Basic Economics, Supply, Demand and Equilibrium Flashcards
PPF, Key Concepts, Demand, Supply, Equilibrium/Price Determination, The Price Mechanism, Producer/Consumer Surplus.
Why would a PPF curve move outwards? (2)
- Quantity of inputs
- Quality of inputs (e.g. better technology or labour)
Why would a PPF curve move inwards? (4)
- War
- Resource usage
- Migration of labour
- Natural disaster
What does PPC/PPF stand for?
Production possibility curve/frontier
What is a PPC/PPF?
The curve which displays the maximum output of a company of the are working at maximum capacity
- the bikes to cookies diagram
Definition of demand:
Quantity of goods and services bought at a given price in a given time period
What is the income effect?
As the price DECREASES we have MORE disposable income, thus we can buy MORE of a good.
Quantity demand increases
What is the substitution effect?
If the price INCREASES, this means price relative to alternatives INCREASE. The quantity demand of the good DECREASES but the quantity demand of the alternative INCREASES
What are the reasons for a shift of a demand curve? (7)
- Fashion/trend
- Population
- Price of alternative/substitute goods
- Price of Complimentary goods
- Legislation conditions
- Derived demand (what you need to make something)
- Incomes increase
What is diminishing marginal utility?
How people value their things
The utility someone would get out of the product, constantly goes down with time
What does the law of demand state?
When the price increases, the quantity demand will decrease.
When the price decreases, the quantity demand will increase
How do you calculate the opportunity cost?
The amount of product A you will loose to produce x amount of B
E.g. to make 17 more computers you will loose 5 microwaves - so the opportunity cost = 5/17
Why is it most likely that an economy’s output is inside the PPC? (2)
Because there is never full employment
Also it is hard to work at perfect capacity as workers aren’t 100% effective
Definition of supply:
Quantity of goods and services produced at a given price in a given time period
What are the 3 main reasons for the upwards slope of the supply curve?
- Profit incentive
- Covering costs of production
- Attracting new entrants to the market
What is profit incentive?
When firms what to make a profit, so charge more for their goods and create more goods so that profit is maximised
Why is covering the costs of production a reason for the supply curve being an upwards slope
Firms may need to make more goods at a higher price in order to cover the cost of their Costs of production
What does opportunity cost =
Amount gained/amount lost
Why are PPF’s usually curved?
Because certain workers are better at making x than y, and some are better at making y than x
What is productive vs allocative efficiency?
Productive = what you can make Allocative = how the demand effects where you maximise well fair, optimum supply of demand
What is ceteris paribus?
“All other things being equal”
What are the reasons for a movement along the demand curve?
Price or quantity
What is perfectly competitive?
Lots of producers - none is able to set prices/influence the price
What is the difference between Normative and Positive Statements
Normative = A value judgement
which cannot be proven true or false
Positive = a factual statement which can be proven true or false
What is meant by ‘modeling’ in Economics
When economics is expressed in mathematical terms for greater precision
What is the assumption of rationality?
Making assumptions of people so that it is easier for scientists to manage solving problems.
How do you show economic growth on a PPF curve?
It shifts outwards
Causes of a shift of supply?
- New technology
- Change in the cost of production
- Price of other goods (Joint+substitute)
- Gov. tax, subsidy and regulations
- Change in climate (agricultural industries)
- No. producers in the market
- Expectations
Causes of Movements on the supply curve?
Attempts to raise profits (raising prices)
What is equilibrium?
The point at which Demand and Supply meet. So the price and quantity is determined
What is excess Demand? + how it is solved
A SHORTAGE
When there is too much demand for the supply to fulfil the needs of, so there is upward pressure on prices and then less consumers and more producers enter the market until equilibrium is reached again
What is excess Supply? + how it is solved
A SURPLUS
When there is too much supple for the demand to consume, so there is downward pressure on prices and then less producers and more consumers enter the market until equilibrium is reached again
What is the incentive function?
Consumers tell producers about changing needs and wants through what they buy. Higher prices act as an incentive to raise output because the supplier stands to make greater profit. Alternatively, lower prices act as an incentive for consumers to consume more.
What is the Rationing Function?
Prices serve to ration scarce resources when demand in the market is greater than supply. e.g. When there is a shortage, higher prices mean that only those who are willing and able will purchase the good
What is the signalling function?
Prices adjust to demonstrate where resources are require and where they are not. Prices rise and fall to reflect surplus or shortage. (if prices are rising due to high demand, this signals to producers to produce more)
Define Consumer Surplus + how does it look on a graph?
The difference between the price that consumers pay and the price that they are willing to pay. On a supply and demand curve, it is the area between the equilibrium price and the demand curve
Define Producer Surplus + how does it look on a graph?
The difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade. It is shown graphically as the area above the supply curve and below the equilibrium price.
Where is consumer and producer surplus maximised? (on a graph)
Equilibrium
