Week 1 Flashcards
(25 cards)
Why do incentives matter?
Incentives are rewards and penalties that motivate behaviour.
How do Good Institutions Align Self-interest with the social interest?
Those who pursue their own interests end up promoting the social interest as if led by an ‘invisible hand’.
Define a ‘trade-off’
A trade-off can be described as a balance that is achieved between two desirable but incompatible features; a compromise.
Define ‘opportunity cost’
The opportunity cost of a choice is the value of the opportunities that are lost.
Explain ‘Thinking on the Margin’
Thinking on the margin is just making choices by thinking in terms of marginal benefits and marginal costs; the benefits and costs of a little bit more.
Define marginal costs
The additional costs from producing a little bit more.
Define marginal revenue
The additional revenue from producing a little bit more
Define marginal tax rates
The tax rate on an additional dollar of income
What’s the real power of trade?
The real power of trade is the power to increase production through specialization.
Explain economies of scale
When the costs are reduced because of the mass production of goods.
Explain the theory of comparative advantage
The theory of comparative advantage says that when people or nations specialize in goods in which they have low opportunity costs, they can trade to mutually advance.
Why do Institutions matter?
Institutions such as property rights, political stability, and competitive markets create an environment where individuals and businesses are incentivised to invest in capital and adopt efficient methods.
Institutions like honest government, a dependable legal system, and open markets ensure that innovators can benefit from their ideas motivating further innovation.
Define Inflation
Increase in the general level of prices
Why is inflation one of the most common problems in macroeconomics?
Inflation makes people feel poorer, and rising and volatile prices make it harder for people to figure out the real value of goods, services and investments.
When does inflation occur?
Inflation comes about when there is a sustained increase in the supply of money.
Why is central banking a hard job?
There’s a lag - often of many months - between when the Fed makes a decision and when the effects of that decision on the economy are known.
In the meantime, prices have changed again.
Predicting those movements cannot be done perfectly, so the feds decisions aren’t always the right ones.
Name the 3 main benefits of trade:
- Trade makes people better off when preferences differ
- Trade increases productivity through specialisation and the divison of knowledge
- Trade increases productivity through comparative advantage.
Why does trade make people better off when preferences differ?
Trade created value by moving goods from people who value them less to people who value them more.
Explain the term ‘specialization’:
People will specialize in the production of a single good only when they are confident that they will be able to trade that good for many other goods that they want and need.
Why does specialization greatly increase productivity?
Without specialization and trade, we would each have to produce our food as well as other goods, and the result would be mass starvation and the collapse of civilization.
Explain an ‘absolute advantage’:
The ability to produce the same good using fewer inputs than another producer.
How does a production possibilities frontier work?
A production possibilities frontier (PPF) shows all the combinations of goods that a country can produce given its productivity and supply of inputs.
A PPF illustrates trade-offs.
If a country wants to produce more goods of some kind, it must produce fewer goods of another kind: It moves along its PPF.
When does a country have a comparative advantage?
A country has a comparative advantage in producing goods for which it has the lowest opportunity costs.
What’s Adam Smith’s viewpoint on trade?
People will never attempt to produce something at home that will cost them more than when they just buy it.
