Micro Flashcards
Factors of Production
Resources used to produce goods/services
Capital (FoP)
Things which are used to make goods/services
Enterprise (FoP)
Is the willingness of people in firms to take risks + make a profit + organise land, labour, capital
Land (FoP)
Refers to natural resources such as oil, land itself + renewable and non-renewable
Labour (FoP)
Is the work done by humans in production
Production Possibility Frontier (PPF)
Shows the maximum potential output of a combination of two goods or services an economy can achieve when all its resources are fully and efficiently used, given the current level of technology
Economic growth
Is an increase in the production of goods/service in an economy (negative growth is a decrease in the production)
Consumer goods
Goods which do not produce other goods + used by people to satisfy their wants and needs
Capital goods
Goods which are used to produce other goods/services
Positive Statements
Can be proven true and false + are objective statements
Normative Statements
Express opinions + cannot be proven true or false + are subjective statements
Specialisation
Occurs when an individual, firm, region or country concentrates on the production of a limited range of goods/services
Division of Labour
Is the specialisation of workers on specific tasks in the production process
Functions of Money
1) Medium of exchange: commonly accepted in exchange for goods/services
2) Measure of value: the price of a good reveals its value
3) Store of value: value is maintained + can be kept for a long time
4) Method of deferred payment: allows debt to be created
Planning
Refers to the process by which a government allocates resources + funded through taxation
Price Mechanism
The means by which decisions of consumers + businesses interact to determine the allocation of resources
Command economy
An economy in which resources are allocated solely by the state (government)
Mixed economy
An economy in which resources are allocated by the state + the price mechanism
Free market economy
An economy in which resources are allocated solely by the price mechanism
Public sector
The part of an economy which is controlled or owned by the government
Private sector
The part of an economy which is not controlled or owned by the government + by individuals or groups of individuals
Utility
The satisfaction or benefit derived from consuming a good
Habitual Behaviour
Something that becomes a habit
Consumer Inertia
Fear of the unknown + don’t know what to expect
Bounded rationality
Individuals wish to maximise utility but are unable to do so due to a lack of time, information, ability to process information
Demand
Is the quantity of a good or service purchased at a given price over a given period of time
Substitute goods
Are two alternative products that can be used for the same purpose
Complement goods
Are products that are used together
Supply
Is the quantity of a good or service that firms are willing to sell at a given price in a given period of time
Revenue
The income that a government or company receives + price x quantity
Opportunity cost
Is the value of the next best alternative forgone
Excess demand
Shortage - occurs when demand exceeds supply at a given price
Excess supply
Glut - occurs when supply exceeds demand at a given price
Equilibrium price
When the supply of goods matches demand
Direct tax
A tax levied directly on an individual or organisation (tax on income, business profits)
Indirect tax
A tax levied on a good/service
Specific tax
Causes a parallel shift in the supply curve + the tax is the same fixed amount at all prices e.g. fuel duty, beer duty
Ad Valorem tax
Causes a non-parallel shift in the supply curve + the tax increases as the amount sold rises e.g. VAT, import tariffs
Price elasticity of demand (PED)
Measures the responsiveness of demand given a change in price
Price elasticity of supply (PES)
Measures the responsiveness of supply given a change in price
Factors affecting demand (6)
1) Population size
2) Changes in the prices of substitute + complement goods
3) Change in the age structure of the population
4) Change in income
5) Advertising
6) Changes to consumer taste/preference
Factors affecting supply (6)
1) Weather conditions (agriculture factor)
2) Changes to production costs
3) Improvements to technology/innovation
4) No. of firms
5) Changes in prices of related goods
6) Firm expectations of future prices e.g. may hold back supply until price increases
Determinants of PED (5)
1) No. of substitutes
2) Necessity/Luxury
3) Addictiveness
4) Time
5) Proportion of income spent on the product
Determinants of price elasticity of supply (5)
1) Time required to produce the product
2) Level of spare production
3) No. of stocks/finished goods available
4) Time
5) Perishability of the product
Consumer Surplus:
The extra amount of money consumers are prepared to pay for a good/service above what they actually pay + it is the utility or satisfaction gained from a good/service in excess of the amount paid for it
Producer Surplus:
The extra amount of money paid to producers above what they are willing to accept to supply a good/service + it is the extra earning obtained by a producer above the minimum required for them to supply the good/service
Income effect:
Assuming a fixed level of income, the income effect means that as the price falls the amount that consumers can afford increases + so demand increases
Marginal utility
The utility or satisfaction obtained from consuming one extra unit of a good/service
Diminishing Marginal Utility:
As successive units of a good are consumed, the marginal utility gained from each extra unit will fall
Cross elasticity of demand (XED)
Measures the responsiveness of demand for one good to changes in the price of another good
Income elasticity of demand (YED)
Measures the responsiveness of demand to changes in income
Market failure
Is where too much or too little of a good is produced or consumed compared with the socially optimal level of output OR when the price mechanism leads to an inefficient allocation of resources
External costs
A cost to a third party that is not involved in the making, buying, selling and consumption of a specific good/service (negative externality)
External benefits
A benefit to a third party that is not involved in the making, buying, selling and consumption of a specific good/service (positive consumption)
Non-rival
That consumption of a product does not prevent another person from also consuming that product e.g. radio programme, as if one person listens to the programme it doesn’t prevent another person from also listening to it. However, a radio itself is a rival good.
Non-excludable
Means that once a good is provided, it is impossible to stop people from using it e.g. once a lighthouse is provided the ships cannot be prevented from benefitting from it
Free-rider problem
Is a type of market failure that occurs because everybody is able to benefit from them
Public goods
Goods that have the characteristics of non-rivalrous + non-excludability
Regulation
Is a rule or law enacted by the gov that must be followed by economic agents + used to encourage a change in behaviour
Minimum price
A price set ABOVE the market equilibrium price by the gov
Maximum price
A price set BELOW the market equilibrium price by the gov
Limit
A limit (cap) is set on the total amount of pollution (e.g. CO2) firms are allowed to emit over a period
Government failure
When gov intervention designed to correct a market failure results in a less efficient allocation of resources
Guaranteed minimum pricing scheme
Where the surplus output created is purchased by a gov agency at the minimum price + the main aim is to protect producers incomes
Externalities
Are spill over effects from production and consumption for which no appropriate compensation is paid to one or more third parties affected
They can cause market failure if the price mechanism does not take account of the social costs + benefits of production and consumption
Profit Cap
- A limit on profits as a percentage of total revenue
- Profit cap is usually introduced where supernormal profits are regarded as excessive
Perfect information
When a buyer/seller has a complete understanding of the quality + nature of a good/service
Symmetric information
When buyers/sellers have equal amounts of knowledge about a good/service
Imperfect information
When a buyer/seller lacks a complete understanding of a quality + nature of a good/service
Asymmetric information
When a buyer or seller has more info about a good/service than the other party
Information gap
When either the buyer/seller doesn’t have access to the info for them to make a fully informed decision
Irrational Behaviour
Happens when people make choices + decisions that go against the assumption of rational utility maximising behaviour
