Microeconomics Flashcards
scarcity
unlimited wants in the face of limited resources
finite resources
resources that are fixed in supply and whose quantity falls as they are consumed
needs
necessary for human life
wants
things people would like to consume
wants
things people would like to consume
free goods
not regarded as scarce eg. air
economic goods
goods which are scarce and their consumption creates an opportunity cost
what does the existence of scarcity do
forces people to make choices
sustainable resources
resources which if managed carefully, can be replenished
non-sustainable resources
resources will eventually run out as they cannot be replenished
opportunity cost
value of the next best alternative forgone
factors of production
inputs needed into the production of goods and services
land - factor reward
natural resources - rent
labour - factor reward
human input into the production process - wages
capital
manufactured resources for the production of other goods - interest
enterprise
organises the other factors of production and takes risks - profit
economic questions
what to produce, how to produce, for whom to produce
economic problem
how to satisfy unlimited wants with limited resources
positive statement
objective statements that can be tested, amended or rejected with evidence
normative statements
subjective value based judgement
household choices
consumers who demand goods and services, and supply their labour
firm choices
produce goods or services, and what and how to sell
government choices
expenditure and taxation and regulation of markets
evaluation of choices
irrational behaviour eg. charity
interdependence
where one group responds to the actions of another group, or when one group is impacted by the decisions of another
production possibility frontier
shows the maximum combinations of two goods or services that an economy can produce when all resources are fully and efficiently employed
how does PPF represent opportunity cost
increases of an extra marginal unit production of one good leads to increasing sacrifices of production of the other good
why does the gradient of the PPF increase
there must be greater sacrifice in terms of the good foregone to produce one more new good
factors causing an outward PPF shift
- higher productivity
- better management to reduce wastage
- increase in stock of capital or labour
- innovation or invention of new products or resources
- discovery of new natural resources
factors causing inward PPF shift
- natural disasters
- civil war / conflict
- outward migration of labour
- decline in productivity caused by a recession
what causes a shift in PPF
increase/decrease in quality or quantity of factors of production
capital goods
goods used to increase future capacity of the economy
consumer goods
goods created for current use
consumer goods
goods created for current use
effect of capital and consumer goods on living standards
if an economy chooses to produce more consumer goods, living standards in the present will increase but fall in the future
if an economy chooses to produce more capital goods, living standards in the present will decrease, but increase in the future
trade off
willingness of an economic agent to give up one thing for another
axioms for rationality
completeness, transitivity, non-satiation
completeness
if the individual has an opinion on the value of any item relative to the value of another item
has an order of preferences and understands their choices
transitivity
consistent preferences through ranked order
non-satiation
belief that ‘more is better’ - utility increases the more consumption increases
incentive
something that motivates an economic action
often relates to profit, prices and social welfare
market economy
market forces are allowed to guide the allocation of resources in a society through supply and demand with the price mechanism without government intervention
command economy
government makes all economic decisions and allocates resources
mixed economy
market forces work with government intervention
advantages of a free market economy
efficiency, entrepreneurship, choice, incentives, competition
disadvantages of a free market economy
- income and wealth inequalities
- lead to monopolies
- under-provision of merit goods
- fail to address negative externalities
advantages of a command economy (3)
- maximises welfare,
- low unemployment,
- prevent monopolies
disadvantages of a command economy (4)
poor decision making, restricted choice, lack of risk taking and efficiency
productive efficiency
when producers minimize the wastage of resources
allocative efficiency
Allocative efficiency exists when the production of a good is at a level where price equals marginal cost
dynamic efficiency
involves improving allocative and productive efficiency over time
evaluating economic systems
incentives for economic agents show why command economies cannot produce resources efficiently - but in a free market this does not create allocative efficiency
mixed economies provide incentives but the government is still free to solve market failure
specialisation
when individuals, firms, regions and whole economies focus on making a particular good/service
division of labour
when the production process is broken down into smaller tasks performed by different individuals/capital
advantages of specialisation / division of labour (3)
- increased output
- less wastage
- lower unit costs
disadvantages of specialisation / division of labour
boredom
advantages of specialisation in trade
- greater output
- greater variety and choice
- economic growth
disadvantages of specialisation in trade
- structural unemployment,
- over-reliance on trading partners,
- changes in tastes and fashions,
- over-extraction of finite resources
opportunity cost formula
change in production of good B / change in production of good A
production
measure of the value of output of goods and services
productivity
efficiency of factors of production
barter system
system of exchanging one product for another without the use of money, requires a double coincidence of wants
money as a medium of exchange
both sides agree on the value of the currency, a price can be negotiated
specialisation addressing the basic economic problem
higher output, variety, bigger market - more wants and needs to be satisfied
