micro economics Flashcards
What is the economic problem?
Scarcity
Define scarcity
A situation that arises because people have unlimited wants in the face of limited resources
What are the ‘limited resources’
factors of production
Name the 4 FOP
Land
Labour
Capital
Enterprise
What are free goods?
Goods that have zero opportunity cost. This means they can be produced by society in as much quantity as needed with little/zero effect. They are not normally regarded as scarce.
eg. Air
What are economic goods?
Goods with an opportunity cost eg it takes time and resources to produce. They are scarce.
What is a positive statement?
About what it is eg a fact. They might be right/wrong and can be tested against facts.
What is a normative statement?
About what ought to be eg they depend on values and cannot be tested.
What are economic agents?
Those responsible for making economic decisions. The economic agents are: Households, Firms and Governments.
What economic choices do households make and what are their objectives?
Choices on their expenditure, and to do this they need income and so therefore need to choose where to supply their labour.
They aim to maximise utility from their expenditure and income from working.
What economic choices do firms make and what are their objectives?
Choices about what goods and services to produce, their production techniques and the prices they sell at.
They aim to maximise profit.
What economic choices do firms make and what are their objectives?
Choices about types of taxation, how much to tax, how to spend tax rev and how to regulate markets.
They aim to maximise welfare
Define FOP?
The resources people use to produce goods and services
What is land?
Natural resources available for production
What is the reward for land?
Rental income to the owners of the land
What is enterprise?
Entrepreneurs organising FOP and taking risks.
What is the reward for enterprise?
Profit
What is labour?
Human input into the production process.
What are the reward for labour?
Wages and salaries from employment
What is capital?
Goods used in the supply of other products. Eg machinery
What are the rewards for capital?
Interest (the return the firm gains from using the capital)
What is resource allocation?
Choices about how to deploy societies available resources across all their alternative uses. The way in which these resources are allocated influences the wellbeing of society.
How is resource allocation determined?
Through the actions of the economic agents.
What can change the behaviour of economic agents?
Incentives
What happens if incentives are not given properly?
Resources will be misallocated.
What is a free market economy?
An economy where governments leave the market to their own devices, so the forces of supply and demand allocate resources.
Economic decisions are taken by priv individuals and firms as priv individuals own everything.
There is no government intervention.
Adam Smiths’ theory of the invisible hand can be applied to this type of economy as the price is determined by the actions of consumers an businesses.
Advantages of a free market economy?
- firms likely to be efficient as they have to produce goods/services demanded by customers. Bc of this they are likely to lower average costs and make better use of scarce resources. Therefore causing overall output of an economy to increase
- Bureaucracy from gov intervention avoided
- some argue freedom from free market leads to more personal freedom
Disadvantages of a free market economy?
- ignores inequality, benefits those who hold the most wealth and there are no social security payments for those on lower incomes
- monopolies could arise, exploiting the market by charging higher prices
- over consumption of demerit goods that have negative externalities
- public goods such as national defence not provided
- merit goods like education underprovided
What is a command economy?
Where gov allocates scarce resources in the economy where they think is a greater need.
Advantages of a command economy?
- easier to co-ordinate resources in a time of crises such as war
- gov can compensate for market failure by reallocating resources.
- reduced inequality as society may maximise welfare over profit
- abuse of monopoly power prevented
Disadvantages of a command economy?
- gov can fail, just like markets, as they may not be fully informed on what to produce
- may not meet customer preferences
- limits democracy and personal freedom
What is a mixed economy?
Has features of both command and market economies.
The market is controlled by both the gov and the forces of supply and demand.
Gov supply public goods such as streetlights, roads and the police, as well as merit goods eg healthcare and education
What is the job of a market?
to allocate scares resources in the most efficient way
What is market failure?
When a free market fails to allocate resources efficiently.
What are the two types of efficiency?
Productive and Allocative
What is productive efficiency?
When production of goods/services is done at the lowest possible average cost, choosing a appropriate combo of inputs and producing max output from these inputs.
What is allocative efficiency?
When the right amount of products and services are produced, maximising consumer satisfaction.
What is economic efficiency?
When both allocative and productive efficiency is achieved.
Define opportunity cost
The value or benefits forgone of the next best alternative
What does the PPC (Production possibility curve) show?
The maximum quantities of different combinations of output of two products given the current resources and state of technology.
It can also show a trade off, which is the calculation involved in deciding whether to give up one good or the other.
What does the PPC curve look like?
Why is the PPC curved?
Because of the law of diminishing returns, which occurs as the factors are not entirely mobile against their uses.
What can the PPC about the economy?
It can help us analyse the output of a simple economy that produces just 2 typesof good: CAPITAL AND CONSUMER GOODS
What does it mean if the PPC shifts to the right
That there has been an increase in the productive potential of an economy leading to long run economic growth.
Or there has been advancements in technology
What does it mean if the PPC shifts to the left
What is a a market?
A set of arrangements that allow trnsactions to take place. Where or when buyers and sellers meet.
What is a sub-market?
A distinguished part of a market, aka a market segment
What do market systems work on the basis of?
demand and supply which sends signals to both buyers and sellers eg
if the price falls
- consumers wil realise the product is cheap and will likely increase purchases
- suppliers will have to rduce their prices to remain competetive
What is the function of price?
allocation
rationing
signalling
incentive
How does price aid alllocation?
Through allocating scarce resources among competing uses.
How does price aid with rationing?
Prices serve to ration scarce resources when demand outsteps supply
How does the price mechanism signal?
Prices adjust to demonstrate where resources are required and where they are not
How do prices provide an incentive?
When prices rise, quantity supplied increases
