theme 1 everything

• irrational behaviour consists of:

  • peer-behaviour
  • habitual-behaviour
  • computational weakness
• Peer-behaviour: Neo-classical economics assumes that individuals make free and independent choices. However, evidence suggests that they make choices which are influenced by social norms. 
• Habitual- behaviour: Habits and rules of thumb can be useful when making decisions – they represent short cuts in decision making. Although they don’t maximise utility, they do save time and cognitive abilities. However, habits can also lead to addiction whereby, a lack of self-control and lead to destructive decisions. 
• Computational weakness: Neo-classical economics assumes that individuals make perfect calculations. However, in reality, cognitive limits may lead to sub-optimal choices. 
• Utility: The satisfaction or benefit derived from consuming goods/ services.
• Marginal: For the next unit.
• Neo-classical Economics: Developed in the late 19th century, neo-classical economics assumes economic agents are rational. Stems from the “Marginal Revolution”.
• Command economy: an economy in which production, investment, prices and incomes are determined centrally by the government.
• free-market economy: an economy in which production, investment, prices and incomes are determined through market forces (supply and demand).
• Mixed economy: an economy in which production, investment, prices and incomes are determined by a combination of government planning and market forces.
• Friedrich Hayek:  was critical of command economies; he was concerned about the information required to distribute resources effectively and argued it was impossible for the government to process this information effectively. Moreover, any form of government intervention would necessarily infringe on the political freedoms of its citizens.
• Karl Marx: considered the flaws of free-market economies - inequality and argued that the free-market economy would break down because the owners of business made huge profits at the expense of workers. The Leninists that followed called for a violent proletarian revolution.
• Adam Smith: In his first book, "The Theory of Moral Sentiments," Smith proposed the idea of an invisible hand – the tendency of free-markets to regulate themselves by means of competition, supply and demand, and self-interest. 
• Examples of command economies: North Korea and China
• Free market examples are Switzerland and Singapore
• economic spectrum measures:

  Percentage of government spending (%GDP)

  Size of public sector work force (% labour market)

  Political and economic freedom
• Specialisation: the process of concentrating on a product or task. Occurs at all levels of production
• division of Labour: the assignment of different parts of a manufacturing process or task to different people to improve productivity.
• Productivity: measures the efficiency of production. In general, calculations take the form: Productivity = Output / Input.
• Derived demand: a demand for a good or service, which is a consequence of the demand for something else.
• Advantages of specialisation

  •Workers become more productive (develop skills and knowledge over time)

  •Production and profits increase

  •Specialised workers tend to get higher pay.

  •More motivation from job satisfaction.
• Disadvantages of specialisation

  •Greater cost of training workers

  •Demotivated workers due to repetition (quality may suffer)

  •More expensive workers

  •Depletion of raw materials and environmental degradation.

  •Overspecialised? Heavily reliant on every worker.

  •Automation?
• 4 functions of money:

  Medium of exchange

  Measure of value

  Store of value

  Deferred payment
• 6 characteristics of money

  Durability

  Portability

  Divisibility

  Uniformity

  Limited supply

  Acceptability
• Medium of exchange: an intermediary instrument or system used to facilitate the sale, purchase, or trade of goods between parties.
• Measure of value: a common unit of account – think menus.
• Store of value: a repository of purchasing power over time – think savings. Disappears with hyperinflation.
• Deferred payment: Buy now pay later. Lending and borrowing are possible if functions 1,2,3 exist.
• Why specialisation works?


  •Repetition enables workers to develop skills.

  •Makes it cost-effective to buy specialist tools.

  •Time is saved as workers no longer have to constantly change task.

  •Allows workers to focus on what they are "naturally" better suited to.
• Government failure:

  Distorting price signals

  the law of unintended consequences

  excessive administrative costs
• Public Choice Theory/ Conflicting objectives: Politicians have their own objectives that may not necessarily align with maximising social welfare.
• •Information gaps: Economic systems are complicated – it is difficult to know how effective a policy will be (even after it has been implemented).
• •Excessive administrative costs: Should also be taken into accountwhen evaluating the effectiveness of government intervention.
• •The Law of Unintended Consequences: When undesirable outcomes arise due to unforeseen circumstances.
• •Distorting price signals: By moving prices away from the free market equilibrium, there is a risk that markets become less efficient.