as level Flashcards
what is the economic problem?
how to allocate scarce resources given that there are unlimited wants
factors of production?
capital- man made aids to production
land - natural land that can produce goods/resources
labour - human resources (workers)
enterprise- innovative risk takers
choices to allocate resources
what to produce
how to produce
for whom to produce
what is opportunity costs?
the cost of the next best alternative (value of what we didnt do)
what ppf shows?
maximum production of 2 goods with given factors of production
combinations of 2 goods that can be produced with given factors of production
why is ppf concave
represents law of increasing opportunity costs
why is ppf linear
constant opportunity costs
on a macro ppf what does below the line mean
unemployment
what factor of production fixed in short term?
capital
how do you shift ppf?
increase factors of production
what is demand?
the amount consumers are willing and able to buy at any given price point
law of demand
inverse relationship between price and quantity
why demand downslope?
income effect- prices go up purchasing power drops
substitution effect- other goods/services prices become more competitive
factors of demand
population- more people to demand shifts right
advertising- good then shifts right
substitute price- sub price increases demand shifts right
income - normal and inferior
fashion- if in fashion demand shift right
interest rates- borrowed money is cheaper so shifts right
compliment price- is complement cheaper shifts right
inferior good and normal good
inferior - demand drops as income rise (tesco brand food)
normal- demand rises as incomes rise
law of supply
direct relationship
why supply upwards slope?
costs of production ( more profit as price is up)
factors of supply
productivity - more shifts right as cheaper costs
indirect tax - less means cheaper to produce shifts left
number of firms- more firms means more supply
technology- better tech less costs
subsidy- cheaper costs if more
weather- allows more supply (growing stuff)
costs of production
what is a free market?
a market without govt intervention
equilibrium
when demand = supply so no excess ( allocative efficiency)
price mechanism
eve if free market is not in equilibrium the market self corrects with its forces
functions of free market
prices…
allocate scarce resources efficiently
ration scarce resources by encouraging or discouraging consumption
signal excess demand/supply and need to adjust allocation of resources
incentivise producers to increase or decrease output for profit max
consumer surplus
difference between the price consumers are willing and able to pay and how much they do
producer surplus
the difference between the price producers are willing and able to pay and how much they do pay
society surplus
CS + PS
joint demand
product / services that are bought together ( printer and ink)
competitive demand
substitute goods (coke and pepsi)
derived demand
when demand for one thing increases demand for its inputs increases
composite demand
2 goods require the same input so when the production of 1 increases the others supply decreases (cheese and butter )
joint supply
increase in production for 1 good increases the supply of another (steak and leather)
ped formula and values
ped = %changeQd / %changeP
ped > 1 elastic
ped < 1 inelastic
ped = 0 perfectly inelastic
ped = 1 unit elastic
ped = infinity perfectly price elastic
determinants of ped
substitutes (number)
percentage of income
luxury / necessity
Addictive
time period (short run inelastic as cant look for subs)
pes equation
pes = %changeQs / %changeP
determinants of pes
production lag ( more means inelastic as longer to react)
stocks (more stock means more elastic as can react to change in price)
spare capacity ( if more then more elastic can react to changes more)
substitutability of FOP (more = more elastic can react)
time( can react better in long run)
xed formula
%changeQda / %changePb
xed figures
+ sub
-compliment
xed > 1 strong relation
xed < 1 weak relation
xed = 0 no relation
yed formula
yed = %changeQd / %changeY
yed figures
+ Normal good
- inferior good
NORMAL
yed>1 income elastic (normal luxury)
yed< income inelastic (Normal necessity
INFERIOR
>1 income elastic
1<income inelastic
business uses of PED
pricing decisions to maximise total revenue
prepare for increase in quantity for if elastic
business use of PES
find ways to make supply price elastic so they can react to changes in price/demand
business use of XED
pricing decisions such reducing price of first good and decreasing price of the second (reduce printer price increase printer ink price) or price against competitors.
cutting prices may cause price war so may show you to compete non price
if substitute don’t follow your price cut then you must be able to increase output and vice versa
business use of YED
tells both responsiveness and type of good
plan for booms by knowing the effect of more income
be able to increase output if boom and demand increases
limitations of elasticity
only ever estimates (sources of the data: surveys competitors and past data)
assumes ceteris paribus ( only one factor effects demand as demand may be effected by all elastticities)
ped varies along demand curve
what is allocative efficiency (graphically)
allocative efficiency is at the social optimum ( msb = msc )
where is the private optimum
mpc = mpb
social costs (sc)?
private costs (pc)?
private benefits (pb)?
social benefits (sb)?
- SC = PC + EC
- Private costs are the producers costs of production
- Private benefit is the benefits of consumption
- SB = PB + EB
maximisation of society surplus ?
maximisation of net social benefit?
demand = supply
MSB = MSC
what is government failure
when the cost of a policy out weighs the benefits of it causing worse allocation of resources
