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CB2 - Chapters 1-10

Terms in this set (39)

What is the fundamental problem of economics
Unlimited wants, but limited resources. Means we must choose between alternatives. So economics can be seen as the study of scarcity.
Economics is concerned with ... and ...
consumption (to satisfy wants) and production (transforms inputs to outputs)
How are resources known as in economics
the 3 factors of production (inputs to produce goods):
- land and raw materials
- labour
- capital
Demand is related to human
desires
Supply is related to
limited resources
What are the 2 strands of economics
- microeconomics
- macroeconomics
Macroeconomics
Looks at aggregates like AS and AD, is concerned with the economy as a whole.
AD
Total spending in an economy
AS
Total output in an economy
Microeconomics
Looks at individual units in an economy e.g. households, individuals, firms and their respective supply and demand.
What are the 3 main choices microeconomics concerns?
1) What goods and services to produce (there are limited resources)
2) How are things going to be produced (production methods, what resources to produce what goods)
3) Who are goods being produced for (how goods are distributed, by income levels or rationed)
If AD is too high relative to AS
inflation and trade deficits tend to result
Inflation
General rise in the price level in an economy
Balance of trade
Exports minus imports
If AD is too low relative to AS
Unemployment and recession
Recession
Two or more successive quarters of falling GDP
demand-side economics
macroeconomic policy that focuses on shifting the aggregate demand curve as a way of promoting full employment and price stability
supply-side economics
An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government.
oppourtunity cost
what you give up when you make one choice instead of another
Rational choice
Looking at the benefits of a choice and the opportunity cost, and picking the option which maximises their utility.
Marginal cost
the cost of producing one more unit of a good
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
Rational decision making
Do more of a choice if MB is greater than MC and less when MC is greater than MB
Economic efficiency 3 conditions
1) productive efficiency - firms produce maximum output for a given input at the minimum cost.
2) Allocative efficiency - combination of goods produced and sold provide the most satisfaction for the consumer at their current income level
economic efficiency
Goods produced at the minimum cost and individuals/firms reap the maximum benefit from the resources.
Equity
(n.) the state or quality of being just, fair, or impartial; fair and equal treatment; something that is fair; the money value of a property above and beyond any mortgage or other claim
An equitable distribution isn't necessarily an ...
an equal distribution
PPF
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
On the PPF resources are
fully and efficiently used
In the PPF curve
resources are not used fully or used inefficiently.
Outside of the PPF curve means
Combination of goods isn't achievable at the current level of resources and technology.
PPF goes from left to right and slops downwards showing
an increasing opportunity cost with ever more production of one good requiring more of a sacrifice of the other.
PPF curve can shift out over time as ...
factors of production increase e.g. there is investment in capital, new raw materials are discovered, tech advances, more productive labour
Why does a PPF generally show an increasing opportunity cost
More resources you devote to one good you have to use less suitable factors of production for its production, so the marginal cost increases. e.g. labour less skilled in producing a certain good, capital less suitable.
Market
any arrangement that allows buyers and sellers to exchange things
circular flow model
Shows the interrelationships between firms and households, and how they interact in the good and factor markets e.g. households provide labour in return for income, in the goods markets firms supply them to households who demand them to fulfill their wants
The central economic problem is that of
scarcity
Give examples of aggregates which macroeconomics deals with
unemployment, growth, output
Why is the PPF curve not a straight line?
increasing opportunity cost
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