Economics test 1

cahp 1/2/3

scarcity

something is scarce when it’s both desirable and limited

choice

as people do not have infinite incomes, they must make choices on what goods/services to purchase

scarcity

something is scarce when it’s both desirable and limited

choice

as people do not have infinite incomes, they must make choices on what goods/services to purchase

oppertunity cost

what is given up to get something else (never expressed in monetary terms). “trade-off”

Factors of production

Land,Labour,Capital,Entrepreneurship

positive statement

concerned with the facts what is actually happening

normative statement

what should be done, contains subjective value judgement

potential output

The maximum quantity of both products that can be produced

utility

usefulness/pleasure a consumer gets when consuming a product

Marginal utility

benefit of consuming one more

merit goods

goods that are healthy for us, gov wants us to consume more(fruits,veg), usually underprovided/underconsumed

demerit goods

products that are bad for us, gov wants us to consume less (alcohol,tobacco), usually overproduced/overconsumed

rationing

since recources in an economy are relatively scarce, there must be a way of rationing those recources and the goods/services that come from them

types of economy (rationing systems)

planned, free market, mixed

planned economy (command economy)

what/how/for whom to produce controlled by gov, all recources collectively owned

free market economy

Prices used to ration goods/services. All production in private hands and demand/supply are left free to set wages/prices in economy. Works relatively efficient, with lesser surpluses/shortages, self righting system

disadvantage free market economy

demerit goods overprovided, recources used up to quickly, people burden unemployment, monopolies

disadvantage planned economy

miscalculation causes shortge/surplus, distorted incentives, govt dominance

circular flow of income model

simple two-sector model that can illustrate the interdependence that exists between key economic decision-making

running a budget deficit

when governments are able to spend more money than they earn in taxes by borrowing money

Market

any place where transactions take place between buyers and sellers

Four types of market

product,factor, stock, internation

demand

the quantity of a good or service that customers are both willing and able to buy at a given price, per period of time

Law of Demand

as price of a product falls the quantity demanded of a product will usually increase, ceteris paribus

income effect

when price of a product falls, increase in ‘real income’

substitution effect

as price of one product falls, the product will be more attractive than competitor

Non-price determinants of demand

various factors other than the price of the good or service that affect the demand for the product. This causes a leftwards or rightwards shifts in demand

normal goods

products that customers tend to buy more of as their real income level increases. This includes both necessities and luxury goods and services.

Inferior goods

products with a negative income elasticity of demand. In other words, the demand for such products tends to fall when consumers real incomes rise.

non-price determinants

change in income, substitutes, complements, unrelated, taste/preferance, future price predictions

Complements (complementary goods)

products that are jointly demanded; for example, torches and batteries, or printers and ink cartridges.

Substitutes

products that are in competitive demand because they can be used in place for each other; for example, butter and margarine, tea and coffee, or Honda and Toyota cars.

movement along the demand curve

movement along a demand curve is caused by price changes only. A fall in price causes quantity demanded to expand while an increase in price causes quantity demanded to contract

increase in demand

rightwards shift of the entire demand curve for a product, caused by favourable changes in non-price factors that affect demand.

decrease in demand

leftwards shift of the entire demand curve for a product, caused by unfavourable changes in non-price factors that affect demand.

Shift

occurs when there is a change in any non-price factor that affects the demand for a product. The entire demand curve shifts to the left if there are unfavourable changes affecting demand, and vice versa.

veblem goods (snob value goods)

demand increases as price rises, gain more utility from consuming expensive products

Giffen good

a low-income, non-luxury product for which demand increases as the price increases and vice versa

key assumptions of law of demand

consumer is rational, has perfect information, is very intelligent, is selfish ect

horizontal summing

adding together the total demand you can create a demand curve for the total market

dual system model

automatic, reflective

system 1- automatic

fast decisions that are essentially subcontious

system 2- reflective

slow decisions that are much more controlled

cognitive biases that affect decision-making

availability bias,anchoring bias, framing bias, social conformity, status quo, losses aversion bias, hyperbolic discounting

availability bias

the availability of recent information/examples tend to over-influence people’s decision making, consumers are quite poor at assessing risk/probabilities

anchoring bias

given a value, use that value as a reference point to influence future decision/choices

status quo/inertia bias

with many choices, consumers would prefer to do nothing and stick to what has always been done

losses aversion bias

consumers feel the losses far more than the gains

hyperbolic discounting

humans prefer smaller short-term gains than larger long-term ones

Choice architecture

The theory that the decisions that we make are heavily influenced by the ways in which the choices are presented to us

nudge theory

suggests that the choice architecture offered to people can be carefully designed to gently encourage (nudge) the people to voluntarily choose the option that is better for them

consumer sovereignty

the consumer’s right to choose, maintained by nudge theory