Micro Flashcards
Microeconomics
Economic behaviour in the individual markets that make up the economy
Included individual consumers, markets and industries e.g. NHS, housing, food
Macroeconomics
Explains how whole economy works; looks at aggregates rather than individual aspects Measuring economy as a whole- GDP Inflation Taxation Unemployment
Economics is a social science
Relationships of individuals within a society
E.g. Customers buy firms supply in the economic market
Economics
Study of social behaviour guiding in the allocation of scarce resources to meet needs and wants of the individual members of a given society
Study of scarcity
Needs
Limited, necessary
Wants
Limited supply
Scarcity
When wants and needs are not satisfied therefore a choice has to be made
Economics look at how resources are allocated in a certain way
So it’s a study of choices
Ex of scarcity
NHS lacking funding because of government making choices
Choices
When resources are scarce choices have to be made
Criteria of choices: maximise economic welfare
Goods
Tangible products
Economic activity
Central purpose of economic activity is production of goods and services to satisfy needs and wants therefore improve/maximise economic welfare
Production
Conversion of raw materials into products
Process of converting inputs into outputs
Factors of production
C apital - money raised to operate business
E nterprise - risk takers who organise other products; thinking, ideas
L and - where business is based; natural resources extracted from environment
L abour - the human input: skills, abilities
Services
Intangible
Free goods
Goods that are freely available at no cost and availability is unlimited
Economic goods
Goods which must be produced using finite resources which are in limited supply
Market failure
When economic welfare isn’t maximised
Goods are either over or under produced
Economic welfare
Economic wellbeing of an individual/group within a society/economy
Fundamental economic problem
How to make the best decisions about the allocation of scarce resources
In order to improve and maximise economic wellbeing
Opportunity cost
Next best alternative
Rational decision making
The assumption that people choose the best option based on their own self interest or which maximises benefit to them
Countering rational decision making
Making irrational choices when buying things When in a hurry On impulse Addictions Designer items Short and long term decisions Long term - retirement
Production possibility curve
Shows different possible combinations of 2 goods that can be produced using available resources
Clearly illustrates importance of opportunity cost
Full employment of available resources
All points on curve are points of maximum productive efficiency
Economic retraction
Recession
Inside production possibility frontier curve
This point would shown that the economy (productivity) is inefficient because there is an underutilisation of resources
Productive efficiency
Measure of efficiency
Occurs when output is maximised from available inputs
For economy as a whole occurs when it’s impossible to produce more of one good without producing less of the other
For individual firms occurs when available total costs of production are minimised
Allocative efficiency
When economic resources are used to produce goods and services that best match people’s preferences
You can see allocative efficiency on a production possibility diagram but not how it’s maximised
Positive statement
Objective statements omitting any opinion that deal with matters of fact
Based on theory not emotion, often expressed in the form of a hypothesis that can be analysed and evaluated
Either correct or incorrect
Question how things actually are: based on solid theory which is based on numbers which is based on the economic principles
Normative statements
Subjective; often without a basis in fact or theory
Based on your opinion and values
Allocative mechanism
Economic systems are the institutional arrangements employed to ensure scarce resources are used effectively to maximise satisfaction
Planned/ command economy
Government decides everything
E.g. Cuba, china,
Market/ price led economy
(Doesn’t actually exist)
Private individuals and companies make the majority of decisions about what goods and services are produced
(If supply is meeting demand then everything is fine)
Often referred to as free trade: the price people are prepared to pay determines what suppliers are prepared to supply
Government involvement is minimal
Mixed economy
Closer to free end of spectrum
Private and individual businesses provide some goods and services while the government will organise the provision of others through the public sector
Law of demand
Quantity or goods/ services that consumers are willing and able to buy at a given time period
Effective demand
Must be able and willing to pay
Effective because it’s only when consumers want to buy (backed up by ability to pay) does demand actually have an impact on the market
Consumers must have sufficient purchasing power to have any effect on the allocation of scarce resources
Ceteris paribus assumption
Other factors remain the same but there is an inverse relationship between price of goods and demand
As prices rise there will be a contraction of demand
As prices fall there will be an expansion in demand
Movement
When PRICE of good changes
Shift in demand curve
When any other factor OTHER THAN price of the good itself changes
Shift to right
Increase in demand
Shift to left
Decrease in demand
Conditions of demand
P opulation A dvertising S ubstitutes I ncome F ashion/ trends I nterest rates C omplementary goods
Expansion in demand
Prices fall
Contraction in demand
Prices rise
Substitutes
Goods in competitive demand and act as replacements for another product
Joint/ complementary demand
When you need one product in conjunction with another product
E.g. DVD players & DVD’s, printers & ink cartridges
Competitive demand
As price increases so does demand
Normal goods
Items where when income increases so does demand
E.g. Nike & adidas- goods you want to buy
Inferior goods
Items where increase in income there’s a decrease in demand
