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Flashcards in Week 1 Deck (34):
1

Economics

The science which studies human behaviour as a relationship between ends and scare means which have alternative uses. Economics uses a scientific method of enquiry. Economics studies the choices people make in allocating limited resources
involves trade-offs (opportunity cost of the next best alternative). Economics focuses on the overall welfare of society recommends policies to government to improve welfare.

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Economics has many branches and sub-fields

normative vs. positive economics

empirical vs. theoretical economics

micro vs. macroeconomics

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Economic method

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Science

The systematic, methodical investigation of cause and effect relationships

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Data

Numerical representation of facts

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Model

Simplified, abstract representation of a real life phenomenon

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Assumption

A statement of fact taken as given, i.e. not subjected to further scrutiny

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Variable

A component attribute or feature of a model which may change in magnitude

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Hypothesis

A proposed relationship between model variables offered for testing

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Theory

A system of ideas intended to explain phenomena using general principles independent of the explanandum. A statement of relationships between model variables with appropriate conclusions and policy recommendations

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FOPs

The factors of production are those resources used to produce: capital (man-made resources), land (natural resources) and labour (the human resource)

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The subsistence economy

A subsistence economy is a non-monetary economy which relies on natural resources to provide for basic needs, through hunting, gathering, and subsistence agriculture.

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The allocation of scarce resources in the subsistence economy involves the following basic economic problems:

Problem #1: What to produce?
Problem #2: How to produce?

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PPF

The production possibilities frontier shows the various combinations of output that the economy can produce given the available factors of production

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Opportunity cost

Opportunity cost is the next best alternative that must be given up in order to obtain something

The opportunity cost is calculated as the number of units of one good you must give up to make one more unit of the other good.

Formula = good x divided by the good you want to produce one more of

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PPF Example

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Absolute advantage

The ability to produce something with fewer inputs (lower cost).

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Comparative advantage

The ability to produce something with something at lower opportunity cost.

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Division of labour example

To produce 1 extra unit of shelter, Friday gives up 2 units of food but Robinson only gives up 1/2 unit. Robinson has comparative advantage in making shelter and specialises in this, while Friday specialises in producing food only. There is now a division of labour and together they produce (8,8).

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Gains from trade

Specialised individuals need to exchange to get what they need. The mutual benefit is called the gains from trade. Each could get (4,4).

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The allocation of scarce resources in the exchange economy involves the additional economic problem:

Problem #3: How to exchange?

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Exchange economy

Exchange economy is technical term used in microeconomics research to describe interaction between several agents. Each agent brings his/her own endowment, and they can exchange products among them based on a price system.

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Economic system

The which a society allocates its resources i.e. organises production and exchange (i.e. solves economic problems 1-3)

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The free market economy

an idealized system in which the prices for goods and services are determined by the open market and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

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The command economy

an economy in which production, investment, prices, and incomes are determined centrally by the government.

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FOP OWNERSHIP FREE MARKET

PRIVATE

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DECISION MAKING FREE MARKET

INDIVIDUALLY AUTONOMOUS

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COORDINATION FREE MARKET

MARKET

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FOP OWNERSHIP COMMAND

PUBLIC

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DECISION MAKING COMMAND

CENTRALISED AND HIERARCHICAL

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COORDINATION COMMAND

CENTRAL PLANNING

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Economic systems example

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Mixed economy

an economic system combining private and state enterprise.

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The circular flow of resources in a mixed economy

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