Micro and Macro Economics Flashcards
microeconomics
study of economic behaviour of individual consumers, firms, and industries
macroeconomics
considers aggregate behaviour, and the study of the sum of individual economic decisions (working economy as a whole)
what does micro focus on?
how individual parts of economy make decisions on how to allocate scarce resources
Demand
shows how much of a product someone intends to buy at a price
what is effective demand?
consumers need cash to buy product rather than just desiring it
what do we assume when considering lvl. of demand at a price?
conditions of demand are held constant
what does supply curve show?
how many units producers would be willing to offer for sale, at a price, over a period of time
why does supply curve slopes upwards?
if price that goods can be sold at increases, each unit will make more profit for supplier, so they’ll want to manufacture more units
what assumptions do micro-economic models make?
- there is a perfect market
2. there is an imperfect market
criteria for perfect market to exist:
- large no. of customers and suppliers
- products sold are identical
- perfect information available
- no barriers to entry/exit
3 types of imperfect markets
- monopoly - one major supplier
- monopolistic competition - many suppliers offering differentiated products
- oligopolies - only a small no. of suppliers control market
4 factors of production and their incomes:
- labour -> wages
- land -> rent
- capital -> interest
- entrepreneurship -> profit
objectives of governments when intervening through macro policies to improve the performance of the economy?
- econ. growth = increasing productive capacity/output of economy
- low inflation = ensuring prices remain stable
- high employment = getting people into work
- sustainable BoP = managing trade with other countries
4 stages of the trade cycle?
- recession
- trough
- expansion
- peak
Recession (trade cycle)
Starts when demand begins to fall. Firms reduce output, causing decline in purchases of raw materials, increase in unemployment. Reduction in D feeds into households’ incomes which fall and further create decline in D.
Trough (trade cycle)
Economy quickly moves into this with low business confidence and little incentive for investment
Expansion (trade cycle)
Eventually, econ. activity picks up and with this extra investment, incomes push up. This induces more investment, reducing unemployment.
Peak (trade cycle)
Economy will expand, pushing towards a boom. After time, full capacity is reached and D becomes stable. Reduction in investment starts the downward spiral again.
Inflation
rise in prices of products in economy over time. it reduces purchasing power of money, meaning that each unit of currency buys fewer products.
4 problems from high inflation:
- as prices rise, consumers purchase less, reducing economic growth
- employees push for higher wages, to match price rises
- people on fixed incomes find themselves off worse
- consumer confidence damaged by uncertainty in future prices of products
unemployment
when people are willing and able to work, but can’t find a job
3 problems high levels of unemployment cause:
- govt. suffers from loss of income from tax, increased unemployment also increases benefits payments
- leads to increased taxes on other workers, reducing spending power as well as, workers worrying about their job security, damaging consumer confidence
- unemployed individuals suffer significant reduction in their income and this affects self-image
how do businesses benefit from high unemployment:
- easy to find employees
- reduce amount of wages needing to be offered
- existing staff may be willing to take lower pay increases
however, economy in general will be demanding less products
trade deficit
imports > exports
trade surplus
imports < exports
trade deficits mean..
net outflow of cash from country, not supportable in longterm –> country will drain reserves and damage int. credit rating –> difficult for country to raise further finance
trade surplus mean..
net flow into country –> increases wealth of country –> increases D for products and can lead to inflation and further problems of it
stronger home currency
makes country’s exports more expensive, but imports cheaper –> reduces AD in economy
weaker home currency
exports become cheaper, imports become more expensive, increases D for local products
