Section 2- The allocation of resources Flashcards
Define microeconomics
The study of the behaviour and decisions of households and firms and the performance of individual markets
Define macroeconomics
The study of the whole economy
Define market
An arrangement which brings buyers into contact with sellers
What is the connection b/w micro + macroeconomics
Microeconomics decisions and interactions add up to the macroeconomic picture
Eg. A cut in income tax may lead to households buying more cars
Define economic agents
Those who undertake economic activities and make economic decisions
Firms (producers, employers)
Households (workers, consumers, savers)
Governments (provides benefits, taxes, regulates private sector)
Define private sector
The firms owned by shareholders and individuals
What are the aims of decision makers
Households:
- Consumers: Low prices, high quality
- Workers: Good working conditions, high pay
- Savers: Safe money, good return
Firms: Profits
Government: Strong economy
What are the 3 economic questions?
What to produce?
How to produce it?
Who is to receive the products produced?
Define an economic system
The institutions, organisations and mechanisms that influence economic behaviour and determine how resources are allocated
Describe a planned economic system
The state (government) makes the decisions about what to produce, how to produce (through directives), and who to give it to( by deciding workers’ wages and controlling the price).
The state owns the land, and capital and employs workers.
Necessities like housing, transport, education are all free of cost or extremely cheap
Define directives
A set of instructions given by the state to the state-owned enterprises
Define a mixed economic system
An economic system in which the private and public sector play an important role
Describe a market economic system
Government intervention is minimal and the land and capital is privately owned
Consumers decide what to produce and signal producers through price mechanism
Private firms decide how to produce the product (seek the lowest production cost but high quality)
Maximum influence over the market is influenced by whoever earns the most income, the most skilled, have more demand.
Define price mechanism
The way the decisions made by households and firms interact to decide the allocation of resources
The difference between labour-intensive and capital intensive
Labour intensive is when there is use of a higher proportion of labor relative to capital (vice versa)
Role of price mechanism
It acts as a sort of incentive for producers to respond to changes in market conditions (demand and supply)
Higher demand for a product typically means consumers are willing to pay more for it, this profit encourages firms to produce more of that product.
It also rations out products when the supply falls short of demand. The prices normally rise to lead to a reduction in demand as only people that can afford it will consume it.
Describe market equilibrium
When demand and supply are equal at the current price
Definition of demand
The willingness and ability to buy a product
Market demand? How?
The total demand for a product.
Found by adding up individuals demands at different prices (aggregation)
Define extension in demand
A rise in quantity demanded caused by a fall in price of a product
Define changes in demand
A shift on the demand curve
Define increase in demand
A rise in demand at any given price, causing the demand curve to shift to the right
Causes for a change in demand
- Change in income
- Changes in taste
- Changes in population
- Advertising campaigns
- Changes in related products
- Weather conditions
Difference between normal and inferior goods
Normal goods demand increases as income rises but inferior goods demand decreases when income rises
Relationship between substitute, compliment and demand
When the price of a complement product falls, demand for the product will rise along with its complement
Whereas, if the substitute of a products price rises, the products demand will rise
Define supply
Willingness and ability to sell a product
Define market supply
Total supply of a product
Define extension in supply
A rise in the quantity supplied caused by a rise in the price of the product itself
Define contraction in supply
A fall in the quantity supplied caused by a fall in the price of the product itself
Which curve slopes up from left to right? & down from left to right?
Up from L–> R: Supply curve
Down from L –> R: Demand curve
Define changes in supply
Changes in the supply conditions causing shifts in the supply curve
Define changes in supply
Changes in the supply conditions causing shifts in the supply curve
Define increase in supply
A rise in supply at any given price, causing the supply curve to shift to the right
Causes of change in supply
- Changes in costs of production
- Improvements in tech
- Taxes
- Subsidies
- Weather conditions
- Health of livestock/crops
- Disasters
- Wars
- Depletion
Why would costs of production change?
- Changes in costs of FOPs
- Changes in productivity
Define unit costs
The average cost of production which is found by dividing total cost/total output
Define equilibrium price
The price when demand and supply are equal
PED Formula
Percentage change in quantity demanded /
Percentage change in price
Define PED
A measure of the responsiveness of the quantity demanded to a change in price.
What 2 pieces of information are provided by PED?
- Sign: This tell us that there is an inverse relationship between the quantity demanded and price – a rise in price will cause a contraction in demand and a fall in price will cause an extension in demand. (Minus)
- Size of the figure. This indicates the extent by which demand will extend or contract when price changes. A figure of –2, for example, indicates that a 1% change in price will cause a 2% change in quantity demanded.
Define elastic demand
When the quantity demanded changes by a greater percentage than the change in price.
PED figure of more than 1, less than infinity
Define inelastic demand
When the quantity demanded changes by a smaller percentage than the change in price.