Basic economic problem and supply and demand Flashcards
What is the basic economic problem?
There are unlimited needs and wants but limited resources
What are the three economics question?
-what to produce
-how to produce it
-for whom to produce it
What are the three markets?
-centrally planned
-mixed
-free enterprise
What are the four economic agents?
-producers (maximise profit)
-consumer (maximise satisfaction)
-government (maximise social welfare)
-workers (maximise pay)
What is the law of diminishing marginal utility?
As the amount consumed of a commodity increases, the utility derived by the consumer from the additional units
(The more of something someone has, the less satisfaction they get from it)
What is total utility?
The total satisfaction from a given level of consumption
What is marginal utility?
The change in satisfaction from a given level of consumption
What does the demand curve show?
Shows the amount of a product that consumers would buy at different prices
-it slopes downwards because cheaper the product = more people that will buy it
What could be causes of shift in demand curve?
-population
-change in price of a substitute good
-change in price of a complimentary good
-income
-advertising
What does the supply curve show?
-how much of a product producers will supply onto the market at each price
- a change in price will cause a movement along the curve
-> an increase in supply = line moves right
-> a decrease in supply = line moves left
What could be causes of a shift in the supply curve?
(Cost of production factors)
-wages
-raw materials
(Government factors)
-tax / subsidies
-technology
(Natural factors)
-floods
-droughts
What is the equilibrium on a d+s graph
(Also called market cleaning price)
Found where the demand and supply curves meet
What is excess demand?
When the Price of a good is lower than the Equilibrium Price
What will happen if the price is lower than the equilibrium price?
There will be a shortage of the good as firms want to supply les onto the market than consumers want to buy
What is derived demand?
One demand comes from a demand for something else
(E.g. demand for houses = demand fro more builders)
What are some likely determinants of elasticity of demand?
-time period
-number and closeness of substitutes
-the proportion of income taken up by the product
-luxury or necessity
-habit forming
What is price elasticity of supply?
The responsiveness of supply to a change in price
What will supply always be?
Positive
How do you calculate price elasticity or supply?
% change in quantity supplied / % change in price
What are likely determinants of elasticity of supply?
-availability of the four factors of production
-time
-spare capacity
-spare stock and components
What is income elasticity of demand?
Responsiveness of demand to a change in income
What is price elasticity of demand?
The responsiveness of demand to changes in price
How do you calculate price elasticity of demand?
% change in quantity demanded / % change in price
When would an answer be an elastic good?
If the answer is greater than one
