1 Flashcards
Factors of production
Land
Labour
Capital
Enterprise
Command economy
How to produce
What to produce
For whom to produce
(Gov decides)
Free market economy
Firms compete with each other without government intervention
Positive statement
Statements that can be tested using evidence
Normative statement
Subjective statements (ought)
What is assumed in economics
- Rational consumers
- Producers/firms want to maximise profits
- Government wishes to improve economic/social welfare of citizens
What happens in a command economy
- most resources are state owned
- planning allocates resources
- little role for market prices
What happens in a mixed economy
- mix of state/private ownership
- gov. Intervention in markets
- mix will vary from country to country
What happens in a free market economy
- markets allocate resources
- driven by the profit motive
- limited role for the state
- private sector dominates
Utility = ?
Measurement of satisfaction
What’s a free good?
Resources that aren’t scarce
What’s allocative efficiency?
You can’t make anyone better off without making someone else worse off (like on PPF curve)
What’s productive efficiency?
Producing maximum output (points along PPF curve)
What are the 4 non price determinants of demand?
Price of substitutes
Price of complements
Income
Fashion/taste
Definition of demand:
The quantity that purchasers are willing and able to buy at a given price in a given period of time
How does demand relate to price?
Inverse relationship
5 non price determinants of supply
Costs Firms expectations Technology Legislation Indirect tax
Reasons why supply slopes upwards
- the profit motive
- production and costs
- new entrants coming into the market
What’s the profit motive?
Market price rises following an increase in demand (more profitable)
How does production and costs make the demand curve slope upwards?
When output expands, a firms production costs tend to rise therefore resulting in higher prices
How does new entrants coming into the market result in an upward sloping supply curve
Higher prices may create an incentive for other businesses to enter a market leading to an increase in total supply
What is price elasticity of demand?
The responsiveness of demand to a change in price (always negative but ignore the sign)
PED equation
% change in QD
/
% change in P
What do price inelastic curves look like
Steep
Small decrease in price results in a less than proportionate increase in quantity demand
What do price elastic curves look like?
Shallow
PED of price inelastic
PED < 1
PED of price elastic
PED > 1
Extreme inelastic
PED = 0
Vertical line
Extreme elastic
PED = infinity
Horizontal line
Factors determining PED
- number of substitutes available
- price of good compared to total income
- cost of substituting between different goods
- brand loyalty
- degree of necessity/ luxury
Increase price of inelastic good means….
Increase in revenue
Higher up the demand curve….
Prices more elastic
What is income elasticity of demand?
Shows how responsive the demand for a product is to a change in real income
YED formula
% change in QD
/
% change in real income
(Always put + or - )
XED formula
% change in good x
/
% change in good y
Positive or negative XED for substitute
+
Positive or negative XED for complements
-
XED of unrelated products
0
What does price elasticity of supply mean
PES measures the relationship between change in quantity supplied and a change in price
If supply is elastic, producers can _________ their output…..
Increase output without a rise in cost or time delay
If supply is inelastic, firms ____________
Find it hard to change their production in a given time period
PES > 1
Elastic
PES < 1
Inelastic
PES = 0
Perfectly inelastic
PES = infinity
Perfectly elastic
Factors affecting PES
- Spare production capacity
- Stocks of finished products/components
- Ease and cost of factor substitution/factor mobility
- Production speed
What is consumer surplus
The difference between the total amount that consumers are willing and able to pay for a good or service (shown by the demand curve) and the total amount they actually pay (market price)
Where is consumer surplus on a demand curve
The area under the demand curve and above the market price
What does elastic demand mean for consumer surplus
Relatively low
What does a low PED mean for consumer surplus
High consumer surplus
If demand is inelastic, what happens to consumer surplus
Greater consumer surplus as some buyers are willing to pay a high price to continue consuming the product
Where is producer surplus on a supply curve
The area above the supply curve and below the current market price
4 functions of the price mechanism
- Allocate
- Rationing
- Signalling
- Incentives
