Microeconomics year 1 Flashcards
what is the basic economic problem
how to allocate scarce resources when there are unlimited wants but finite needs
another word for resources
factors of production
what are the four factors of production
- land - areas where goods can be produced
- labour - human resources which can produce goods and services
- capital - man made aids to production like machinery, schools
- enterprise - risk takers who are innovative in order to make profit
what choices are made in order to scarce resources
manufacturers choose:
- what to produce
- how to produce
- for whom to produce for
what is opportunity cost
the cost of the next best alternative forgone when a choice is made
what does a PPF tell you
the maximum possible production of all goods and services that can be produced with the level of the factors of production in the economy
labels on a macro ppf
- Goods, services
what does the shape of ppf show
the law of increasing opportunity cost,as we move further along the curve, factors of production are more suitable towards one thing than they are towards another thing
what does a linear PPF show
a constant oppurtunity cost
what is demand
the quantity of a good/service consumers are willing and able to buy at a given price in a given time period
what is the law of demand and what does it mean
there is an inverse relationship between price and quantity demanded, meaning that as price increases, Qd decreases
what do we assume when looking at a demand curve
ceteris paribus - meaning all other factors remain unchanged
- meaning when we increase price, we MOVE along the curve
whats it called when we MOVE along the curve
a contraction of demand, as price increases
whats it called when we decrease price
there is an extension of demand
what explains the inverse relationship between price and demand
the income effect - as prices go up, income cant stretch as far, therefore we are less able to buy, maybe our income doesn’t allow us to purchase the quantity of goods and services we couldve before
substitution effect - as prices go up, other goods and services become more price competitive, so we switch consumption to buy those goods and services instead, which is why demand contracts
what do non price factors do to the demand curve
they SHIFT it
examples of non price factors which will shift demand to the right
- population - higher population = higher demand for a particular good or service
- price
- good advertising
- price of substitutes - eg if the price of pepsi goes up, more ppl are gonna be willing and able to buy coke
- income(normal and inferior goods)
- fashion/taste - if fashion moves towards a particular good/service, demand for it will be higher
- interest rates - if consumers need to borrow before buying it, lower IR make it cheaper for consumers to borrow, increasing demand for these items
- complements price - if the price of one of the complementary goods increase, the demand for both the goods shift left and vice versa
what is a substitute
a good that is a rival good to something else
what are normal goods
goods where, as incomes rise, demand for them will increase, eg fine dining and vice versa
what are inferior goods
goods where, as incomes rise, demand for them decrease and vice versa, eg fast food, public transport
what is a complementary good
a good which is often bought with another
what is supply
the quantity of a good or service producers are willing and able to produce at a given price in a given time period
what is the law of supply
there is a direct relationship between price and quantity supplied. as price increases, Q increases and vice versa, ceteris paribus
explain the law of supply
private producers have a profit motive
- as price increases for a good/service, there is more profit to be made if they can produce and sell more, so there’s a stronger need incentive to produce more when prices go up
- when quantity goes up, cost of production goes up. therefore suppliers want a higher price to cover the cop to allow them to maintain their profit margin
non price factors that may shift supply
productivity (output per worker) - if workers become more productive, they produce more, this will reduce cost of production and shift supply to the right
indirect tax - increased tax like corporation tax may increase cost of production and shift supply left
number of firms - the more firms that enter the market, the more supply in a market, supply shifts left
technology - improvements in technology may reduce cop, eg robotics ai , increasing supply
subsidy - reduced cop and shifts supply right
- weather - good weather shifts supply, for example if it’s sunny, more crop
- cost of production - oil, transport, regulation
- availability of land
how would cost of production impact supply
lower cost of production = high willingness to supply more at the same price
higher = less willing to supply at the same price when it’s more expensive to produce
what is a subsidy
a money grant given by the government to producers to lower cost of production and to encourage an increase in output
what is a free market
an economy where the market mechanism allocates resources so consumers and producers make decisions abt what is produced, how to produce and for whom
what is equilibrium
Where demand is equal to supply - represents allocative efficiency, because the resources that firms are using to make goods and services, are perfectly following consumer demand
What is disequilibrium?
Where is demand is not equal to supply
adam smiths views
🔹 1️⃣ Higher Productivity & Output
When workers specialise in a single task, they become highly skilled at it.
This reduces errors and increases the speed of production.
Firms can produce more goods in less time, leading to higher total output.
This boosts economic growth and allows firms to benefit from economies of scale.
📌 Example: A worker in a car factory focusing only on installing engines will be much faster than if they had to build an entire car themselves.
