Economics-microeconomics Flashcards
What is the basic economic problem?
There are limited resources and the government needs to make choices of how to use them to fulfil our infinite wants and needs.
Who are the economic agents?
.Individuals
.Households
.Firms
.Government
Explain the factors of production
.Capital- technology used to make products
.Enterprise- the people who bring the factors together
.Land- the natural resources used
.Labour- the human input into production
Define specialisation
When a firm is focused on producing a particular product
What are the advantages of specialisation?
.Allows countries/firms to focus on specific products and improve the quality and quantity of them
.Countries can trade with others
What are the disadvantages of specialisation?
.Over Specialisation can leave a country vulnerable to a change in demand
.If finite minerals are overused they can become exhausted
Define division of labour
Separating a task into many to create a continuous repeated line of work
What are the advantages of division of labour?
.Increased boredom could lead to lack of productivity and worsen quality and quantity of the products
.People could move jobs leaving other sectors scarce of workers also creating a lack of productivity
What are the disadvantages of division of labour?
.Decrease in the cost per unit which makes the products cheaper for consumers
.Increased productivity
.Workers can be trained faster and cheaper
What are economic goods?
Scarce goods which have an opportunity cost of use, e.g. gold, oil, tin
What are free goods?
Resources which are not scarce and have no opportunity cost of use, e.g. air
What are sustainable resources?
Resources which can be exploited over and over again because they renew themselves, e.g. fish stocks
What are non-sustainable resources?
Resources which are finite and cannot be replaced when used, e.g. coal
What are the functions of money?
.A means of exchange- money allows the buying and selling of goods
.A unit of account- money measures the worth of goods
.A store of value- money keeps its value over time
.A method of deferred payment- money allows goods and services to be acquired now and payed for later
What is a barter economy?
An economy where people exchange goods and services for others in return
What are the problems with a barter economy?
.Double coincidence of wants- people exchange goods without any monetary medium
.Indivisible goods- goods can’t be divided
What are the sectors of production in the economy?
.Primary- agriculture
.Secondary- manufacturing
.Tertiary- services
.Quaternary- technology, research
What are the characteristics of money?
.Durability- it lasts long
.Portable- easy to use
.Divisible- it can be broken down
.Can’t be counterfeited- hard to copy
Define ceteris paribus
All other things remain equal
What is a command economy?
An economy where only the government allocates resources deciding what, how and whom to produce.
Which economic thinker agrees with the command economy?
Karl Marx
What are the disadvantages of a command economy?
.People have less choice and freedom
.Government owned firms have less incentive to be efficient
What are the advantages of a command economy?
.Government may provide more equitable distribution of resources
.Shortages and surpluses
Define a free market
An economy where resources are allocated by the individual economic agents
What are the advantages of a free market economy?
.Consumers are free to choose what they buy(sovereignty)
.Producers are free to produce what they want
.Profit is the main motive of all businesses
What are the disadvantages of a free market economy?
.Inequality
.Market failure
.Monopolies
Which economic thinker agrees with a free market economy?
Adam Smith
Friedrich Hayek
What is a mixed economy?
An economy where resources are allocated by the government and through the economic agents
What are the advantages of a free market economy?
.The government provides things that businesses can’t, e.g. education, healthcare
What does a PPF graph show?
.The maximum productive potential of an economy
.Opportunity cost
.Economic growth or decline
.Efficient or inefficient allocation of resources
.Possible and unattainable production
What is opportunity cost?
The next best alternative that is foregone when making a choice
What is the law of diminishing returns?
States that as you add more of one factor in production while others are constant, increasing output of product become smaller
What are public sector goods?
Goods and services that are owned by the government
What are private sector goods?
Goods and services owned privately by individuals and organisations
What is the law of diminishing marginal utility?
States that as we consume more of a good the less we value the good
What is the formula for diminishing marginal utility?
DMU = Change in utility
Change in quantity
What is demand?
The quantity of a good/service that a consumer is willing and able to buy at a given time and price
What factors affect demand?
.Population .Advertisement .Substitutes .Income .Fashion/trend .Interest .Complementary goods .External shocks .Speculation
What is the theory of demand?
States that as the price of a good increases, the demand for the good decreases, vice-versa
What factors affect the theory of demand?
.Income effect- when the price of a good rises people can afford less so demand falls
.Substitution effect- when the price of a good rises people switch to cheaper alternative goods
What is the price elasticity of demand?
Measures the responsiveness of demand to a change in price
What is the formula for PED?
PED = Change in quantity demanded
Change in price
What is the PED value for perfectly inelastic?
0
What is the PED value for inelastic?
0-1
What is the PED value for unitary elastic?
1
What is the PED value for elastic?
1-infinity
What is the PED value for perfectly elastic
Infinity
What factors affect PED?
.% of income spent .Brand loyalty .Addictiveness .Necessity vs Luxury .Time period .Substitutes
What is revenue?
Income earned from selling goods and services
What is the formula for revenue?
R = P x Q
How should firms react to a change in demand?
.Elastic- decreasing price increases revenue
.Inelastic- increasing price increases revenue
What is a market?
The interaction between demand and supply
What is the price elasticity of supply?
Measures the responsiveness of supply to a change in price
What is the formula for PES?
PES = Change in quantity supplied
Change in price
What factors affect PES?
.Capacity- no capacity = elastic
.Ease/cost of production- easy/low cost to move Fop = elastic
.Stocks- long shelf life = elastic
.Time period- Long run = elastic
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What is supply?
The quantity of goods and services that producers are willing and able to sell at a given time and price
What is the theory of supply
States that as price rises the quantity supplied rises, vice-versa
Why does the supply curve slope upwards?
The incentive of profits
What factors affect supply?
.Productivity .Indirect tax .Number of firms .Technology .Subsidies .Weather .Cost of production
