allocation of resources Flashcards
microeconomics
the study of the behaviour and decisions of households and firms, and the performance of individual markets
macroeconomics
the study of the whole economy
market
an arrangement which brings buyers into contact with sellers
planned economic system
an economic system where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives
mixed economic system
an economy in which both the private and public sectors play an important role
market economic system
an economic system where consumers determine what is produced, resources are allocated by the price mechanism and land and capital are privately owned
3 key resource allocation questions
what to produce, how to produce it, and who is to receive the product
price mechanism
the way that resources are allocated by the interaction of demand and supply
demand
the willingness and ability of a consumer to buy a product at any given price
substitute
a product that can be used in place of another
complement
a product that is used together with another product
supply
the willingness and ability of a producer to sell a product at any given price
unit cost
the average cost of production, found by dividing total cost by output
direct taxes
taxes on income and wealth of individuals and firms
indirect taxes
taxes on goods and services
tax
a payment to the government
subsidy
a payment by the government to encourage the production or consumption of a product
excess demand / shortage
the amount by which demand is greater than supply
excess supply / surplus
the amount by which supply is greater than demand
price elasticity of demand
a measure of the responsiveness of quantity demanded to a change in price
elastic demand
when the quantity demanded changes more than proportionately to a change in price
inelastic demand
when the quantity demanded changes less than proportionately to a change in price
perfectly elastic demand
when a change in price causes a complete change in quantity demanded
perfectly inelastic demand
when a change in price has no effect on quantity demanded
unit elasticity of demand
when a change in price causes an equal change in quantity demanded
price elasticity of supply
a measure of the responsiveness of quantity supplied to a change in price
elastic supply
when quantity supplied changes more than proportionately to a change in price
inelastic supply
when quantity supplied changes less than proportionately to change in price
perfectly elastic supply
when change in price causes complete change in quantity supplied
perfectly inelastic supply
when change in price has no effect on quantity supplied
unit elasticity of supply
when change in price causes equal change in quantity supplied
PES/PED equation
determinants of demand (acronym+)
producing paper is so incredibly painful
(price, preferences, income, substitutes/complements, interest rates, population)
determinants of supply
costs of production, technology, tax/subsidies, number of firms, trends
determinants of PED (acronym+)
SPLAT
(substitutes, proportion of income, luxury/neccessity, addiction, time)
determinants of PES (acronym+)
FAST
(factor mobility, availability, storage, time to produce)
public sector
part of economy controlled by gov
privitisation
sale of public assets to private sector
price mechanism
system by which market forces of demand and supply determine prices
market failure
a situation where too much/little of g/s are produced and consumed than socially desirable level. misallocation of resources
free rider
someone who consumes g/s wo paying
third parties
those not directly involved in producing or consuming a product
private costs
costs bourne by individual economic units
external costs
negative spill-over costs to third party, costs imposed on those who are not directly involved in production/consumption of g/s
social costs
full cost of an activity borne by society as a result of economic actions. calculated by adding private costs to external costs
private benefits
advantages enjoyed by individual economic units producing/consuming product
external benefits
advantages enjoyed by those not involved in consumption/production of product
social benefits
full advantages enjoyed by society as result of actions by producers/consumers
causes of market failure
underconsumption of merit goods, overconsumption of demerit goods, public goods, abuse of monopoly power, factor immobility
merit goods
products that are socially beneficial (benefit third party and consumer/producer)
demerit goods
products that are detrimental to society (detrimental to third parties and to consumer/producer
public good
a product which is non-rival and non-excludable
private good
a product which is rival and excludable
monopoly
a single seller of g/s in a market
nationalisation
moving ownership and control of an industry from private sector to gov
what are the causes of market failure
underconsumption of merit goods, overconsumption of demerit goods, public goods, abuse of monopoly power, factor immobility
why does the underconsumption of merit goods occur
low level of income among consumers, imperfect information
why does the overconsumption of merit goods occur
lack of knowledge about harmful effects
why are public goods market failure
free rider problem. non rival, non excludable, therefore not provided by free market (no profit incentive)
why is abuse of monopoly power market failure
dominates market, restrict g/s to raise price
why is factor immobility market failure
prevents resources from being allocated efficiently
