Flashcards in Week 1 Deck (19):
Economics is concerned with the choices that individuals, businesses, governments and societies make as they cope with scarcity and the incentives that influence these choices.
Define an incentive
A reward that encourages an action or penalty that discourages one.
What are 4 fundamental questions in economics
1) What goods will be produced?
2) How will they be produced?
3) Who will receive them?
4) How involved should the government be in the market?
Describe the Fallacy of Composition and provide an example
The fallacy of composition is that the sum of the parts does not necessarily equal the whole.
The paradox of thrift is one example. While an individual can save money by spending less, society as a whole cannot as it everyone saves a portion of their income, there is less demand and consumption which leads to lower production, lower income and higher unemployment.
What caused macroeconomics to gain attention?
The Great Depression caused economics to bifurcate as standard 'classical' economic theory could not fully explain the dynamics at the economy wide level.
What is the difference between positive and normative statements?
Positive statements are of what is and can be proved/disproved and answered objectively.
Normative statements are subjective statements relating to what ought to be.
What is the purpose of modelling?
Modelling helps people to understand reality by simplifying the world into key logical components.
Define a correlation and why it is not causation
A correlation is a statistical relationship between data sets (opposite direction = - correlation). Correlations may be spurious - highly correlated simply by chance
Three steps to testing for causation
1) Test if correlations are consistent with predictions and reality
2) Conduct a controlled comparison (two groups differentiated by one factor or examining date and analysis)
3) Cause must be shown to proceed effect and directly linked empirically.
4 Key assumptions in macroeconomics
1) People are rational, maximising and self interested
2) Resources are scare
3) People respond to incentives
4) People compete with each other to get the most for themselves.
Define endogenous variables
Variables that are explained within the model.
Define exogenous variables
Variables that are explained outside the model but impact it
Define functional relations
rules that characterise the relationship between endogenous variables.
Describe the Production Model
The production model considers a world with a single representative firm. The firm takes inputs and uses technology to transform them into outputs.
Inputs include labour, land and capital.
Define physical cpaital
Physical capital includes the quantity of factories, equipment, housing and inventories at a point in time.
Define Human capital
Human capital includes the stock of skills and education in society at a point in time
Formula for the Typical Representation of Porduction
Q = f(K,L,LA)
Output = f(capital, labour, land)
Describe the circular flow model
The circular flow model is the basis for most national income accounting. In return for money, households offer firms factors of production (labour) which is then used to produce goods and services. These are then sold to households.
Some resources may also go to the government which are then distributed via transfer costs and subsidies.