1.0 Flashcards
Positive statement
Statements that are objective and can be tested using evidence
Normative statement
Subjective statements which contain a value judgement
The economic problem
How can the available scarce resources be used to satisfy the infinite wants and needs of people as effectively as possible?
Economic problem solutions
What to produce
How to produce it
For whom to produce/ how to best allocate the produced goods and services
Opportunity cost
Th next best alternative forgone when an economic decision is made
Factors of production ( these are owned by households)
Capital
Enterprise
Labour
Land
Capital
Man made good used in the production of goods and services e.g. factories and schools
Enterprise
Willingness to make a risk to make a profit. Refers to the people (entrepreneurs) who take risk and create things from the other three factors of production.
Labour
The physical and mental effort that goes into producing a good or service
Labour force
The population who are able to work are called the labour force
Land
As well as actual territory land includes all of the earths natural resources :
1) non renewable (natural gas, oil, coal)
2) renewable (wind, tidal power)
3)materials (diamond, gold)
4)Water
5)animals
Payment of capital
Interest
Payment for enterprise
Profit
Payment of labour
Wages
Payment of land
Rent
Expenditure
Spending of income
Goods
Physical products you can touch
Economic systems
Network of organisations and institutions engaged within a society to allocate scarce resources in an attempt to maximise social welfare
Spectrum of economic systems defined by allocation
Pure command economy
Mixed economy
Pure market economy
Pure command economy
Resources are allocated outside/without markets via a planning mechanism
Mixed economy
Contains large market and non market sectors
Pure market economy
The price mechanism allocates resources in markets
Spectrum of economic systems defined by ownership
Communist economy
Mixed
Capitalist economy
Communist economy
The means of production are publicly owned
Mixed ownership economy
Mixed ownership of the means of production. Therefore it has large private sectors and public sectors
Capitalist economy
The means of production are privately owned
Market
A market is where buyers and sellers interact to trade (exchange) goods and services
Market operating freely
- Individual buyers and sellers decide; what, how, how much, where and when to trade
- Individual buyers and seller trade in reference to their own self interest
- Prices convey to the market participants information about self interest and opportunities.
Three functions of market prices
1) signalling function: provides Clean information to buyers (consumers) and sellers (producers) about the market conditions
2) incentive function: creates incentives for households and firms that allows them to meet objectives based on their own self interest
3) rationing (allocating) function: The price mechanism allocates and rations scarce resources to households and firms who are most willing and able to pay in pursuit of self interest
Production possibility curve (PPC)
Shows the maximum output combinations of two goods and services that can be produced utilising current resources’ and technology in a given period of time
What is economic efficiency?
Allocative efficiency plus productive efficiency
Definition of supply
The quantity that sellers are willing to and able to supply at a given price over a given period of time
Definition of individual supply
Is the supply of one seller
Definition of market supply
Is the total supply of all sellers in the market. Market supply is the sum of all the individual supply by sellers in a market
What is the law of supply
Quantity supplied will usually increase as price increases, and quantity supplied will usually fall as price falls, ceteris paribus.
Equation for price elasticity of supply
PES = %change in quantity supplied/ % change in price
Contraction of supply curve
A contraction of supply occurs when there is a fall in quantity supplied due to a fall in price
Extension of supply curve
An extension of supply occurs when there is an increase in quantity supplied due to an increase in the price of the product
Economic efficiency
Allocative efficiency plus productive efficiency
Allocative efficiency
Maximise social welfare
Consumer surplus + producer surplus
Productive efficiency
Using all resources
Operating on the ppc
Shift of ppc
Caused by a change in the quantity and/or quality of resources available in the economy, improvement in technology
How does ppc show potential economic growth
An increase in a county’s potential productive capacity
How does ppc show actual economic growth (short run economic growth )
The country experiences an actual output of goods and services produced
Demand
The quantity that buyers are willing and able to buy at a given price in a given period of time
What is the law of demand ?
The quantity demanded will usually increase as price falls, and vice versa ceteris paribus
Demand function
I demand function is an equation that shows the mathematical relationship between the quantity demanded of a good and the various determinants of demand
Determinants of demand
Price of product
Income of buyers
Price of substitute goods
Price of complimentary goods
Tastes and preferences of buyers
Expectations of future price
Price elasticity of demand
PED = percentage change in quantity demanded/ percentage change in price level
PED =%deltaQd/%deltaP
Contraction of demand
A contraction of demand occurs when there is a fall in quantity demanded due to an increase in the price level of a product. Shown by movement to the left
An extension of demand
Occurs when there is an increase in quantity demanded due to a fall in the price of the product. Show by a movement to a right
Income (wealth) effect
An increase in price leads to buyers being worse off. Their income is unchanged and therefore their income buys less of the given goods/service. This is likely to lead to an extension in demand.
What is the substitution effect?
In increase in price leads to consumers/buyers being more likely to switch to buying an alternative product and is likely to lead to a contraction of demand. Vise versa
What is division of labour
Where the production process is broken down into stages and workers are assigned different tasks
What is specialisation
Where an individual, worker, firm, region or country produces a limited range of goods or services
What is bartering
Is trade/exchange of goods or services for other goods or services without using a medium of exchange (such as money)
Income elasticity of demand
%change in quantity demand/ %change in income
YED = %changeQd/%changeY
Positive YED
Indicates a normal good
Negative YED
Indicates an inferior good
YED magnitude greater than 1
Indicates that a good or service is income elastic
YED magnitude less than 1
Demand for good or service is income inelastic
YED close to 0
Demand for good or service is relatively unresponsive to a change in income
XED
%DeltaQd of good x/%deltaP y
Positive XED
if there is a positive relationship the two goods are substitutes
Negative XED
The two products are considered compliments
XED > 1
Cross price elastic
XED < 1
Cross price inelastic
Movement of supply curve
Caused by a change in price
Shifts in the supply curve
1) cost of raw materials
2)costs of labour
3) productivity
4) technology
5) interest payments ( cost of finance)
6) indirect taxes
All cost related
