1.1.2-1.2.3 Flashcards
What are positive statements
Positive statements are objective statements which can be tested, amended or rejected by referring to available evidence. E.g falling price of oil will lead to increased demand for fuel cars
What are normative statements
Subjective statements which carry a value judgement on what ought to be e.g high level of unemployment is worse for the economy than high inflation
What is the economic problem
How to allocate scarce resources given unlimited human wants
What are the factors of production
Capital,enterprise,land,labour
What does a PPF show.
- Opportunity cost
2.the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed - Various output combinations of two goods/services that can be produced within given factors of production
What is the formula to calculate opportunity cost?
Goods given up
———————-
Goods gained
Explain the law of diminishing returns
The amount we get back becomes less and less the more we give up
What is ceteris paribus
When all conditions
remain constant apart from the one being tested.
What are the advantages of division of labour
- Improved skills through task repetition
2.save time by not switching tools between process
3.faster production through task repetition-finding fastest way to do it
Disadvantages of division of labour
1.repetition bores workers - unmotivated - unproductive.
2.reduction in craftsmanship due to mechanisation
3. Could suffer from structural unemployment
4. Mass produced standardised goods lack variety for consumers
What is the theory of comparative advantage
Countries should specialise in goods which have a lower opportunity cost so they’re the best at producing it
Disadvantage of specialisation
Countries can become over dependant on one particular export and if it fails then their economy may collapse
What are the function of money
- Medium of exchange
- Store of value
- Method of deferred payment
- Method of value
Money works best when it is:
Durable
Divisible
Consistent
Convenient
Generally accepted
Factors required to make a rational decision
- Carefully weigh choices
- Make decisions individually
- Consider all readily available information
What is consumer rational decision making
Consumers aim to maximise utility (satisfaction with their purchase)
What is a firms rational decision making
To maximise profit
What is the definition of demand
The quantity that purchasers are willing and able to buy at a given price in a given period of time.
What is the basic law of demand
It varies inversely with price - lower prices make products available for consumers
What is the law of demand
As prices fall, demand expands
As price rises, demand contracts
Why does demand curve slope downwards - income effect
- Decreased price increases customer purchasing power
- Allows people to get more with the same budget
- For normal goods, demand rises with an increase in real income
Why does demand curve slope downwards - substitution effect
- A fall in price of good x will make it cheaper compared to substitutes
- Some consumers will switch to good x - increasing demand
- Much depends on whether products are close substitutes
What are normal and luxury goods
Where the quantity demanded increases in response to an increase in consumer incomes
What are inferior goods
Products which decrease in demand as consumer incomes increase
What are the causes of shifts in demand
Complementary
Advertising
Trends
Price
Income
Seasonality
Substitutes
External shocks
Demographics
What is market equilibrium
Where market demand and supply meet.
Where there is no excess demand or supply
When might there be excess supply
When there is more being produced than demanded
What is disequilibrium?
When supply is at a different level/ quantity to demand
When might there be excess demand
If there are more buyers than products supplied. - lower price attracts more buyers
How to calculate ped
% change in quantity demanded
———————————————-
% change in price
What does ped measure
The extent to which the quantity of a product demanded is affected by a change in price
What are the ped values
More than 1
= price elastic = change in demand is more than the change in price
Less than 1 = price inelastic = change in demand is less than the change in price
Exactly 1 = Unitary price elasticity = change in demand is equal to the change in price
What can affect the PED of a product
Price of product in relation to total income
Number of close substitutes available for consumers
Degree of necessity
Brand loyalty
