Foundations of Economic Analysis Flashcards
What are the main factors of production?
Land - all natural resources
Labour - physical and mental
Capital - machines, produced inputs.
Entrepreneurship - creativity
Typically, what are economists most concerned with?
Typically, economists are most concerned with Labour and Capital, as land is usually fixed and entrepreneurship is given (at least in the short-run).
What does a production function typically look like?
Q = f (K, L)
where Q is output, K is capital and L is Labour. “f” is a function - which indicates that there is a general relationship between the inputs and output.
How could the government invest more in public sector goods? (Route 1)
Route 1 - Growth in the economy.
Growth in the economy can occur for several reasons:
Growth in the factors of production e.g. population growth.
Improvements in technology
Specialisation and trade
How could the government invest more in public sector goods? (Route 2)
If the government wishes to increase public sector goods then it can do this by transferring resources from the private sector to the public sector. This can be done by:
Taxation - the government can tax the private sector in general
Government spending - extra spending on the public sector
Regulation - forcing investment in public sector bonds and restricting private sector investment
If we are buying a good, for example: beer, what does our preference for beer depend on?
a)The price of beer (own-price effect) b) The future expected prices of beer. c) The price of close substitutes for beer e.g. wine, whisky etc (cross-price effect).
d) The prices of other commodities.
What are other determents of demand?
Income levels.
The size of the adult population
The weather
Tastes - is wine more fashionable?
Advertising etc.
Society’s income distribution
Is there linkage between supply and demand?
Some of these reasons for buying beer are more important than others.
These reasons for buying beer are not necessarily the same as the reasons for selling beer (e.g. to make a profit) - so in general there is no linkage between demand and supply.
Economists tend to concentrate on the current price as the main variable which determines demand - a ceteris paribus assumption.
What do economists tend to concentrate on that determines demand?
Economists tend to concentrate on the current price as the main variable which determines demand - a ceteris paribus assumption.
(This does not mean that other variables are ignored)
How is demand therefore usually expressed?
Demand therefore is usually expressed as follows:
Qd = f (P)
We need to make a psychological assumption about how people react to changes in the price.
In general, how do people react with changes in price?
Agents will buy more goods if the price of those goods is lower.
We assume that if substitutes exist for a good then people will tend to transfer from those substitutes to the good when the price goes down and away from the good when the price goes up.
This is a tendency - not everyone will transfer.
How can we represent demand curves algebraically?
e.g. Qd = 50 - 3P
Where Qd is the quantity demanded and P is the price. Note that the value of the parameter, -3, is negative implying a negative slope.
What is the difference between actual and desired demand?
Actual v desired (or planned) quantities is a very important distinction in economics - especially in macroeconomics.
The demand curve gives a set of desired quantities - they are hypothetical and do not tell us what the actual quantities demanded are
If the price is X, then the quantity demanded is Y