competition and lower prices - specialization acts as a way to reduce costs as firms want to remain competitive
division of labour addressing the basic economic problem
raise output per person - competition and reduce costs
repetitive work lowers productivity - quality and quantity suffers - not with machinery
if one machine breaks leads to halt of entire production process
structural unemployment with narrow skills - cannot work to produce other goods
demand
willingness and ability to purchase a good or service at a given price over a given period of time
individual demand
what one individual would be willing and able to buy at a given price over a given period of time
what causes the inverse relationship between price and quantity demanded on the demand curve
disposable income effect
substitution effect - relative price changes to competitors
diminishing marginal utility
total revenue formula
price x quantity sold
joint demand
products are complements for another
competitive demand
products are substitutes for one another
composite demand
product has multiple uses
shift of demand curve
any factor other than price affects demand leads to increase/decrease
factors causing shift in demand
Population
income
related goods/ substitutes
advertising
tastes of fashion
expectation
season
supply
willingness and ability of a firm to sell products at a given price over a given period of time
individual supply
what one firm would be willing and able to supply at a given price over a given period of time
market supply
sum of all firms’ willingness and ability to supply a product at a given price over a given period opf time
why does the supply curve have a positive relationship
the higher the price the greater the incentive for a business to supply products
joint supply
when one product is a byproduct of another, or the production process leads to more than one product
competitive supply
when a producer has alternative uses for the factors of production and must decide what to produce
movements along the supply curve
there is an expansion/contraction from a change in price
shift of the supply curve
when any other factor affects supply leading to an increase/decrease
market equilibrium
when quantity demanded equals quantity supplied - allocative efficiency
market disequilibrium
in a competitive market, market forces will naturally gravitate to equilibrium
if the price is too high there is excess supply
if the price is too low there is excess demand
ceteris paribus
assumes there are no other influences on the market, which operates with total efficiency
allows to model how a market should respond
evaluating the impact of demand and supply in related markets
extent of the substitute/complement
time frame
size of the price change
consumer surplus
difference between the total amount that consumers are willing and able to pay for a good or service and the total amount they do pay
where is the consumer surplus
above price, below demand curve
if PED is elastic what is consumer surplus
consumer surplus is zero
evaluating impact of price change on consumer surplus
the more inelastic PED is, the more consumer surplus will change when price changes
if PED is inelastic what is consumer surplus
consumer surplus is infinite
producer surplus
difference between what producers are willing and able to supply a good for and the price they actually receive
where is producer surplus
below price and above supply
when is consumer and producer surplus important
when discussing the effects of different government intervention in markets
total economic welfare
producer surplus + consumer surplus
when does producer surplus increase
if supply costs fall and S shifts out
if market demand increases and D shifts out
evaluation of the impact of a change in price on producer surplus
the more inelastic PES is, the more producer surplus will change
if PES is perfectly elastic what is producer surplus
producer surplus is 0
if PEs is perfectly inelastic, what is producer surplus
producer surplus is infinite
price discrimination
consumer surplus changes with different groups
if firms can identify groups of consumers who are willing and able to pay different prices for the same product, this is a way of turning consumer surplus into producer surplus for higher revenue
price elasticity of demand
responsiveness of quantity demanded due to a change in price
PED formula
% change in quantity demanded / % change in price
% change formula
new-old/old x 100
price inelastic demand
a change in price leads to a less than proportionate change in quantity supplied
price inelastic demand value
between 0 and -1
price inelastic demand value
between 0 and -1
price elastic demand
a change in price leads to a more than proportionate change in quantity supplied
price inelastic demand value
between 0 and -1
price inelastic demand value
between 0 and -1
price elastic demand value
between -1 and -infinity
total revenue when PED is inelastic and price increases
total revenue increases
factors affecting PED
substitutes
proportion of income
luxury / necessity
addictive
time period
when PED is -1 what is demand
demand is unitary
when is total revenue maximised along a PED curve and what is the PED
PED is unit elastic exactly half way along the PED curve - at this point total revenue is maximised
on a straight line PED curve, what is the elasticity to the left of the midpoint and how does this affect total revenue
it is price elastic
if price is cut along this range, total revenue will increase
on a straight line PED curve, what is the elasticity to the right of the midpoint and how does this affect total revenue
it is price inelastic
if price is cut along this range, total revenue will fall
income elasticity of demand
responsiveness of quantity demanded due to a change in income
income elasticity formula
% change in quantity demanded / % change in income
What to produce (free market economy):
determined by what the consumer prefers
How to produce (free market economy)
Producers seek to make profit
For whom to produce ( Free market Economy)
whoever has the greatest purchasing power in the economy
what to produce (Planned economy)
Determined by what the government prefers
How to produce it ( Planned economy)
governments and their employees
For whom to produce it (Planned economy)
who the government prefers
what to produce ( mixed economy)
determined by the government and the consumer preferences
