Micro Flashcards
What is a free good?
A free good is a good that is not scarce, and therefore is available without limit. A free good is available in as great a quantity as desired with zero opportunity cost to society. e.g. air, sunlight
Free market
The free market is an economic system based on supply and demand with little or no government control
Planned Economy
an economic system in which the elements of an economy (such as labour, capital, and natural resources) are subject to government control and regulation designed to achieve the objectives of a comprehensive plan of economic development
Mixed Economy
mixed economy, in economics, a market system of resource allocation, commerce, and trade in which free markets coexist with government intervention.
What does the circular flow of income model show?
The circular flow of income represents money moving through the economy. It shows how households purchase goods and services from firms by using the income they earned from firms by working for them.
Demand
Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period
The Law of Demand
Ceteris paribus, as the price of a product falls, the quantity demanded of a product will usually increase
Income effect
If the price of a product rises and we assume that income remains constant they will naturally buy less of the product.
Substitution effect
The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises.
5 non-price determinants of demand
- changes in income
- changes in tastes amd preferences
- prices of related goods
- demographic changes
- seasonal changes
Supply
The quantity of a good or service that producers are both willing and able to sell at a given price in a given time period
The law of supply
Ceteris paribus, as the price of the product rises the quantity supplied of that product will usually increase.
6 non-price determinants of supply
- Changes in costs of factors of production
- Changes in technology
- Changes in prices of related goods
- Expectations of the future
- Indirect taxes and subsidies
- Number of firms in the market
What is a positive statement?
Positive statements are objective statements that can be tested, amended or rejected by referring to available evidence.
What is a normative statement?
Normative statements are subjective statements i.e. they carry value judgements about what ought to be.
Negative Externalities of consumption
When certain goods are consumed, such as demerit goods, negative effects can arise on third parties.
Demerit Goods
Demerit goods are goods and services that negatively effect third parties when consumed e.g. tobacco, junk food
Price Elasticity of Demand (PED)
The responsiveness of quantity demanded to a change in price, along a given demand curve.
What are price ceilings?
A price ceiling is a ‘maximum price’ imposed by the government on a particular good (or service)
Normally imposed on neccesity goods such as essential food items or merit good that would be underprovided if left to the free market.
What are price floors?
A price floor is a minimum price that the government sets above the equilibrium
They may do this to raise the incomes of producers of important goods e.g. agricultural products.
Negative externalities of production
occurs when the production of a good or service creates external costs that are damaging to third parties .
e.g. manufacturing plants cause noise and atmospheric pollution during the manufacturing process.
Common access resources
Typically natural resources such as, fishing grounds, forests and pastures,oil and gas fields, national parks, grazing lands and irrigation systems, which are difficult to exclude people from (non-excludable) and rivalrous.
Public goods
Goods that are non-rivalrous in consumption and non-excludable (creates a “free-rider” problem).
e.g. street lighting, national defense, roads.
Law of diminishing marginal returns
As more and more units of a variable input are added to one or more fixed inputs, the marginal product of the variable input at first increases, but there comes a point where it begins to decrease
Increasing marginal costs
Marginal Cost is the increase in cost caused by producing one more unit of the good. The Marginal Cost curve is U shaped because initially when a firm increases its output, total costs, as well as variable costs, start to increase at a diminishing rate.
Price Elasticity of Supply
The measure of responsiveness of quantity supplied to changes in price.
Elasticity values
less than 1 = inelastic
greater than 1 = elastic
equal to 1 = unit elastic
What is allocative efficiency?
Occurs where there is an optimal distribution of goods and services. (D=S)
Social surplus is maximised
Net social benefit is maximised (MSC=MSB)
What are the functions of price mechanism?
Signalling
Incentive
Rationing
Resource Allocation
Price Mechanism
Price mechanism refers to the system where the forces of demand and supply determine the Prices of commodities and the changes therein
Consumer Surplus
The extra utility that is gained by consumers from paying a lower price than they were initially willing to pay.
Producer surplus
The excess actual earnings that a producer makes from a given quantity of output over and above what the producer was willing to accept for that output.
Income elasticity of demand (YED)
The measure of responsiveness of demand to changes in income.
Law of diminishing marginal utility
As consumption of a good increases, the marginal utility (/the extra utility) that the consumer receives decreases with each additional unit consumed.
