Economics Lecture Review: Resource Allocation, Markets, and Elasticity

Comprehensive practice flashcards covering introductory economics lecture concepts, including resource allocation, utilitarianism, Pareto efficiency, competitive markets, consumer and producer theory, market equilibrium, surpluses, elasticity, and the equimarginal principle.

According to the lecture, what is the core goal of economics and how should it be viewed?

The goal of economics is to create allocation of resources, and economics should be viewed as a science.

What is utilitarianism, and who were the key thinkers that created it?

Utilitarianism is a theory in ethics suggesting that the best action is the one that maximizes overall well-being, happiness, or pleasure for the largest number of people. It was created by Jeremy Bentham, who stated that 'humans seek more utility', and John Stuart Mill.

How is social utility defined and measured in the lecture?

Social utility is the benefit that an action or behaviour brings to a society as a whole rather than one single individual, and it is measured by economic output.

What is a barter exchange and what condition must be satisfied for it to work?

A barter exchange is a system of direct trade where participants exchange goods without the use of money or currency. Both parties must have what the other person is offering.

What is Pareto efficiency, as formulated by Vilfredo Pareto?

Pareto efficiency is a state where a system is efficient if no one can be made better off without making someone else worse off, meaning resources are allocated such that it is impossible to make any single individual better off without causing a loss to another.

How does Pareto efficiency fundamentally differ from utilitarianism?

Pareto efficiency does not focus on fairness or distributing resources, but solely on ensuring that no single person experiences a loss from the current situation. Furthermore, it cannot measure or sum up happiness like utilitarianism.

What purpose do prices serve regarding utility in economic evaluation?

Prices allow for comparison and act as a proxy for utility, showing how happy consumers are with a good they currently have versus a good they are considering buying.

What critical environmental blind spot do both utilitarianism and Pareto efficiency share?

Both utilitarianism and Pareto efficiency only consider effects on humans instead of the environment, leaving animals and ecosystems undetected in their systems.

How is economic efficiency defined in the context of markets?

Economic efficiency is achieved when consumption and profits are maximized, and no one can be made better off without making someone else worse off.

What are the core assumptions of competitive markets outlined in the notes?

The assumptions include clearly defined property rights, many buyers and sellers who act as 'price takers' without individual influence on market price, freedom to enter and exit, identical goods produced, and buyers and sellers acting independently based only on their own positions.

What are the core characteristics of 'Homo economicus'?

Homo economicus describes actors who are utility maximisers, rational in maximizing utility, self-interested/self-centred, consistent in preferences, fully informed, and operate within property rights.

What is the distinction between substitute goods and complementary goods?

Substitutes can replace one another, whereas complementary goods cannot replace each other and utility can only increase with more of both products.

What is marginal utility, and what does the law of diminishing marginal utility state?

Marginal utility is the utility gained by consuming one more unit of a good or service. The law of diminishing marginal utility states that as goods are consumed more and more, utility generally decreases.

What does the producer production function $Q = F(a,b,c\text{...})$ show, and what are diminishing marginal returns?

It shows that the quantity of output produced is a function of production inputs (such as the number of bakers). Diminishing marginal returns means that each additional group of inputs adds less output than the previous one.

What is meant by increasing marginal costs for producers?

Increasing marginal costs means that the more a business produces, the more expensive it becomes to make each additional product due to requirements like employing extra workers and equipment.

What does the market equilibrium point represent on a supply and demand graph?

Market equilibrium is the point where the demand ($D$) and supply ($S$) curves cross, where the quantity consumers want to buy equals the quantity producers want to sell.

How are consumer surplus and producer surplus defined?

Consumer surplus occurs when consumers pay less for something than what they were willing to pay (for example: $100 - 70 = 30$). Producer surplus occurs when producers sell something for more than the minimum price they were expecting.

What is elasticity and what is the difference between elastic and inelastic demand?

Elasticity measures who is affected the most by tracking responsiveness of quantity to price changes. Elastic demand means consumers are very reactive to price changes, while inelastic demand means consumers will still buy the product despite price increases.

What are the formulas for elasticity of demand and elasticity of supply?

Elasticity of demand equals change of quantity demanded divided by quantity demanded, all divided by change in price divided by price. Elasticity of supply equals change of quantity supplied divided by quantity supplied, all divided by change in price divided by price.

What is the Equimarginal Principle Maximization (EPM) for consumers?

EPM states that to achieve maximum utility, marginal utility per pound must be spent equally across goods. Dividing marginal utility by price identifies how much utility is gained per $1$ pound.

Why is measuring Equimarginal Principle Maximization (EPM) more complicated for producers than consumers?

It is more complicated because producers must take into consideration short-run and long-run costs, fixed costs, variable costs, and economies of scale (where producing bigger quantities is more cost-effective).