Mid sem test Flashcards
Scarcity
A good or service is scarce, there is not enough of it to satisfy everyone at zero price
Economics
The study of the systems society uses to allocate scarce resources to the production of goods and services and then to distribute them to consumers
How people make principles
People make tradeoffs, opportunity cost, rational people think at margin, people respond to incentives
How people interact with key economic principles
Trade makes everyone better off, markets good way to organise economic activity, govt can improve market outcomes in certain occasions
Macro lessons
Countries standard of living depends on its ability to produce goods, price rises when govt prints money which leads to inflation, society faces a short term trade off between inflation and unemployment
Positive statement
Claims that attempt to describe the world as it is, can gather info and be tested by looking at data
Positive statement
Claims that attempt to describe the world as it is, can gather info and be tested by looking at data
Normative statement
Claims the attempt to describe how the world should be and is a value judgement
PPF
A graph that shows various combinations of output that the economy can possibly produce, given the available resources and technology
What does the PPF curve show
The tradeoff as scarcity
NZ standard of living ranking in the 1950’s
3rd
NZ standard of living ranking in 1978
22nd
Reasoning behind NZ decrease in standard of living
Britain seeking economic future in Europe and increase in oil prices then increasing COP
NZ regulated economy in 1980’s
Permission to truck goods on railway upwards of 150miles, regulated monopolies, ownership of industries
Significance of fourth labour government elected in 1984
Introduction of economic reforms
Economic reforms
Removing barriers to trade, state owned assets were sold, tax structure less progressive and tight monetary policy introduced to reduce inflation
The market system
It is driven by individual decisions as what to produce is decided by the willingness and ability of individual consumers to pay for each good.
Price signals
These decide what to produce such as if demand for a good increases, the price will then increase, which increases supply and then decreases demand
Relative price
Price of one good divided by another
Invisible hand
Price changes allocate resources, operates as the outcome of self interest
Questions answered in market economy
How to produce = individual business owners
Whom to produce = individual consumers
Gains from trade
Individuals differ in OC of performing particular tasks where potential gains can be made which leaves room for specialisation
Why trade
Misallocated endowments of goods, gains from larger scale production, variation in resource productivity ( CA )
Absolute advantage - AA
AA if takes fewer hours to produce a good or perform a task so is therefore more productive
Opportunity costs
OC is the comparative advantage held by the person with the lowest OC of production
Specialisation
Arguments in favour of trade
Increases competition, prevents high monopoly prices, domestic produces efficiently, allows domestic firms to access larger markets
Arguments against trade
Loose jobs where exports are better, have to move and retrain in new jobs
Perfectly competitive market
Many suppliers and buyers who have negligible affect on the price
Characteristics of a perfectly competitive market
Homogenous product, price takers, perfect knowledge, freedom of entry and exit
Law of demand
As price increases, quantity demanded decreases vice versa
Affects on demand
Substitution effect and income effect
Movement along the demand curve
Change in price causes movement along
Shift of the demand curve
Change in any other variable other than the price shifts the quantity demanded curve inwards or outwards
Reasons for a shift in the demand curve
Price of related goods, taste, expectations about the future, number of buyers
Law of supply
As price increases the quantity supplied increases vice versa
Reasons for shift in the supply curve
Changes in input prices, technology, expectation, number of sellers
Where is market equilibrium
Where supply and demand meet, price where everyone who wants to buy and sell can
Adjustments of price increase to equilibrium
Price now above equilibrium, excess surplus as supply exceeds demand so suppliers decrease price, QD increases and this continues to return to equilibrium
