Exam 1 Flashcards
The basic economic problem
Our wants are infinite,but resources are finit. Therefore, we have to choose how to best allocate our scarce resources in a way that best maximises utility in society
The output point is above the PPF curve
It is currently unattainable but with technological breakthrough this can be produced
Output point is on the PPF curve
All resources are fully utilised
Output point is under the PPF curve
A misallocation of resources
PPF line
Shows the maximum potential output of an economy if all resources are fully utilised
Factors that could shift the PPF line outwards
- land
- productivity of labour
- technological breakthrough
- increased retirement age
- better machinery
- increased working class population
Opportunity cost
The benefit forgone when choosing the next best alternative
Excess supply
When the quantity supplied is larger than the quantity demanded at the price
Shortage
Excess demand
As P increases
There will be some contraction of D
Unitary elastic demand
When a change in price leads to equal proportional change in demand
Factors of production
Land, Labour, Capital, Enterprise
Land
Copper, trees, coal
Labour
Teachers, Accountants, dentists
Capital
Roads, computers, factories
Enterprise
CEO, The chairman, the managing director
Pareto efficiency
When an economy is using all its resources
Allocative efficiency
When resources are allocated to produce goods and services that best reflects the current desires of society
Concave-shaped PPF line
Imperfect factor substitution
Straight line PPF
Perfect factor substitution
Pivot shift PPF
A technological breakthrough only applied to one output
Potential economic growth
A rise in the maximum potential output of an economy
Actual economic growth
A rise in the amount of goods and services produced
Output gap
The difference between the maximum potential output and the actual output being produced
Labour productivity =
Total output / number of workers employed
Total production =
Output per worker per hour x Number of hours worked
Division of labour
The breaking down of production process, whereby workers specialise in just 1 or 2 tasks
Specialisation
When a worker/firm/country focuses on producing just one or two goods
Labour productivity
Measures the value of output per worker per hour
Structural Unemploymet
The inability of labour to take a job in a different profession, due to a lack of transferable skills
Occupational immobility of labour
Structural Unemployment
The supply curve:
The marginal cost of production curve
The supply curve shows:
The cost of producing each unit of output
Or
The total quantity produced at any given price
If the price rises due to an extension of demand
There will be an extension of supply (upwards)
If the price falls due to a fall in demand
There will be a contraction of supply (downwards)
The demand curve shows
How much an individual would buy at different prices
The law of diminishing marginal utility
As consumption increases, marginal utility derived from each additional unit declines
Why does the demand curve slope downwards?
The income effect
The substitution effect
The income effect
When price falls people can afford to buy more of that good
The substitution effect
As the price of a good falls, consumers will substitute and switch to buy that good.
Supply is more abundant, the price falls
Extension of demand (downwards)
When price rises due to a left shift in the supply curve
The rising price will ration goods to those who most enjoy consuming them
Supply curve shifts right
Increase the quantity supplied at any given price
Demand curve shifts right
Increase in quantity demanded of a good at any given price
Consumer surplus
The difference between the highest price consumers are prepared to pay, and the price they actually pay
Producer surplus
The difference between the lowest price a producer is prepared to sell for, and the actual price received
The sum of all the consumer surplus on each unit
The area between the demand curve and the equilibrium price
The cum of all producer surpluses on each unit
The area between the supply curve and the equilibrium price
Community surplus
Producer surplus + consumer surplus
Excess supply
When the quantity supplied is greater than quantity demanded at that given price
Excess demand
When quantity demanded is greater that quantity supplied at that given price
The rationing function
When the price for a good falls, it is like a small increase in REAL income
Elastic demand
-infinity to -1
Inelastic demand
-1 to 0
The signalling function
And increase in prise caused by a rise in demand, will signal to entrepreneurs to enter the market
A decrease in price, waisted by a fall in demand, will signal to entrepreneurs to EXit the market
PED
% ^ Qd / %^ price
Inelatic demand
Vertical
When a change in price leads to a less than proportional change in quantity demanded
Elastic demand
Flat
When a change in pride leads to a more than proportional change in quantity demanded
Unitary-Elastic demand
Convex (
When a change in price leads to an equal proportional change in quantity demanded
YED
%^Qd / %^P
Inferior good
Income very inelastic
PES
%change in Qd / %change in P
