Economics test 1

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scarcity

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51 Terms

1

scarcity

something is scarce when it’s both desirable and limited

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2

choice

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

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3

oppertunity cost

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

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4

Factors of production

Land,Labour,Capital,Entrepreneurship

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5

positive statement

concerned with the facts what is actually happening

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6

normative statement

what should be done, contains subjective value judgement

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7

potential output

The maximum quantity of both products that can be produced

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8

utility

usefulness/pleasure a consumer gets when consuming a product

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9

Marginal utility

benefit of consuming one more

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10

merit goods

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

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11

demerit goods

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

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12

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

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13

types of economy (rationing systems)

planned, free market, mixed

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14

planned economy (command economy)

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

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15

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

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16

disadvantage free market economy

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

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17

disadvantage planned economy

miscalculation causes shortge/surplus, distorted incentives, govt dominance

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18

circular flow of income model

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

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19

running a budget deficit

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

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20

Market

any place where transactions take place between buyers and sellers

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21

Four types of market

product,factor, stock, internation

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22

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

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23

Law of Demand

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

<p>as price of a product falls the quantity demanded of a product will usually increase, ceteris paribus</p>
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24

income effect

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

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25

substitution effect

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

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26

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

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27

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.

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28

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.

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29

non-price determinants

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

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30

Complements (complementary goods)

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

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31

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.

<p>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.</p>
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32

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

<p>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</p>
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33

increase in demand

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

<p>rightwards shift of the entire demand curve for a product, caused by favourable changes in non-price factors that affect demand.</p>
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34

decrease in demand

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

<p>leftwards shift of the entire demand curve for a product, caused by unfavourable changes in non-price factors that affect demand.</p>
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35

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.

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36

veblem goods (snob value goods)

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

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37

Giffen good

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

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38

key assumptions of law of demand

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

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39

horizontal summing

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

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40

dual system model

automatic, reflective

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41

system 1- automatic

fast decisions that are essentially subcontious

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42

system 2- reflective

slow decisions that are much more controlled

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43

cognitive biases that affect decision-making

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

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44

availability bias

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

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45

anchoring bias

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

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46

status quo/inertia bias

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

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47

losses aversion bias

consumers feel the losses far more than the gains

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48

hyperbolic discounting

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

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49

Choice architecture

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

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50

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

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51

consumer sovereignty

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

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