Micro part 1 Flashcards
What is economic good?
- a good that requires scarce resources to make, thus production has an opportunity cost.
- They are scarce so have value, thus consumers will pay for them
What is free good?
- has no opportunity cost since it doesn’t require scarce resources to make
What is positive statement?
- Positive statement – capable of being verified/argued against through the use of facts.
- Can be proven to be true or false using evidence.
- They are objective
What is Normative statement?
- It is based on value judgements, subjective and based more on opinion than actual fact as they can’t be refuted/verified.
- Influence economic decision as can take different conclusions based on same statistics,
- for example the rate of inflation can give rise to different conclusions
What is the basic economic problem
- Consumers have unlimited wants yet there are limited resources – scarcity (shortage of resources in relation to the quantity of human wants)
- Forces economic agents to make a choice when allocating scarce resources between competing uses
- Every choice has a range of alternatives and a rational economic agent will choose the best one, but then all the other choices will have to be given up.
- The value of the next best alternative forgone when making an economic decision (opp. cost)
Define needs
- Needs – the minimum that is necessary to survive as a human being
Define wants
- Wants – desires for the consumption of goods and services, above our needs
What are the four factors of production
- Land
- Labour
- Capital
- Enterprise
Explain the land factor of production and the reward of it
- The land itself including the natural resources on, above and below the ground, in the sea
- Rent
Explain the labour factor of production and the reward of it
- Workforce of the economy, the human capital
2. Wages
Explain the capital factor of production and the reward of it
- Man-made goods used to produce other goods e.g. machinery
2. Interest
Explain the Enterprise factor of production and the reward of it
- The risk bearing aspect in order to seek out profitability opportunities. Organises other economic resources
- Profit
What are the three Economic agents
- Governments
- Firms
- Households
Explain the economic agent- governments
- assumed to act on behalf of consumers and maximise the welfare of society.
- They can intervene in economies to different extents, in order to decide how consumers/firms interact.
- Can also produce g/s
Explain the economic agent- Firms
- assumed to aim to maximise profits (reward for taking risks and making investments).
- Some may have different objectives like maximising social welfare.
- They combine factors of production to produce g/s. 4. Decide what to produce and how much to sell for
Explain the economic agent- Households
- provide the factors of production for firms.
- Make decisions on how to spend their limited resources, assumed to maximise their utility.
- Decide what to buy and how much to buy it for
What are Non-renewable resources
- if we use them today then they cannot be replaced on a human timescale e.g. coal.
- Choices have to be made for where these scarce resources are best used
What are Renewable resources
- can be used and replaced e.g. solar power.
2. Only stay renewable when the rate of consumption is less than rate of replenishment
What is a Sustainable resource
- are a type of renewable resource. Can be economically exploited and will not run out over time
What is a market economy
- Market economy is where all resources are privately owned and all resources are allocated by the market forces of supply and demand.
- Economic decisions are made by firms and consumers, and there is no gov. intervention
What is the motivator, allocator and regulator of a market economy
- Motivator: self interest
- Allocator: price determines who has access to g/s
- Regulator: perfect competition
What are the 3 advantages of a market economy
- Achieve allocative efficiency.
- There is an incentive of profit and wanting to profit maximise.
- Can result in higher levels of worker efficiency
Describe how a market economy allows allocative efficiency to be achieved
- Because resources are allocated through demand and supply, so output is determined by where supply meets demand.
- This means all consumers willing and able to consume the g/s at the market price are able to.
- Producer/consumer surplus are maximised (firms maximise profits, consumers maximise utility)
Describe how a market economy can lead to firms maximising profits and any problems from this
- Means firms are technically efficient to make the best use of scarce resources to maximise profits.
- May reinvest profits for innovation leading to profit maximisation.
- Innovate because firms are in competition, which raises quality of g/s and choice, so consumers have higher utility from consumption and firms from profit.
- but could give rise to monopolies if they can manipulate the market e.g. through advertising.
- Fewer firms mean less innovation as less profit motive.
Explain how a producer/consumer surplus are maximised in a market economy
- as more there is more incentive to work hard, since more goods available and want to be able to afford these.
- Can increase growth
- but can lead to inequality when not everyone has access to these goods
What are the 2 disadvantages of a market economy
- Can miss markets, especially public goods.
2. Overconsumption of demerit goods.
Describe how a market economy can cause markets to be missed
- Because some goods being non-rival and non-excludable.
- Means no consumer can be prevented from consuming good once its produced and one’s consumption does not affect another’s consumption.
- Means once good is produced then no consumer is willing to pay for that good.
- Means producers have no incentive to produce good as it is not profitable.
- Means public goods may not be provided for, leading to allocative inefficiency
Describe how a market economy can lead to an overconsumption of demerit goods
- Consumers may not act rationally to maximise utility or have perfect information.
- Occurs when they discount private costs if only experienced in future or are underestimated.
- Means demand with perfect info is higher, so output is greater than what is socially desirable.
- Same happens for underprovision of merit goods.
- Means gov. may allocate resources allocatively efficiently, via state provision.
- this increased choice can mean more volatility for firms as consumer preferences change quickly
What are 3 Roles of government in a market economy
- Step in when merit goods are underprovided
- Price can be manipulated by gov. policy e.g. subsidy so more resources are allocated here, but if demand is still low then can’t completely control provision
- Correct market failure e.g. regulate monopolies
Increase equality by redistributing income