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Microeconomics > Economic Methodology And The Economic Problem > Flashcards

Economic Methodology And The Economic Problem Flashcards

1
Q

What is a positive statement?

A

An objective statement that can be tested, the results examined and the statement rejected or accepted

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2
Q

What is a normative statement?

A

A value judgement based on opinion rather than factual evidence

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3
Q

What is the fundamental economic problem?

A

Wants / needs are infinite but resources required to satisfy them are scarce

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4
Q

What is the purpose of economic activity?

A

Producing goods and services which satisfy consumer needs and wants

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5
Q

Who decides what to be produced?

A

The government

The private sector

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6
Q

How are goods and services produced?

A 
Inputs in the form of the factors of production
Produce output (goods and services)
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7
Q

What do firms aim to do?

A

Minimise cost

Maximise profit

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8
Q

What are the four factors of production?

A

Land
Labour
Capital
Enterprise

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9
Q

Describe capital in the factors of production?

A

A good which can be used in production process

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10
Q

Describe land in the factors of production?

A

Natural resources such as oil coal water

Can also be the physical space for fixed capital

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11
Q

Describe labour in the factors of production?

A

Human capital which is the workforce of the economy

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12
Q

What is the incentive for labour?

A

Wages

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13
Q

Describe entrepreneurship in the factors of production?

A

The entrepreneur is someone who takes risks, innovates, and uses the factors of production

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14
Q

Incentive of entrepreneurship?

A

Profit - an incentive to take risks

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15
Q

What does a PPF curve illustrate?

A

The total possible output of two goods or services that can be produced from a given level of factors of production

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16
Q

Why does the PPF curve cube outwards?

A

Specialisation of factors of production

LAW OF DIMINISHING RETURNS

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17
Q

A point within the PPF curve shows what?

A

An inefficient allocation of scarce resources

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18
Q

Describe long run economic growth?

A

Increased total productive capacity

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19
Q

Describe short run economic growth?

A

Makes use of spare capacity

Takes up slack in the economy

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20
Q

What does the PPF curve assume?

A

Ceteris Paribus

  • a fixed amount of resources are used
  • constant state of technology
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21
Q

What is demand?

A

The number of units consumers are willing and able to pay at any given price

22
Q

What does price do to a demand curve?

A

Causes a movement along the existing demand curve

23
Q

What is the mnemonic to remember determinants of demand?

A

PIRATES

POPULATION
INCOME
RELATED GOODS
ADVERTISING
TASTES
EXPECTATIONS
SEASONS
24
Q

Describe how population can cause a shift in demand?

A

Larger population = higher the demand

25
Q

Describe how income can cause a shift in demand?

A

More disposable income
Demand increased

  • they can afford more goods
26
Q

Describe how related goods can cause a shift in demand?

A

Substitutes : price of a substitute falls, demand for the original good falls

Complement : price of a complement falls, demand for the original good increased

27
Q

Describe how advertising can cause a shift in demand?

A

Increased consumer loyalty and increased demand

28
Q

Describe how tasted and fashions can cause a shift in demand?

A

The demand for a good may change if consumer tastes change

29
Q

Describe how expectations can cause a shift in demand?

A

(Future price changes)
If consumers expect prices to rise
Demand is likely to increase in the present

30
Q

Describe how seasons can cause a shift in demand?

A

Demand changes according to the season

Eg. Icecream

31
Q

What does the law of diminishing marginal utility state?

A

For an extra unit of the good is consumed, the marginal utility falls

32
Q

In a free market, what do market prices do?

A

Provide incentives for consumers about how much to purchase
Reflect the relative scarcity of the product
Communicate information to producers about how much to supply

33
Q

In a market, how does the economy use scarce resources efficiently?

A

Through price

34
Q

Define supply?

A

Quantity of a good or service which forms are willing and able to produce at any given price

35
Q

Why does the supply curve slope upwards? (rise in price rise in supply)

A

It is more profitable for firms to supply the good
New firms enter the market because it seems profitable
Firms cost increases (larger outputs) so price increases to cover the cost

36
Q

What is the mnemonic for the determinants of supply?

A

PINT - SWC

PRODUCTIVITY
INDIRECT TAXTES
NUMBER OF FIRMS
SUBSIDIES 
WEATHER
COSTS OF PRODUCTION
37
Q

How does productivity shift supply?

A

Higher productivity caused an OUTWARD shift because average firm costs fall

38
Q

How do indirect taxes shift supply?

A

Inward shift in supply

Higher costs

39
Q

How does technology shift supply?

A

More advanced technology causes an OUTWARD shift of supply

40
Q

How do subsidies shift supply?

A

Subsidies cause an outward shift in supply

41
Q

How does weather shift supply?

A

Favourable conditions increase supply

42
Q

How do costs of production shift supply?

A

If costs fall

Firms can afford to supply more

43
Q

What are the three functions of prices?

A

Rationing function for demand
Incentive to supply
Signalling

44
Q

Explain the rationing function of prices?

A

Prices will rise
As goods become more scarce
Ensuring only those who are most willing and able to pay in order to gain the benefit of consumption

45
Q

Explain the incentive function of prices?

A

High prices give firms motive

to increase production as higher prices will often results in increased profitability

46
Q

Explain the function of signalling in prices?

A

Prices provide information to consumers about the likely quality of a good or service
High prices provide a signal about the likely profitability of a market

47
Q

What does the PPF illustrate?

A

Total possible output of two goods and services that can be produced from a given level of the factors of production

48
Q

when is an economy productively efficient?

A

only one more good can be produced by producing less of another

49
Q

what is the fundamental economic problem?

A

what
how
whom

goods and services should be produced

50
Q

characteristic of a free good?

A

no opportunity cost to supply

51
Q

what is the purpose of economic activity?

A

the production of goods and services to satisfy needs and wants

52
Q

what does the demand curve show

A

relationship between price and quantity demanded

Microeconomics (5 decks)

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