1.1 How Markets Work Flashcards
Ceteris Parabis
“Keeping all else equal” - used to isolate variables when completing experiments
Economics as a science - 4 points For Science
- Uses data and facts
- Economists must calculate figures and use graphs
- Economists must carry out experiments
- Economists develop models
Economics as a humanity - 4 points for humanity
- Studies the behaviour of people
- Studies may be prone to political bias
- Opposing ideals
- The ability to carry out experiments is severely limited by the need to do it on such a wide scale and the potential impact on other livelihoods
Positive statements
Are backed by data and statistics, and are objective
Normative Statements
Are subjective that cannnot be backed by data or proved to be true or false - avoid the word opinion
What influence do value judgements make on economies
Can influence economic decision making and policies.
What is the basic economic problem?
Infinite wants, and finite resources
Define scarcity
If a product is scarce, it means there is a limited amount of it
Define needs
Things that you must have to survive
Define wants
Things that you desire but aren’t necessary to survive
Name the factors of production and define them
Capital - Man made machinery and resources
Enterprise - Willingness to organise, coordinate and take risks in the production process
Land - Natural resources
Labour - Human input
Define Macroeconomics
A branch of economics which considers the economy as a whole.
Define Microeconomics
A branch of economics which considers the individuals and firms within the market.
What are the rewards of the factors of production?
Capital - interest
Enterprise - profit
Labour - income
Land - rent
5 Aspects of rational thinking: name and explain
1) Customers aim to maximise utility - customers aim to maximise satisfaction and use of product.
2) Firms aim to maximise profit
3) Customers decision making - customers make decisions based on features (price, quality) to their preferences
4) Firms decision making - Firms make decisions according to customer preferences. Firms change prices and production to aline with customer preferences to maximise profit
5) Real-world application: customer utility - Customers evaluate factors such as price, quality etc
Opportunity cost
The next best alternative forgone
What are PPFs for
For displaying the maximum best combinations of two goods or services that an economy can achieve while all resources are fully and efficiently used.
The law of diminishing returns - define and what graph displays this?
The PPF graph displays the law of diminishing returns - This law states that the marginal (extra) output of consumer goods diminishes as more factor resources are allocated to it.
Capital goods
Goods that build consumer goods
Consumer goods
One time use goods
What causes inwards/outwards/non parallel shifts in PPF?
Inwards: a decrease in quality or quantity of the factors of production
Outwards: an increase in quality or quantity of the factors of production, or advances in tech
Non parallel: A technological advancement in producing one of the goods only.
Explain total utility, marginal utility and the law of diminishing utility.
TOTAL UTILITY: The total satisfaction that a consumer gets from buying a product.
MARGINAL UTILITY: The shift in total utility a consumer gets from re-purchasing the product.
THE LAW OF DIM. UTILITY: As a consumer buys the same product over and over again, their total utility drops as they get bored of it, which explains the curve of the demand curve.
Name 5 demand concepts and explain them.
EFFECTIVE DEMAND: Demand which is supported by willingness and ability to buy
LATENT DEMAND: Willingness to buy but not ability
DERIVED DEMAND: Demand for one product which is driven by another (Factors of production) eg wood and chair
JOINT DEMAND: Demand for one product which is closely linked to another eg fish and chips
COMPOSITE DEMAND: Demand for a good with one or more use.
Name the factors causing shifts in the demand curve
Population
Advertising
Substitutes
Income
Fashion
Interest rates
Complements
What does higher demand lead to
A contraction of demand
What does a lower market price lead to
An extension of demand
When does the demand for inferior goods increase?
When income (Y) decreases
When does the demand for luxuries increase?
When income (Y) increases
What factor results in a movement of the demand curve
Price
Why may consumers act irrational?
- Bounded rationality and lack if self control
-Biases in decision making - Restricted choice or mandatory choices - eg peer pressure
What is the equation for PED
Percentage change quantity / percentage change price
What is elasticity
Elasticity is how sensitive the quantity demanded in response to changes in price.
Why is PED always negative?
It is inversely proportional to price
State the possible values for PED
If PED = 0 it is perfectly inelastic
If PED = infinite it is perfectly elastic
If PED = 1 it is unitary
If PED <1 it is inelastic
If PED is >1 it is elastic
What do the following gradients represent in terms of PED? (Steep, flatter gradient, like a reciprocal graph, horizontal line, straight line)
Steep - inelastic
Flatter - elastic
Reciprocal - unitary
Horizontal line - perfectly elastic
Straight line - perfectly inelastic
What kind of goods are represented by the different types of PED
Inelastic - normal goods
Elastic - luxuries
Unitary - normal goods
Perfectly elastic - A really bad product nobody wants
Perfectly inelastic - Necessities
Uses of PED
- Helps government see if they should apply indirect taxes to any products
- Indication of competition faced
- Determination of pricing policies
Factors causing a shift in supply
Population
Indirect tax
Number of firms
Technology
Subsidies
Weather
Cost of production
Define Price determination
Price determination is the process by which the forces of supply and demand interact
What is the equilibrium price?
The equilibrium price is the only price where quantity demanded = quantity supplied
Law of supply
As prices fall, the quantity supplied falls too
Define specialisation
Concentrating of individuals producing a limited range of goods
Division of Labour
The idea of splitting up a manufacturing process among workers
Advantages and disadvantages of specialisation
ADV:
- Faster
- Mass producing
- Lower costs - train less
DIS:
- Higher Workers turnover as monotonous work
- Limited range of products
- Lack of structural unemployment - not flexible working
- Dependancy
