micro - topic 1 Flashcards
what is the fundamental economic problem?
people have infinite needs + wants but resources are finite
– humans = insatiable
what is a want?
a luxury g/s that’s deemed as unnecessary for survival
what is a need?
a g/s that’s necessary for survival (like food // water // shelter)
what are the key economic decisions?
- what to produce
- how to produce
- how to ration what is produced // who benefits from what’s produced
what is scientific methodology?
when experiments = used as evidence to prove a point / hypothesis
– uses experimentation to prove claims
what is economic methodology?
- 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
what is a positive statement?
a statement that can be tested / proven
what is a normative statement?
a statement based on value judgement (an opinion) –> cannot be tested / proven
what are economic decisions mainly based on?
moral / political values –> hence why it’s difficult to prove that they’re objectively right or wrong –> hard to justify
what are the 4 factors of production?
- 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)
define opportunity cost
- 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
what do PPF graphs show?
the max output of a combination of g+s that could be produced if factors of production = fully + efficiently employed
define productive efficiency
- 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
what is an outwards shift on a PFF diagram?
- 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
what is an inwards shift on a PFF diagram?
- 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
what is a free market?
- a place where buyers + sellers come together to determine the price of a good / service
- they allocate source resources
define demand
- 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
what are the conditions for shifting demands?
Price Adverts Substitutes Income Fashion Interest rates Complimentary (PASIFIC)
the formula for price elasticity of demand (PED)
’(%) change in QD’ divided by ‘(%) change in price’
arc method:
change of Q / mid Q divided by change in P / mid P
what is PED
- 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
how does demand indicate elasticity?
- 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
what does an inelastic demand curve look like?
- steep downwards curve
what does an elastic demand curve look like?
- shallow downwards curve
define unit elasticity
- 1% change in price = 1% change in demand/supply
- - if demand = UE –> change in price doesn’t impact revenue
what is the formula for income elastic demand (YED)?
’(%) change in quantity’ divided by ‘(%) change in income’
what is YED?
- 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
