micro - topic 1

Question 1

what is the fundamental economic problem?

Answer 1

people have infinite needs + wants but resources are finite

– humans = insatiable

Question 2

what is a want?

Answer 2

a luxury g/s that’s deemed as unnecessary for survival

Question 3

what is a need?

Answer 3

a g/s that’s necessary for survival (like food // water // shelter)

Question 4

what are the key economic decisions?

Answer 4

• what to produce
• how to produce
• how to ration what is produced // who benefits from what’s produced

Question 5

what is scientific methodology?

Answer 5

when experiments = used as evidence to prove a point / hypothesis
– uses experimentation to prove claims

Question 6

what is economic methodology?

Answer 6

• economists make models of human behaviour to predict how they’ll react
• classic economics, model human behaviour as:
• • utility maximising –> try to gain as much benefit as possible
• • selfish –> we put our needs before those of others
• • rational –> we know how to get what we want
• economist make assumptions based on these qualities

Question 7

what is a positive statement?

Answer 7

a statement that can be tested / proven

Question 8

what is a normative statement?

Answer 8

a statement based on value judgement (an opinion) –> cannot be tested / proven

Question 9

what are economic decisions mainly based on?

Answer 9

moral / political values –> hence why it’s difficult to prove that they’re objectively right or wrong –> hard to justify

Question 10

what are the 4 factors of production?

Answer 10

• land –> natural resources that produce g+s
  
  • • reward = rent
• labour –> physical human activity involved in the production of g+s
• • reward = wages
• capital –> physical equipment / machinery used to produce g+s
• • reward = capital
• enterprise –> the act of organising the FOP into a business (taking a risk) to produce g+s
• • reward = profit (from business)

Question 11

define opportunity cost

Answer 11

• the next best alternative forgone when making a choice

- free goods = have no opportunity costs when used to produced g+s as they have unlimited supply

Question 12

what do PPF graphs show?

Answer 12

the max output of a combination of g+s that could be produced if factors of production = fully + efficiently employed

Question 13

define productive efficiency

Answer 13

• producing the max output possible from the input // factors of production available
• • impossible to produce more of 1 good w/out producing less of another

Question 14

what is an outwards shift on a PFF diagram?

Answer 14

• aka econ growth
• caused by an increase in quantity + quality of FOP
• quantity: (supply side policy)
• • land –> gov can remove regulations on land usage
• • labour –> relax immigration laws // raise retirement age &// cut taxes / benefits
• • capital –> tax breaks for providers of capital
• • enterprise –> give entrepreneurs tax breaks
• quality:
• • land –> better roads / transport (infrastructure)
• • labour –> investment in education + healthcare
• • capital –> investments in improvements of tech
• • enterprise –> train entrepreneurs

Question 15

what is an inwards shift on a PFF diagram?

Answer 15

• a decrease in quantity + quality of g+s
• • harder to satisfy needs + wants
• straight line on the graph = constant opportunity cost
• curved line on the graph = non-constant opportunity cost

Question 16

what is a free market?

Answer 16

• a place where buyers + sellers come together to determine the price of a good / service
• they allocate source resources

Question 17

define demand

Answer 17

• when individuals = willing + able to affect the given price
• the willingness + ability of consumers to consumer a given quantity of a g/s at a given price

Question 18

what are the conditions for shifting demands?

Answer 18

Price
Adverts
Substitutes
Income
Fashion
Interest rates
Complimentary
(PASIFIC)

Question 19

the formula for price elasticity of demand (PED)

Answer 19

’(%) change in QD’ divided by ‘(%) change in price’

arc method:
change of Q / mid Q divided by change in P / mid P

Question 20

what is PED

Answer 20

• measures the responsiveness / sensitivity of demand for a g/s to a change in price
• • aka –> PED measures how the demand will change when the price changes
• determined by:
  – amount & closeness of subs
  – the proportion of income spent
  – time

Question 21

how does demand indicate elasticity?

Answer 21

• demand changes more than price = price elastic
• demand changes less than price =price inelastic
• PED > 1 = demand changes more than price = elastic demand
• PED < 1 = demand changes less than price = inelastic demand

Question 22

what does an inelastic demand curve look like?

Answer 22

• steep downwards curve

Question 23

what does an elastic demand curve look like?

Answer 23

• shallow downwards curve

Question 24

define unit elasticity

Answer 24

• 1% change in price = 1% change in demand/supply

- - if demand = UE –> change in price doesn’t impact revenue

Question 25

what is the formula for income elastic demand (YED)?

Answer 25

’(%) change in quantity’ divided by ‘(%) change in income’

Question 26

what is YED?

Answer 26

• measures responsiveness / sensitivity of demand for g+s to changes in income
• • aka –> how much demand will change when consumers’ income changes
• YED > 1: normal luxury good
• YED is 0 </= 1: normal + neccesity
• YED < 0 : inferior good