do trade-offs in economics refer to?
Choices made in response to incentives.
How does exchanging with others affect choices?
It leads to a larger option of choices.
Define opportunity cost.
The cost of the next best alternative foregone when a choice is made.
What are the main objectives of microeconomics?
Efficiency (objective) and equity/fairness (subjective).
What is the formula for profit maximization?
π = TR - TC = unit price x quantity – total costs
TR = Total Revenue, TC = Total Cost
What role do firms play in a competitive market?
Firms are price takers.
What determines an individual’s maximum willingness to pay?
The individual’s maximum satisfaction (utility).
What is the term for the desired amount of a product?
Quantity demanded.
What is the income effect?
People feel poorer and cannot buy as much with fixed income.
What is the substitution effect?
People change their consumption, buying similar but rival products.
What does ‘Ceteris Paribus’ mean?
All other things remain equal.
What can cause shifts in demand?
- More affluent society
- Normal/Inferior goods
- Substitutes
- Complements
- Tastes
- Number of buyers
- Expectations of the future
What do individuals demand and supply in an economic context?
Individuals demand goods, supply labour
This highlights the roles of individuals in the economy.
What do firms supply and demand in the economy?
Firms supply goods, demand labour
This emphasizes the roles of firms in the economy.
What is the difference between theoretical economics and empirical economics?
Theoretical economics makes predictions; empirical economics tests predictions
Theoretical economics focuses on models, while empirical economics relies on data.
What does a good economic theory do?
A good theory explains the evidence and makes clear predictions
Good theories simplify complex realities to highlight important factors.
What are positive statements in economics?
Positive statements describe causes and effects (how world is)
They are objective and based on observable phenomena.
What are normative statements in economics?
Normative statements embody value judgements (how world ought to be)
They reflect opinions and beliefs about what should happen.
How is opportunity cost measured?
Opportunity cost is measured via cost of the next best good
This concept emphasizes the trade-offs in decision-making.
What should be compared to make economic decisions?
Compare Marginal Benefits with Marginal Costs
This comparison helps determine the most efficient allocation of resources.
What does a point left of the equilibrium indicate?
A point left of the equilibrium has a higher MB
This suggests that consumers are not maximizing their benefits.
What does a point right of the equilibrium indicate?
A point right of the equilibrium has a higher MC
This means that costs increase without a corresponding increase in benefits.
