Semester 1 Flashcards
Define economics…
Economics is a Social Science that
studies the choices that individuals, businesses, governments and entire societies make
as they
cope with scarcity
and
the incentives that influence and reconcile those choices.
Define the 2 areas of economics…
Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.
Macroeconomics is the study of the performance of the national and global economies.
What are the 2 big economic questions?
- How do choices end up determining what, how and for whom goods and services get produced?
- When do choices made in the pursuit of self interest also promote the social interest?
Break down big question 1 into what, how and for whom goods and services get produced…
- What is produced e.g. services, production, construction, agriculture.
- How its produced by factors of production e.g. Land, Labour, Capital, Entrepreneurship.
- For whom is who gets the goods and services, depends on the income that factors of production earn… e.g. Land earns rent, labour earns wages, capital earns interest, entrepreneurship earns profit.
Explain big question 2 how the pursuit of self interest promotes social interest…
- Self Interest: choices that you think are best for you.
- Social Interest: choices that are best for society as a whole.
- Social Interest has two dimensions:
Efficiency.
Equity.
Example: globalisation, monopolies.
What are the 6 key ideas of the economic way of thinking ?
6 Key Ideas:
- A choice is a trade-off.
- People make rational choices by comparing benefits and costs.
- A benefit is what you gain.
- A cost is what you give up.
- Most choices are “how-much” decisions made at the margin.
- Choices respond to incentives.
What are positive statements ?
- A statement that can be tested.
Example: Global warming is the result of burning fossil fuels.
What are normative statements ?
- What should be.
Example: We should abolish tuition fees.
How can we distinguish between correlation and causation ?
- Models allow us link cause and effect by focusing on a specific issue.
Application: experiments, statistical analysis.
What is the PPF ?
- The Production Possibilities Frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot.
- Illustrates scarcity, opportunity cost, (in)efficiencies, trade-offs.
What is production efficiency ?
- When goods and services are produced at lowest cost.
What is production inefficiency ?
- Resources unused or badly used.
- Combination inside PPF.
What is the opportunity cost ?
- Highest valued alternative foregone.
How does a concave shaped PPF impact the opportunity costs ?
From A to B:
- PPF is flat.
- Increase in pizza costs a small amount of cola.
From E to F:
- PPF is steep.
- Increase in pizza costs a large amount of cola.
How do you find the point which is allocatively efficient on the PPF ?
- Produce at lowest cost and is most valued.
- Is allocatively efficient.
- All points on PPF achieve production efficiency.
How can we find the optimal combination on the PPF ?
- Compare Marginal Cost with Marginal Benefit.
- Marginal implies ONE more UNIT of production/consumption.
How does the opportunity cost impact marginal cost ?
- Increasing opportunity cost of a pizza…
- Means increasing marginal cost of a pizza.
Define the marginal benefit…
- The benefit received from consuming one more unit of it.
- Linked to willingness to pay.
- Dependant on preference of organisation/individual.
- Curve is downward sloping
*How can you find the point of allocative efficiency ?
- The point where the marginal cost line overlaps with the marginal benefit.
- Therefore meaning that MC = MB
What is economic growth in relation to PPF ?
The expansion of the PPF and an increase in the standard of living is called economic growth.
What 2 key factors influence economic growth ?
- Technological Change
2. Capital Accumulation
What is the opportunity cost of economic growth ?
- Decreasing current production of consumption goods and services.
Define a market…
- A market is any arrangement that enables buyers and sellers to get information and trade with each other.
7 key points which define a competitive market…
- Many buyers and sellers.
- No entry barriers.
- Suppliers are price takers.
- The market price is low and is equal to marginal cost.
- Profits are zero in the long run.
- Goods are identical.
- Consumers have perfect information.
Define the quantity demanded…
The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time at a particular price.
State the law of demand…
- All else equal, when the price of a good rises, the quantity demanded of the good decreases; and when the price of a good falls, the quantity demanded of the good increases.
What does the law of demand result from ?
Income effect.
Substitution effect.
What can a demand curve also be known as ?
A demand curve is also a willingness-and-ability-to-pay curve.
