1: Economic problem and methodology

micro ch1

What is a Positive statement?

a statement that can be tested with evidence

/What is a Normative statement

A subjective statement which cannot be tested with evidence

What are the 3 economic agents?

Producers, Consumers and Governments

What does the ppf graph show and what does it look like?

the maximum possible output

What is a trade off and opportunity cost?

Trade off: When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time.

Opportunity cost: the next best alternative forgone or sacrificed

Difference between Capital Goods and Consumer goods?

Capital goods are used to make consumer goods and services

Consumer goods are goods and services that satisfy our needs and wants directly

Difference between Free market, Mixed and Command economies?

Free market: based on supply and demand and the price mechanism. Market allocates resources, driven by profit and private sectors (businesses) dominate. no gov intervention

Mixed: mix of public and private ownership, government intervene in markets and most countries like the UK are like this

Command economies: resources are state owned. planning allocates resources. aim to maximise welfare and low ue and prevent monopolies

main function of price mechanism?

allocate, ration, signal (adjust to demonstrate where resources are required) and incentives (for businesses to produce)

Law of Demand

as prices fall, more is demanded and a prices increase less is demanded

Conditions which can change demand

change in:

tastes, income, size of popu, price of substitute goods, price of complimentary goods, consumer confidence/ expectations

Utility

the satisfaction of economic welfare gained by consuming a good or service

Marginal Utility

satisfaction gained from consuming one extra thing

law of diminishing returns

The law of diminishing returns states that as more units of a variable factor (e.g., labour) are added to a fixed factor (e.g., capital or land), the marginal output eventually begins to fall.

only applies in the short run because at least one factor is fixed

asymmetric information

when there is an imbalance in information between buyer and seller which can distort choices

Adverse Selection

market phenomenon when parties in a transaction where there is asymmetric information, meaning one party has more info that the other so the selection they make is wrong.

e.g those most likely to take out insurance are those most likely to need it

Moral Hazard

any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go bad

basically greater risks taken knowing that claims will be covered

Bounded rationality and bounded self control

bounded rationality suggests that consumers are likely to opt to satisfice than maximise

bounded self control is when individuals have good intentions but lack the self discipline to see them through

What are the 5 biases in decision making and what type of argument are they

arguments against rational behaviour

rules of thumb (heuristics): based on past experiences, intuitive decisions and judgements

anchoring: cognitive bias on relying heavily on the first information offered

availability bias: judgements based on the likelihood of future events based on how easy it is to recall similar events

social norms: influenced by the behaviour of their social group

altruism: concern or the welfare of others (fairness and equity)

What are the 3 choice architecture and framings used for behavioural economics?

Nudges: influencing and making something easier to choose without removing freedom of choice (only allowing smokers in certain areas)

Default choice: decision that stands if no choice is made (employees automatically put on pension schemes)

Restricted choice: can only select limited options

Mandated choice: have to make a choice by law