Economic methodology and the economic problem Flashcards by James Lakaj

positive statements are

objective, tested with factual evidence

look for will

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normative statements are

based on value judgements, opinion rather than fact

look for should

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economic resources are

land, labour, capital, enterprise

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opportunity cost

of a choice is the next best alternative forgone

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law of diminishing returns

states that opportunity cost of producing x, leads to a fall in prod for y

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capital goods are

goods to produce other goods

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consumer goods

goods that cant produce other goods, jeans

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allocative efficiency

One cant be much better off without making someone worse off

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Demand =

quantity of good or service that consumers are willing to buy at a given price at period of time

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Factors that shift demand

pirates

population
income
related goods
advertising
trends
expectations
season

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Law of diminising marginal utility states

as extra good is consumed , marginal benefit decreases so consumer willing to pay less

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PED

percentage change in qd /percentage change in price

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PED ELASTIC

PED >1

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PED INELASTIC

PED <1

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PED unitary elastic

PED = 1

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PED perfectly inelastic

PED = 0

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PED perfectly elastic

PED = infinity

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when ped = negative -

elastic

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Factors influencing ped (trains)

Necessity
substitutes
adictiveness
Peak off peak

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in the LR ..

consumers have time to find substitutes = elastic

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in the sr

consumer no time = . inelastic

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taxes shift

curve supply !

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subsidy

is a payment from government to firm to encourage prod of good and lower ac

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P X Q

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inelastic demand =

firm raise price, quantity sold doesnt fall, increase in total revenue

elastic demand =

firm raise price, qs fall, decrease tr

YED =

%CHANGE in QD/ %CHANGE IN INCOME

complementary goods have a

-XED

close complements, when price falls small good X

small fall in price of good X leads to a large increase in QD of good Y

weak complements, when large fall in price

large fall in price of good X leads to only small increase in good QD of good Y

inferior goods fall in demand when

incomes rise YED <0

normal goods as income

rises demand rises YED > 0

luxury goods as income

rise, QD RISEEEEEE YED > 1

XED =

%CHANGE IN QD OF GOOD X/ %CHANGE OF PRICE OF GOOD Y

Close substitutes when price increase

small increase in p of X | leads to big increase in QD of Y

weak substitutes,,

the opposite as close

unrelated goods have a XED OF

XED = 0

Dervived demand =

demand for x linked to y

composite demand =

good more than 1 use

joint demand

good bought together

joint supply

increase in supply of x , decrease of supply of y

production =

output per worker per given time

specialisation =

when worker does one specific job in production process

adv of specilasation

higher output + quality

dis of specialisation

worker becomes repetitive less motivates

absolute advantage

when a country can produce more of a good with same units of inputs

in SR factors of prod

cannon change

in LR factors of prod

can change, all costs variable

fixed costs :

costs that do not vary with output

variable costs:

costs that do vary

TOTAL COST:

total variable cost + total fixed cost

average cost

ac = total cost / quantity produced

internal economies of scale =

firm becomes bigger, ac of production fall as output increases

REALLY FUN MUMS TRY MAKING PIES for economies of scale, benefit of having big firm

``` risk bearing financial managerial technological marketing purchasing ```

external economies of scale occur when

gov builds roads / better school

diseconomies of scale can happen when

C C C CONTROL COMMUNICATION COORDINATION

TR =

P X QS

AR =

TR / QS

Profit

= TR - TC

Firms break even when

tc = tr

max profit is

mc = mr

plc's want..

max profit to make investors happy so their goals are to max short term profit

objective of firms

survival growth increase market share

other objectives of firms

``` society environmental ethical managerial worker happiness ```

pure monopoly is

sole seller in market

when a monopoly raises price

output fall from q1 to q2, lead to producer surplus

three main factors of market mechanism

rationing incentive signalling

market failure occurs when

there is a misallocation of resources

types of market failure

monopoly info gap underprovision of public good externality

complete market failure

missing market

partial market failure

market is there just wrong price + quantity

public good

non excludable , non rival

private

excludable rival

quasi

both pub + priv

negative externalities can be caused by

demerit good

positive externalities can be caused by

merit good

symmetric info

means perfect info for producers + consum to make decision

asymmetric info

means market failure, misinfo

imperfect info

no info

mobility of labour

how easy to switch jobs

frictional

when changing jobsb

structural

decline in industry (coal)

geographical

family ties, social

occupational

labour workers dont have the skills needed

income =

flow of money

wealth =

flow of assets

indirect tax

tax on expenditure, increases production cost so producers supply less

two types of indirect tax

ad valorem; taxes as a % such as VAT specific set taxes per unit (petrol)

valorem tax producers pay

p1-p2

valorem tax consumers pay

p3-p1

specific taxes are

set taxes per unit (petrol)

more elastic demand (tax)

higher burden of consumers less producers

if tax = external cost

then supply curve becomes msc rather than mpc polluters pay damage

subsidy

payment from gov to producer, lower costs make more

price max graph where is price

at the top

for price max, free market is in equilibrium when

p1, q1

gov set a min price to

discourage

when gov fail at entering a market it results in

net welfare loss to society

causes of gov failure

distortion of price signals unintended consequences excessive administrative costs info gap