Willingness to pay measures marginal benefit.
Demand curves can be nonlinear or linear.
5 main determinants of changes in demand…
- Income (normal good and inferior good).
- The prices of related goods (complements and substitutes).
- Expected future price and income.
- Preferences.
- Population.
*How do the 5 determinants of demand impact the demand curve ?
- Own price changes of a good are reflected as a movement along the demand curve.
- Any other determinant shifts a good’s demand curve.
Define the quantity supplied…
The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.
State the law of supply…
- All else equal, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.
Why would supply of a good or service increase ?
- If the price of a good or service rises, supply increases as it is worth incurring the extra costs
- Therefore 𝑀𝐵 >𝑀𝐶.
What is a supply curve also known as ?
A supply curve is also a minimum supply-price/marginal cost curve.
What does the supply curve show ?
Shows the lowest price at which someone is willing to sell an additional unit.
This lowest price is marginal cost, i.e. supply is positive if price is equal to marginal cost.
6 main determinants of supply…
- The prices of productive resources/input costs
- The prices of related goods produced (substitute/complements).
- Expected future prices.
- The number of firms.
- Technological progress.
- State of nature.
*How do the 6 main determinants impact the supply curve ?
- Input prices will change the shape of the curve.
- Decrease/increase in supply will shift curve
????
Define market equilibrium…
Equilibrium in a market occurs when the price matches the plans of buyers and sellers.
Define the equilibrium price…
The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
Define the equilibrium quantity..
The equilibrium quantity is the quantity bought and sold at the equilibrium price.
How can we use algebra to determine equilibrium quantity and price ?
Let 𝑃=𝑎−𝑏𝑄_𝑑 represent market demand.
Let 𝑃=𝑐+𝑑𝑄_𝑠 represent market supply.
We can determine equilibrium quantity and price through 𝑄_𝑑=𝑄_𝑠=𝑄^∗.
First, equate prices as 𝑎−𝑏𝑄_𝑑=𝑐+𝑑𝑄_𝑠.
Then substitute into appropriate equation.
Define the price elasticity of demand..
- The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, all else equal.
3 determinants of PED…
- The closeness of substitutes.
- The proportion of income spent on the good.
- Time period considered.
How can PED be classified ?
Price elasticity of demand can be defined as follows:
Inelastic Demand: 𝑃𝐸𝐷<1.
Elastic Demand: 𝑃𝐸𝐷>1.
Unit Elastic Demand: 𝑃𝐸𝐷=1.
How is PED calculated ?
𝑃𝐸𝐷 is calculated using the formula:
Percentage change in quantity demanded)/(Percentage change in price
How can calculating PED be important in real life situations?
Several countries, e.g. Denmark and France, have introduced taxes on unhealthy foods.
Taxes means higher prices for consumers.
Impacting the quantity demanded.
How can a business use PED to increase its total revenue?
A good business strategy to increase total revenue is to
offer price discounts or increase the price of a commodity.
To decide which strategy is best a business may look at the PED.
When may it be appropriate for a business to increase or decrease price using PED ?
- If a good is inelastic, increasing the price would increase revenues.
- If a good is elastic, decreasing the price would increase revenues.
What is the cross price elasticity of demand ?
- The cross price elasticity of demand is a measure of the responsiveness of demand for a good to a change in the price of a substitute or a complement, all else equal.
How do we calculate the CPED ?
“Percentage change in quantity demanded “ /”Percentage change in price of substitute/complement “
What is the income elasticity of demand ?
The income elasticity of demand measures how the quantity demanded of a good responds to a change in income, all else equal.
How can the IED be classified ?
Income elasticity of demand can be defined as follows:
Inferior Good: 𝐼𝐸𝐷<1.
Normal Good, Income Elastic: 𝐼𝐸𝐷>1.
Normal Good, Income Inelastic: 0
What is the elasticity of supply (PES) ?
The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good, all else equal.
What are the 2 determinants of the elasticity of supply ?
The determinants of the elasticity of supply are:
- Resource substitution possibilities.
(How easily a good can be reproduced).
- Time frame for supply decisions.
(Comparing immediate, short-run, and long-run responses).