Introduction to Economics (Theme 1) Flashcards
What does Cetris Paribus ?
All other things being equal, remaining the same
What is a normative statements ?
Those which value is based and involve opinions
What is a positive statement ?
A statement which can supported with evidence and facts.
The 4 factors of production ?
Land
Labour
Enterprise
Capital
What is Production Possibility Frontier ?
Capital goods, are the machinery that assists (makes)in making the consumer goods
Consumer goods- good which are used by the public, civilians
PPF-it is the combinations of goods which can be produced if all resources are utilised
Production Possibility Frontier
A curve on a graph that illustrates the possible quantities that can be produced of two products, if both products depend on the same finite resource.
Consequences of producing too much capital goods ?
It would result in too much machinery that would not be needed, as the finite recourse would have been used to produce such machinery rather than the consumer goods.
What are the consequences of producing too much consumer goods?
It would result in there not being enough machineries being able to match the amount consumer goods that are being produced, therefore it would run out of consumer goods
What are the consequences of producing too much consumer goods?
It would result in there not being enough machineries being able to match the amount consumer goods that are being produced, therefore it would run out of consumer goods
What is specialisation of labour ?
When an individual company, or country focuses their resources of which they have, and their labour, on a specific type of production or skill to increase efficiency in this certain area.
Disadvantages of specialisation
It means if certain job is left vacant- very hard to replace such specialised job
Individuals- might get bored of one job for their life
The lack of a multiple skill set, only have the ability to do this one job
Not able to switch careers in companies
Also might expect higher wages for a single job
Advantages of specialisation
It reduces the cost of having to train workers because they only have to be qualified on one particular job
They can maximise efficiency on particular job- since it’s what they are good at
What is absolute advantage?
Being able to produce more of something than another country, this is assuming that both have the same resources
What is Comparative advantage ?
Being able to produce more of something at a much lower opportunity cost than another country, again assuming all factors of production are equal.
Opportunity cost equation
It’s the opposite to what you want so if it’s opportunity cost of furniture, to biscuits it’s biscuits divided by furniture
Reason for division of labour
It means multiple skills can be done in one company
Problem for division of labour
Decreases concentration and specialisation in particular teams,
What are heterodox economists
These are economics that advocate theories assumptions or methods that may be radically different than those used in mainstream economics
What is Flat Tax ? (Ad Valorem Tax)
It is imposed on firms, but can be passed onto customers through higher prices- key example VAT
What is regressive tax ?
This is a tax that affects poor working class people than it will benefit them.
What is consumer Surplus ?
The difference amount between the total amount of money the customers were willing to pay and what they actually paid.
What is producer surplus ?
The amount that the producer is willing to supply and the actually amount they receive.
Below the normal equilibrium
What is the basic economic problem?
There are unlimited needs and wants
Problems of scarcity
Limited Resources
What are the three economic questions ?
What to produce
How to produce it
For whom to produce it
What are the three different types of economic systems
Centrally planned- everything is controlled by the state, bought sold
Mixed Economy- trying to allocate enough resources to satisfy people’s needs
Free enterprise- where everything can be done by choice of the people, eg USA
What are the 4 main groups ( economic agents)
Producers- try to maximise profits
Consumers- try to maximise satisfaction
Governments- Social welfare( best for everyone)
Workers- try to maximise benefits of work
What is the economic theory?
Economic theory- assumed that everything and everyone is perfectly rational, making sensible decisions.
What is the law of diminishing marginal utility ?
Marginal - additional amount, that you have to put onto a product
Total utility- it refers to the amount of satisfaction gained
Marginal utility- the change in satisfaction from consuming an extra unit
Eg. The more of a product or service that is consumer then the amount of satisfaction diminishes.
Demand
How much the consumer is willing to pay at any given price.
Change in price of a given product , it will move along the curve
Eg. Price drops you buy more
Factors that influence demand of products,
Treads and fashion, changes in price in products, income, advertising, population change
, in price of a substitute good.
Factors that cause shifts in supply
Wages, raw materials, government-taxes, subsides, technology, natural factors-droughts and floods,
If a government gives subsidies its means it’s cheaper in production.
What is the equilibrium?
A state of balance, the point of which that both are equal.
What is disequilibrium
This is when price is forced down
For example, summer clothing going into autumn it needs to sell, so price will go down which makes demand go up
What is elasticity of demand
The responsiveness of demand to changes in price
The formula is
% change in quantity demanded
Divided by % Change in price
- Perfectly inelastic ?
- Perfectly elastic ?
1.The percentage change in quantity demanded stays the same no matter what the change in price.
2.The percentage change in price makes the demand drop off a cliff no matter what change in price.
What is derived demand
This is where demand for a product or service comes from the demand for another product or service.
What does Inelastic mean ?
This is when demand or supply is somewhat insensitive to changes in price or income
What is it in elasticity if it is greater than one
The relationship is elastic
What are the determines of elasticity of demand?
The longer the time under consideration the more elastic a good is likely to be,
Number and closeness of substitutes, the greater the number substitutes then it is more elastic
The proportion of income, is taken up by the product, the smaller the proportion the more inelastic
Luxury or necessity, holidays are a luxury, but food is a necessity
Habit farming, for example addictive drugs
Price elasticity of supply
The responsiveness of supply to changes in price
What is a normal good ?
What is an inferior good ?
Normal good - Demand rises as income rises and vice versa
It is a positive value
(Any value that is greater than one, is a luxury good)
Inferior good-demand falls as income rises and vice versa
It is a negative value
What does knowledge of YED do and mean ?
The knowledge of YED(income elasticity of demand) helps firms to predict the affects of changes in the economic cycle of their sales.
Luxury goods- with high income elasticity see greater sales volatility over a business cycle than necessities, where demand is less sensitive to changes in the economic cycle.
Higher value- added products increase profit margins, they have a high YED and low PED
What is income elasticity of demand
The responsiveness of demand to changes in income.
Cross elasticity of demand
The responsiveness of demand of one good to changes in the price of a related good.
