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 behaviour of the whole economy.
Define Market
an arrangement which brings buyers in contact with sellers.
Define Economic agents
those who undertake economic activities and make economic decisions.
Define Economic system
the institutions, organisations and mechanisms that influence economic behaviour and determine how
resources are allocated.
Define Planned economic system
an economic system where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives.
Define Directives
state instructions given to state-owned enterprises.
Define Mixed economic system
an economy in which both the private and public sectors play an important role.
Define Market Economic System
an economic system where consumers determine what is produced, resources are allocated by the price mechanism and land and capital are privately owned.
Define Price mechanism
the way the decisions made by households and firms interact to decide the allocation of resources.
What happens when there is a increase in demand?
- Rise in price
- Rise in profit
- Firms produce more
- Hire more workers, use more capital and land
Causes of changes in demand
- Changes in Income
- Changes in price of related products
- Advertising Campaigns
- Changes in population
- Changes in taste and fashion
Causes of changes in supply
- Changes in cost of production
- Improvements in technology
- Taxes
- Subsidies
- Weather conditions
- Price of other products
- Disasters and wars
- Discoveries and depletions of commodities
Define PED
a measure of the responsiveness of the quantity demanded to a change in price.
PED formula
PED = Percentage change in quantity demanded/ Percentage change in price
Define elastic demand
when the quantity demanded changes by a greater percentage than the change in price.
Define inelastic demand
when the quantity demanded changes by a smaller percentage than the change in price.
Determinants of PED
- Substitute or similar
- Proportion of income spent on the product
- Necessity and/or luxury
- Purchase can be postponed
- Addiction
- Time period
- How market is defined
Changes in PED
Perfectly elastic demand = infinite
Elastic demand = >1
Unit elasticity = 1
Inelastic demand = <1
Perfectly inelastic demand = 0
Define PES
a measure of the responsiveness of the quantity supplied to a change in price.
Determinants of PES
- time taken to produce it
- cost of altering supply
- the feasibility of storing it
Define Privatisation
the sale of public sector assets to the private sector
Advantages of Market Economic System
- Consumers are sovereign
- Price Mechanism
- Competitive Pressure
- Choice
- Efficiency
- Low price
- High quality
Disadvantages of Market Economic System
- Firms only take into account costs and benefits to themselves
- Monopoly may arise
- Firms will not make products if people do not pay for them
- Advertising can distort consumer choice
- Firms may fail to achieve efficiency
- Differences in income will increase over time
