Simplification of reality that takes out certain factors and makes them constant
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Methodology
Positive and Normative
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Positive
Scientific perspective on economics (hypothesis + data)
Verifiable in principle
All other things remain equal (certeris parabus)
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Normative
Subjective value judgement
Cannot be objectively verified/measured
Nonquantifiable adjectives (important, ought to, must, etc.)
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Adam Smith
“the invisible hand” is a metaphor for efficient allocation of resources by society
laissaz faire
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Karl Marx
labour theory of value
decreasing rates of profit and increasing concentration of wealth
more caring towards the masses
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Keynes
counter-cyclical government and multiplier
argued that governments had an important management role in macroeconomics
provided a foundation for modern macroeconomics
full employment is a special case and is not frequently occuring
incentive to invest is too weak and the urge to hoard cash is too strong
without necessary investment, the economy maximizes the unfull employment which increases productivity
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19th century classical economic ideas
Bentham, Jevon, Menger, Walras
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Bentham
utilitarianism - most happiness among greatest number of people
utility - property in any object tends to produce benefits/advantages/pleasure/good/happiness or to prevent the opposite
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Margin
theory of how prices are derived
derived from consuming something
not total utility, but extra utility of consuming
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Say’s Law
unemployment cannot exist for long periods because production would create its own demand
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Jevon’s Paradox
as technological advancements increase efficiency of labour, demand will increase thus not changing efficiency and waste
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Carl Menger
subjective theory of value - in an exchange, both parties always profit as they trade something they think is less valuable for something they think is more valuable
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Leon Walras
Walras’ Law - the existence of excess supply in one market must be matched by excess demand in another market so that both factors are balanced out
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Milton Friedman
economic theory should be subject to empirical corroboration to test its relevance to the real world
prediction is a key factor
not the realism of the assumptions but the accuracy
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Robert Lucas Jr.
individual’s rational expectations of inflation and government policies
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Friedman + Lucas
the role of markets in bringing the economy back to a situation where there is full employment without any government intervention
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Free Sector Diagram
Injections - investment (I), government spending (G), exports (X)
Leakages - savings (S), tax (T), imports (M)
if injections = leakages, the economy is in equilibrium/static
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Assumptions made in behavioural economic graphs
1. People are rational/consistent 2. Utility is maximized 3. People have access to all information at all times
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Bounded Rationalism
all rationality is lost past a certain point
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Thinking Fast/Slow
heuristics where people use rule of thumb to make quick decisions
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Present Bias
people under-invest because the benefits come in the future, and people generally would want benefits in the present
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Representative Individual
one person is recorded/measured and “cloned” to create a larger demographic
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Nudging
preserving freedom but helping people make decisions when they can’t/don’t (default)
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Hot-hand fallacy
belief that a winning streak leads to further success
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Bias 1 - overconfidence
a belief that one’s skill/judgement are better than they truly are, or that probability of success is higher than it actually is (health club membership example)
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Bias 2 - Hyperbolic Discounting
tendency of people to make the present much more important than even the near future while making economic decisions (example: credit cards)
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Bias 3 - Framing effects
Endowment effect - possessing a good makes it more valuable
Loss aversion - a framing bias in which consumers choose a reference point around which losses hurt more than gains feel good
Anchoring - a framing bias in which a person’s decision is influenced by specific pieces of information given
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Bias 4 - Sunk cost fallacy
the mistake of allowing sunk costs to affect decisions
example: Robert Griffin III (NFL, Washington Redskins)
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Degrowth communism
the economy is big enough already, when is the stopping point for growth?
focus growth on more important aspects such as healthcare and not consumption as it raises healthcare costs
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Interdependence
a consideration of possible economic consequences of interdependences is essential when conducting economic analysis
nothing in the economy is self-sufficient, so they interact with one another (the greater the scale of interaction, the greater the interdependence)
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Linear economy
Take → make → waste
resource extraction → production → distribution → consumption → disposal
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Circular Economy
Take → Make/remake → Distribute → Use/re-use/repair → Selectively dispose → Enrich/recycle → Take
aims to minimize waste and promote a sustainable use of natural resources
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Problems with the circular economy
1. No clear definition (too vague in the definitions and different defitions clash with one another) 2. Ignores scientific principles (you cannot create or destroy matter/energy) 3. Lack of scale (hard to scale up to a global level)
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Systems Perspective
taking into account all of the behaviours of a system as a whole in the context of its environment
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Economic efficiency
socially constructed concept with its politics and its political implications
public goal, competing with other public priorities
to improve the state of one party, you must hurt another
society gets maximum net benefits
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Eco-efficiency
production of goods/services while using fewer resources and creating less waste and pollution
creating more value through an increase in resource productivity and a decrease in resource intensity
leads to less resource consumption
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Economic Well-being
refers to levels of prosperity, economic satisfaction and standards of living among the members of a society