MicroEconomics Flashcards
bun a zot; bun a lot
Define Economics
The study of financial systems and how markets work in society
Define the basic economic problem
Wants are infinite and resources are scarce. Therefore societies are forced to make a decision on what to produce, how to produce and for whom to produce to, to maximise efficiency and make the best use of their scarce resources.
Describe the problem of what to produce
Due to the problem of scarcity, we are unable to produce everything we want. Economies need to make a list of priorities of what to produce and in what quantities. If an economy decides to produce more of one good, it will be able to produce less of another.
Describe the problem of how to produce
Limited economic resources need to be used as efficiently as possible, without causing harm to the environment. Therefore, we need to decide the best method to maximise output and not waste limited factors of production
Describe the problem of for whom to produce to
Economies have to decide who is going to receive the final goods and services and in what proportion.
What are the factors of production?
Capital, Enterprise, Land, Labour
Remember ‘CELL’
What are factor endowments?
The amount of Land, Labour, Capital and Entrepreneurship an economy possesses and is able to exploit.
What is ‘Land’?
All natural resources. Everything that is above the Earth and below. Eg. mineral deposits, forests, the sea etc.
What is ‘labour’?
The Human resource of an economy. It is also called ‘Human capital’. The labour force of a country can be skilled or unskilled
What is ‘capital’?
Man-made goods. Used to produce more goods and services in the economy. Also called ‘producer goods’
What is ‘enterprise’?
To organise the other three factors of production and to take the risks of production. In large companies there is a divorce between risk-taking and the running of the firm.
Consumer goods can be two things…
Single use
OR
long use/durable goods
What is a single use consumer good?
A consumer good that can only be used once. eg. bread
What is a long use/durable consumer good?
A consumer good that can be used many times eg. a car
What are basic wants?
Needs of the consumer that keep us alive eg. food, water, shelter, clothing
what is notional demand?
When consumers desire something irrespective of whether they have the resources available to purchase them
What is specialisation?
The process by a firm, region or nation to specialise in the production of a certain good or service which they hold a comparative advantage over others at.
What is division of labour?
The division of work so all workers perform different tasks and become particularly specialised at an individual task
What sort of economy does specialisation lead to?
An economy based on exchange, as we thus need exchange to receive the variety of goods that we need
What is the barter system?
The direct exchange of goods for goods.
What are the benefits of specialisation? (6)
- Increased productivity as they are more skilled in their area of production
- Leads to exchange and thus a greater variety of goods and services
- Allows workers to improve their skills in their area
- Allows nations to specialise in the goods they are best at producing as they have the comparative advantage over other nations
- Creates a larger global market
- Increases competitiveness and lowers prices
What is comparative advantage?
When a nation has a ‘margin of superiority’ over others. In other words, the cost of their factors of production are less than other countries in relation to the production of their specialised good
What are the cons of specialisation?
- Over-specialisation can lead to unemployment. People become highly skilled in only their one specialty and if the demand for them decreases, they become redundant and find it hard to find work in other sectors
- If a whole nation specialises in one good and the demand falls, the national economy can suffer greatly and nationwide unemployment can occur
What is productivity?
The measure of efficiency. The amount of time taken for a good-quality product to be produced
What is a subsidy?
a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low
How can specialisation reduce the problem of scarcity?
Countries can obtain specialised goods that are in abundance elsewhere but are scarce where they are. Specialisation allows a wider variety of good and services.
Benefits of division of labour?
- Increased productivity and output per worker
- Workers become more skilled by ‘learning through doing’
What are the limitations of division of labour? (4)
- Boring, repetitive work decreases motivation and reduces productivity in the long run
- Boring work leads to a high worker turnover
- Some workers receive little training and thus cant find work elsewhere as they have limited skills
- Mass produced goods tend to lack variety for consumers
What are the issues with barter?
- Indivisibility of goods (cant trade half a cow)
- Need for a common desire for exchange
- Difficult to value certain goods
What is ‘opportunity cost’?
The real cost of giving up the next best alternative foregone. Eg. If we have £20 and we buy a CD instead of a concert ticket, the opportunity cost in the concert ticket
What is a free good?
A good that costs nothing to produce
A good that has no opportunity cost
What is a PPC?
A product possibility curve
What does a PPC show?
- All the possible combinations of consumer and producer goods that an economy is able to produce, assuming that all it’s limited economic resources are fully utilised
- The maximum productive capacity of an economy over a given period of time, assuming that the quality and quantity of resources as well as the state of technology does not change
What does a point within the PPC show?
Underproduction or unemployment as the economy is producing below it’s full capacity.
