economics chapter 1

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    • What does economics study?

      The economic behaviour of both individuals and groups of people
    • What is economics in essence ?

      The theory of supply and demand
    • What is a positive statement ?

      A statement that can be tested to see if it is incorrect
    • What is a value judgement?

      A value judgement is about whether something is desirable or not
    • What improves economic welfare ?
      Economists argue that satisfying peoples needs and wants improves economic welfare
    • What is welfare ?

      Anything that makes a person happier and improves their economic wellbeing
    • What is an economic system ?

      The set of institutions within which a community decides what, how and for whom to produce
    • What is a market economy ?

      An economic system in which goods are purchased through the price mechanism ( supply is product based on demand )
    • What is a command economy ?

      An economy where government officials allocate economic resources to firms / productive enterprises ( government control the supply produced and what is produced )
    • What is a mixed economy ?

      A mix of different types of economic systems. They contain a large market sector and large non - market sector in which the planning mechanism operates.
    • What are the 4 factors of production?
      Land, Labour, Capital and Enterprise
    • What is an opportunity cost?

      The opportunity cost of any choice or decision is measured in terms of the alternatives that have to be given up
    • What does the PPF illustrate?

      The different combination of two goods or two sets of goods that can be produced with a fixed quantity of resource
    • what does the PPF curve illustrate ?

      shows all the different combinations of consumer goods and capital goods that can be produced
    • allocative efficiency
      the allocative efficiency output is the point on the PPF curve that bests meets peoples tastes and preferences
    • rational behaviour
      People try to make decisions in their self interest or to maximise their private benefit
    • utility
      the satisfaction or economic welfare on individual gains from consuming a good or service
    • marginal utility
      the additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service
    • asymmetric information
      When one party to a market transaction possesses less information relevant to the exchange than the other
    • imperfect information
      The absence of full knowledge concerning product characteristics, available prices, and so on.
    • when does asymmetric information occur

      it arises when either the buyer or seller involved in a potential transaction knows something that is not observative to the other party
    • Traditional economics
      Assumes that people are rational and make decisions based on self interest
    • Behavioural economics
      Assumes that people do not always act in a rational way, they decisions are influenced by their emotions, social norms and cognitive biases ( mental thinking )
    • Bounded self control
      Where individuals have limited self control to act rationally in their own interest
    • Thinking fast (system 1)

      decision making that operates quickly, with little effort that is used to analyze the situation and less control. Decisions are made instinctively
    • Thinking slow (system 2)

      refers to decision making that operates more slowly, with more effort and more deliberate control
    • What is a bias in decision making ?
      Behavioural economics argues the quick decisions that people make when exercising choice ( automatic thinking) are heavily biased
    • Cognitive bias
      A systematic error in thinking that affects the decisions and judgments that people make
    • Confirmation bias
      The tendency to seek only information that matches what one already believes
    • rule of thumb
      thinking shortcuts or informed guesses that individuals use to make decisions in order to save time and effort
    • availability bias
      when individuals place too much weight on the probability of an event happening because that can recall vivid examples of similar events. this leads to decisions that are not based on logical reasoning
    • Anchoring bias
      People are more likely to pick the middle priced item, when comparing the item with competitors, believing it is not too expensive or cheap.
    • Social norms
      Forms or patterns of behaviour considered acceptable by a society or group within that society
    • nudges
      factors which convince people to think in certain ways
    • economic sanctions
      they restrict an individuals freedom to behave in certain ways through punishment
    • altruism
      when we act to promote someone else’s well being, even though we may suffer a cost in terms of financial time or loss, or by incurring personal risk
    • maximizing theory
      assumes that individuals derive pleasure as a result or giving to others
    • Choice architecture
      A framework setting out different ways in which choices can be presented to consumers and the impact they have on consumer decision making
    • default choice
      an option that is selected automatically unless an alternative Is specified
    • framing
      the concept that how something is presented, influences the choices that people make. in general people are influenced by how information is presented to them
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