🔹 2️⃣ Efficient Use of Resources & Lower Costs
Specialisation reduces waste as workers and machines are used more efficiently.
Firms save time by reducing the need to switch between different tasks.
Lower costs per unit allow businesses to sell goods at cheaper prices.
This makes industries more competitive in both domestic and international markets.
🔹 3️⃣ Encourages Innovation & Technological Progress
Repeating a task leads workers to discover better methods of doing it.
This encourages the development of new machinery and techniques, leading to further productivity gains.
Firms invest in research and development (R&D) to optimise processes.
Over time, technological advancements help industries grow and improve living standards.
📌 Example: The Industrial Revolution saw factories develop assembly lines to enhance production efficiency.
🔹 4️⃣ Increased Trade & Economic Growth
Specialisation allows countries to focus on producing goods they are best at (comparative advantage).
They can then trade with other countries, gaining access to a greater variety of goods at lower prices.
This raises global efficiency and increases living standards.
As a result, global trade expands, benefiting both consumers and producers.
📌 Example: The UK specialises in financial services, while China specialises in manufacturing, benefiting both through trade.
🔹 5️⃣ Higher Wages & Improved Living Standards
More productive workers generate higher profits for businesses.
Firms can then afford to pay higher wages, improving workers’ living standards.
A wealthier population increases consumer spending, stimulating demand and growth.
Over time, higher incomes lead to better healthcare, education, and overall well-being.
📌 Example: The rise of software development jobs in India has increased wages and improved living conditions for millions.
what do prices do
- allocate scarce resources efficiently
- ration scarce resources by encouraging / discouraging consumption
- signal excess demand or supply
- incentivise producers to increase or decrease output to increase profit
When will excess demand occur? and what’s the impacts
If prices are below equilibrium
- long queues of ppl desperate to buy a certain good or service, eg toilet paper during covid
- huge waiting lists, eg NHS
- competition between buyers
- naturally, prices will rise because of high demand
- new firms may be attracted by the increase in price and join the market, increases supply
When will excess supply occur? and what’s the impacts
- when the price level is higher than equilibrium
- Warehouses and shelves would be over stocked, restaurants empty
- prices fall
- less need for resources in a market
- incentivises firms to decrease their output, sell their stocks, shown by a contraction along the supply curve, firms may leave market
- rationing of scarce resources eg by encouraging consumption
what do price mechanisms do when there is excess demand
Shortage Identified
- Excess demand occurs when the quantity demanded exceeds the quantity supplied at the current price.
- This creates upward pressure on prices as consumers compete for limited goods.
Rationing Effect
- Higher prices reduce the quantity demanded as some consumers are priced out of the market. This limits the demand to match the available supply.
Signaling Effect
- Rising prices signal to producers that there is strong demand for the good.
- This incentivizes them to increase production to meet the higher demand.
Incentivizing Effect
- Higher prices attract new entrants or firms from other markets to produce the good, as they see an opportunity to earn greater profits.
Equilibrium Restored
- As prices rise, the quantity demanded decreases, and the quantity supplied increases until they equalize at the new equilibrium price and quantity.
what do price mechanisms do when there is excess supply
Surplus Identified
- Excess supply occurs when the quantity supplied exceeds the quantity demanded at the current price.
- This creates downward pressure on prices as sellers struggle to sell their goods.
Rationing Effect
- Lower prices increase the quantity demanded as consumers find the product more affordable.
- This reduces the surplus in the market.
Signaling Effect
- Falling prices signal to producers that there is too much supply relative to demand.
- Producers respond by reducing output to avoid further losses.
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Incentivizing Effect
- Lower prices discourage some firms from entering or remaining in the market, particularly those with higher production costs, as profitability decreases.
Impact: This natural adjustment ensures that only the most efficient producers remain, promoting productive efficiency
what is consumer surplus
the difference between the price consumers are willing and able to pay and the price they actually pay. usually a triangle found BELOW DEMAND CURVE and ABOVE PRICE LINE
What is producer surplus
the difference between the price producers are willing and able to supply a good/service for and the price they actually receive
- usually a triangle found ABOVE THE SUPPLY CURVE and BELOW THE PRICE LINE
how to find society surplus
consumer surplus + producer surplus
how to find surplus when there are shifts
take the original surplus away from the new one
complement goods are
goods that are in joint demand, goods that are bought together. if the price of one of the goods go up, the demand for both the goods decrease
substitutes are
- goods that are in competitive demand, eg coke and pepsi. as the price of one substitute increases, demand for the other substitute shifts left
what is derived demand
when demand for a good or service comes from the demand for something else
eg - cars and aluminium, labour and goods and services
what is composite demand
the idea that two goods require the same input to make them. therefor, if there is an increase in the production of one good, there will be a decrease in the supply of another, because there is less of the input available to make the other
eg bread and livestock, cheese and butter (milk needed to make these)
karl marx views
🔹 1️⃣ Increased Productivity → Exploitation of Workers
Specialisation allows firms to break tasks into simple, repetitive jobs, increasing efficiency and output.
