econ theme 1 Flashcards
Economic Problem
Choices to be made due to scarcity
What to Produce and in What Quantity?How to Produce? For Whom to Produce?
Factors of production
Land - natural resources (oil)
Labour - human input
Capital - man-made items used in production process (machines)
Enterprise - organises fop and take risks
FOP rewards
Land - rental income
Labour - wages
Capital - Interest from savings
Enterprise - profits
Opportunity costs
The next best alternative forgone when making a decision
Free goods
Goods so abundant that its availability is not a constraint on economic activity (sunlight)
Positive statements
Objective statements that can be tested
Normative statements
Subjective statements carry value judgements and cannot be tested
Economic agents
Firms -make goods/services
gov. - provides rules under which consumers interact
consumers - buy goods/services
Production Possibility Frontier
Alternative combinations of two goods/services attainable when all economic resources are fully and efficiently employed
Factors causing outward shift in PPF
-discovery of new natural resources
-advancement in tech
-increase in size of workforce
Factors causing inward shift in PPF
-war
-recession
-reduction in workforce size
Ceteris Peribus
“all other things equal”
-all other variables stay constant
Division of labour
production is broken down into separate tasks, to raise output per person
advantages of division of labour
+ workers speacilised in tasks so increase output
+worker trained in 1 task so lowers training costs
+less time moving from each task
disadvantges of division of labour
- boredom in workers decrease productivity
- workers have limited skills so if fired hard to find new job
-if 1 group of workers strike it brings entire production to standstill
Specialisation
The process wherein a company decides to focus their labor on a specific type of production.
advantages of specialisation
+uses resources more efficiently
+ increases growth and standard of living
disadvantages of specialisation
-if demand for a good a country specialises in decreases unemployment increases
-over-reliance on certain production means a reduction in it can stunt economic growth
Demand
Quantity purchasers are willing/able to buy at a given price in a given period of time
Factors shifting demand graph
PASIFIC
Population
Advertising
Substitutes
Income
Fashion
Interest rates
Complements
Command Economy
Economy where all descisions are made by GOV.
Command Economy (+)
+More certainity in terms of economic descisions
+More equal society and provides public goods
Command Economy (-)
-State-owned firms do not aim for profit maximisation so poorer quality goods
-consumers cannot decide what is to be produced
Free market
market free from Gov. intervention
Free Market (+)
-Firms objective is profit so leads to faster growth = more profits for workers
-competition between firms ensure lower price
Free Market (-)
- Certain public goods not provided
- creates unequal society, rich get richer at expense of poor (exploiting workers)
Functions of money
Medium of exchange
store of value
measure of value
deferred payment
Utility
Measure of satisfaction we get from purchasing and consuming a good/service
Marginal utility
Change in total satisfaction from consuming an extra unit of a good/service
Composite demand
goods have more than one use - an increase in demand for one product leads to fall in supply of the other
Derived Demand
the demand for a good or service that arises from the demand for another related good or service
Supply
quantity of a good/service that a producer is willing/able to supply on the market at a given price in a given time period
Externalities
-Cost and benefits to 3rd parties that are not part of transaction
-They are not take into account by the price mechanism so are a form of market failure
Private costs
Cost paid directly by producer and consumer in transaction
Social costs
-The sum of private costs and external costs
- Social cost = private costs + external costs
why economists use models
to develop theories of behaviours
model are based on assumptions to allows deductions to be made
scarcity
resources are finite but wants are infinite, creating scarcity where choices must be made
capital goods
those required to produce other goods
consumer goods
those that give satisfaction to consumers e.g. smartphones
potential growth economy
the rate of expansion an economy can sustain at full capacity and employment
actual growth
a percentage that shows the rate of change in a country’s GDP, typically from one year to the next
consumers (rational beings)
seek to maximise satisfaction + utility
(most affordable+highest satisfaction)
irrational behaviour
when people make choices and decisions that go against the assumption of rational utility-maximising behaviour.
why may agents behave irrationally
- influence of other peoples behaviour
- importance of habitual behaviour
- information overload
bounded rationality
humans cannot be fully rational because of limits
- information failure
- amount of time to make decision
- limit of human brain to process every piece of info
shortage
- qd of g/s > qs
resolving shortages
- firms have an incentive to increase price to increase profits
- as prices rise there is a contraction in demand
- and there is an incentive for suppliers to increase supply
surplus
- qs > qd
resolving surplus
- producers may decrease the price of g/s
- this will cause an extension in demand
- and will mean suppliers have less incentive to supply
consumer surplus
- happens when the price that consumers pay for a g/s is less than the price theyre willing to pay
