Ch 1: Basic Economics + PPF + Markets Flashcards
What is the economic problem?
resources are limited relative to society’s unlimited wants
What are the types of resources?
- land- natural resources
- capital- man made equipment that contributes to the productive process
- labour- can be skilled or unskilled
- enterprise- person who combines the other three resources together so you can get the final product/service
What are the basic questions an economic system must fulfill?
- what to produce (and how much)?
- how to produce?
- for whom to produce?
Another way of saying this, is that economics is concerned with the production, distribution and consumption of goods and services
What is positive economics?
testing and developing economic theory, concerned with ‘what is’ in the economy’
What is normative economics?
‘what should be’ in the the economy, involved personal opnion and value judgements
What is opportunity cost?
value of the best alternative foregone
What is the production possibility frontier and what are the assumptions it operates under?
(PPF) important economic model that shows all the combinations of goods and services that can be produced by an economy given:
- resources are fixed
- technology if fixed
- economy produces just two goods
What does the PPF model illustrate?
The frontier illustrates the trade-off; to produce more of one good the production of another must decrease.
The frontier has a negative slope due to scarcity. It also provides a measure of opportunity cost. The PPF is not always straight, it is usually bowed. Constant opportunity cost=resources are equally suited to producing all types of goods.
In reality, some resources would be better making one good, while other resources would be more suite to manufacturing another. When the productivity of resources differs between types of goods, the PPF will be bowed outwards.
How is marginal rate of substitution calculated?
also known as opportunity cost, for good a=a/b
What does the PPF look like after an improvement in technology of good A?
What does the PPF look like after an increase in quantity of resources?
What will the outcome be if an economy chooses to work at point A/B and what does X and Y represent?
If an economy chooses to produce at point A,
its future economic growth will be less than for
an economy that choses point B. At point B,
economic growth will be greater and living
standards will be higher in the future
X=economy operating at less full capacity
Y=unattainable
movement outwards of curve=economic growth
What are the characteristics of a market economy and what is the role of the market?
- supply and demand- determines price (price mechanism)
- competition
- profit
- less government intervention
Market creates a situation where buyers and sellers are in contact with each other for the purpose of exchange. In the modern world they can be both physical and electronic
What are the features of a product market?
- buyers (demand)
- sellers (supply)
- something to exchange (goods, services or resources)
- i.e. eBay
What are the features of a factor market?
- firms (buy resources: demand)
- households (provide resources: supply)
- something to exchange (factors of production/resources)
- i.e. seek.com.au
What are the characteristics of a competitive market?
- large numbers of buyers and sellers (no influence on market price)
- firms are price takers (take the price established by market) + relatively small
- very similar (homogenous/substitute) products
- easy entry into market
- i.e. agriculture, fruit and veg, cafes
What are the characteristics of a non-competitive (imperfect) market?
- small number of firms
- product differentiation
- firms are price setters⇢have market power
- entry into market is restricted
What is the price mechanism and how does it answer the 3 basic economic questions?
pressures for change in price in a market.
The three economic questions are answered by this. In a market economy, the consumer is king (consumer sovereignty)- the consumer determines what and how much will be produced. Consumers signal their tastes and preferences to producers by casting their dollar votes. Producers respond to the level of demand signalled by consumers. The how to produce question is answered by producers. Producers are guided by self-interest, so to operate profitably, firms have to operate efficiently and minimise costs. Producers will compare the price of inputs when deciding what techniques of production to use. Price also determines the for whom question. The rewards of production reflect the price which the market is willing to pay for the resources. The amount of income earned by resource owners generally reflects the scarcity of the resources they have provided.
Competitive markets determine prices via the model of demand and supply
role of prices in a market economy:
What is the role of price in a market economy?
- prices reflect the relative scarcity of goods and services in terms of their supply
- prices help to allocate resources
- prices act as incentives for producers
- prices act as a rationing device in enabling markets to clear shortages and surpluses
What is the economic essay formula?
D efine - key parts of the question
E xplain - body of essay
E xample - relevant and up to date, real world example
D iagram - model