What causes the PPC to shift outwards?
- Improved technology and innovation
- Increased factor endowments.
- Increased population/immigration
- New found land resources
What does a shift right on the PPC show?
An increase in a country’s productive capacity and in growth in the GDP of that country
What does a shift left on the PPC show?
A decrease in a economy’s productive capacity.
What causes a shift left on the PPC?
- Exhaustion of a nations natural resources
- A fall in a country’s working population
What is gross investment?
The total quantity of of capital goods produced
What is capital consumption/depreciation?
The use of capital goods during production
What are the 3 different economic systems?
- market economy
- Planned economy
- Mixed economy
What is an economic system?
An economic system is the system of producing and distributing of goods and services and allocating resources in a society
What is a price system?
The allocation of resources into a system of wealth
eg. our price system is money
What is a positive statement?
A statement that can be proved right or wrong and therefore is based on factual evidence
What is a normative statement?
A statement based on opinion
What is a market?
Any situation where a buyer and seller come together in order to complete a transaction of a good or service
How does the price mechanism work?
Prices respond to shortages and surpluses. Shortages ( demand exceeds supply) causes prices to rise. Surpluses (when supply exceeds demand) cause prices to fall.
In a competitive market, what do consumers aim to do?
To maximise satisfaction from their purchases. To maximise their utility.
In a competitive market, what are the aims of the producer?
To maximise profits
What is a factor market?
Where factors of production are bought and sold
What are the determinants of demand?
Population (demographic) Income Related goods Advertisement Tastes & preferences External events Seasons
How does the price of a product effect demand?
Assuming that other things remain unchanged (ceteris paribus) a change in price creates movements along the demand curve.
A fall in price will increase the quantity demanded, whilst an increase in price will lower the demand
What is the demand schedule?
It is on the demand curve and shows the relationship in price between price and quantity demanded at any given period of time.
What is consumer surplus?
The difference between what a consumer was willing to pay for a good or service and what they actually paid
How do consumer surpluses arise?
When consumers are prepared to pay a price which is higher than the market price.
Who do consumer surpluses benefit
The consumer: they are paying less than they would be willing to!
What is the real income effect of a price rise?
When an increase in price results in less income left over
What is the substitution effect of a price rise?
When an increase in price leads to a consumer searching for an alternative
What are the main determinants of demand?
- Consumer’s disposable income
- Consumer’s tastes and preferences
- The prices of other related goods substitutes or complements
- Changes in population and age distribution of population
- Weather conditions
- Changes in legislation
What is elastic demand?
If PED > 1, it is called elastic demand. It means a change in price leads to a greater than proportional increase in quantity demanded.
What is inelastic demand?
If PED < 1, it is called inelastic demand. It means a change in price leads to a less than proportional change in demand.
What is the 1st law of demand?
The higher the price, the lower the quantity demanded. The lower the price, the higher the quantity demanded.
What happens if the demand curve shifts inwards?
A decrease in demand at each and every price
What happens if the demand curve shifts outwards?
An increase in demand at each and every price
What causes an outwards shift in the demand curve? (Determinants of Demand)
- Increase in income
- A rise in the price of a substitute
- A fall in the price of a complement
What causes an inwards shift in the demand curve? (Determinants of demand)
- A decrease in income
- A fall in the price of a substitute
- A rise in the price of a complement
What causes a good to have inelastic demand?
- Lack of a substitute
- Shortage of time
- Good is a necessity
- Good is habit/forming
- Small percentage of total expenditure
What causes a good to have elastic demand?
- Plenty of substitutes
- Plenty of time
- Good is not a necessity or habit forming
- Makes up reasonable percentage of total expenditure
What is a monopoly?
When one company controls 100% of the market
What is an oligopoly?
When there are a few large firms that control the market
In a monopoly, who has control?
Firms have control as they can set their prices and consumers have no choice as there are no substitutes
In an oligopoly, who has control?
Consumers have control as companies compete over prices, quality and special debts
What are characteristics of a perfectly competitive market?
Many suppliers
Homogeneous products
No ability to set prices
What is marginal utility?
How useful a product is to the consumer per unit (eg. the first kit kat will be very useful but the 5th will have little use)
How does opportunity cost change with a change in the allocation of resources?
The opportunity cost increases the more the allocation of production changes.
Why does the opportunity cost increases the more the allocation of production changes?
Because of limited mobility of factors of production. eg. shears used for sheepskin cannot be used for wheat
Therefore, at first, all the FOP’s that are not mutually exclusive (eg land) are given up but when we run out of that, we have to use things that are not as useful