However, this means that workers perform monotonous, repetitive tasks, reducing their control over the production process.
The bourgeoisie (capitalist class) benefits from the increased productivity but does not fairly compensate workers.
This leads to exploitation, where workers produce more value than they are paid for (surplus value), enriching the owners.
📌 Example: Factory workers in the Industrial Revolution worked long hours in poor conditions while business owners profited from their labour.
🔹 2️⃣ Alienation from Work → Dehumanisation & Loss of Fulfillment
In a highly specialised economy, workers only contribute to a small part of the final product.
This disconnects them from the fruits of their labour, leading to alienation (Entfremdung).
Instead of feeling pride in their craft, they become mere cogs in a machine, performing repetitive, unfulfilling tasks.
This harms their well-being, reducing motivation and job satisfaction.
📌 Example: In assembly line production, workers perform one small task repeatedly, never seeing the full product.
🔹 3️⃣ Power Imbalance → Capitalist Domination Over Workers
As production becomes more complex and mechanised, capitalists gain greater control over the means of production.
Workers become increasingly dependent on employers, reducing their bargaining power.
This allows capitalists to dictate wages and working conditions, suppressing labour rights.
Over time, this creates a permanent class divide between the proletariat (working class) and the bourgeoisie.
📌 Example: Gig economy jobs (Uber, Deliveroo, etc.) often have low pay, little job security, and no worker control over conditions.
🔹 4️⃣ Technological Advancements → Structural Unemployment & Proletarianisation
As firms specialise, they adopt new technologies to replace human labour, increasing capital intensity.
This leads to structural unemployment, where workers lose jobs and lack the skills for new roles.
Those who remain employed are forced into low-skilled, repetitive work, further worsening alienation.
The working class grows in number (proletarianisation), increasing tensions between workers and capitalists.
📌 Example: Automation replacing factory workers has led to job losses and lower wages for low-skilled workers.
🔹 5️⃣ Class Struggle → Revolution Against Capitalism
Over time, as workers face low wages, poor conditions, and alienation, they become discontent with capitalism.
The working class may begin to organise into trade unions and socialist movements, demanding change.
Eventually, this could lead to a revolution, where the workers overthrow the capitalist system.
Marx predicted that capitalism would collapse, replaced by socialism and then communism, where production is collectively owned.
📌 Example: The Russian Revolution (1917) was driven by worker discontent and class struggle, leading to the overthrow of the ruling el
john Maynard Keynes beliefs
Specialisation and Efficiency
- Keynes acknowledged the efficiency gains from specialisation and division of labour in boosting productivity and economic growth.
- By allowing workers to focus on specific tasks, production processes become streamlined, output per worker rises, and firms can achieve economies of scale.
- This contributes to higher aggregate supply and potentially greater economic output, but Keynes was cautious about its implications on aggregate demand and employment.
Vulnerability to Economic Shocks
- Keynes highlighted that excessive specialisation could make economies vulnerable to disruptions.
- If industries are highly specialised and dependent on external trade, a decline in global demand or trade restrictions can lead to unemployment and reduced incomes.
- This aligns with Keynes’ emphasis on the importance of managing aggregate demand to prevent economic downturns and unemployment.
Division of Labour and Worker Welfare
- Keynes expressed concern over the potential social consequences of extreme division of labour.
- While it improves efficiency, it can lead to monotonous work, worker alienation, and reduced job satisfaction, ultimately harming long-term productivity and welfare.
- These issues could lower aggregate demand due to reduced worker morale and consumption, which Keynes viewed as central to maintaining economic stability.
Role of Government in Mitigating Issues
- Keynes believed that government intervention could help address the inequalities and instabilities arising from specialisation.
- Through public investment, redistribution policies, and demand management, governments could balance the benefits of specialisation with the need for stable and inclusive economic growth.
- This would ensure that the productivity gains from specialisation contribute to overall economic welfare without exacerbating inequality or cyclical unemployment.
Why do economists develop models?
To simplify complex real-world economic interactions and make predictions about economic behavior.
