Social The Concept of Consumption and Production Flashcards
Economy is composed of two decision-making units. Firm and Households
Circular Flow of the Economy
Defined as the purchase of goods and services by the households for personal use
Consumption
In the book, The Wealth of Nations, Adam Smith claims that “consumption was the sole end of production”
Classical Interpretation of Consumption
Interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer
Classical Interpretation of Consumption
Father of Classical Economic School of Thought
Adam Smith
Disposable income(Yⅆ) refers to the remaining income an individual has after taxes and other government obligations (T) are deducted from the individual’s gross income (Y)
-Yⅆ=Y-T
Absolute Income Hypothesis
Keynes supported his absolute income hypothesis with the mathematical expression of consumption
Consumption function
Measures the change in consumption given a change in disposable income
The Marginal Propensity to Consume (MPC)
An alternative to Keynes’ consumption function theory and was created by Milton Friedman.
Permanent Income Hypothesis
What are the Determinants of Consumption
Interest Rate and Consumer Expectation
Is a concept in microeconomics which links consumer spending to personal preferences which are, in turn, subject to the individual’s maximum utility and budget constraints.
Consumer Choice Theory
Refers to satisfaction
Utility
Sets the limit to what the households can buy given their limited income
Budget
Consumers are fully aware of all options prior to making decisions
Full Information
Given two identical goods, a rational consumer is indifferent to either good
Indifference
If a consumer prefers GOOD A to GOOD B and prefers GOOD B to GOOD C, the same consumer is assumed to prefer GOOD A to GOOD C
Consistency
Consumers are assumed to be utility-maximizing individuals who would always prefer the option that gives the highest satisfaction
Diminishing
Is identified as “household final consumption expenditure” in the government’s national income statistics
Consumption Expenditure
What are the three processes in production?
Input, production system, and output
It is the first stage of production and consists an power, raw material, capital, energy, information
Input
Manual or mechanical operations when manufacturing a good
Production system
The last stage of production, and is the effect of Production system
Output
It is impossible to carry out production without land, water, and other resources
Nature
Transformation of resources into goods or services
Labor
Money used as a resource to buy capital goods
Capital
Combines all other factors of production into a product or service. The profit is the reward to the entrepreneur
Enterprise
Observed when you need to produce one single unit of a product at a time
Unit or Job Type Production
A large variety of products being manufactured with variable demands
Batch Production
Manufacturing large quantities of standardized products. Work is done by humans and machines
Mass Production/Flow Production
It is done purely by machines. It is done 24/7
Continuous Production or Process production
It is the first step in the supply chain. Extracts or grows raw materials
Primary Sector
Raw materials are turned into finish products
Secondary Sector
It is when the finished products are sold
Tertiary Sector
The resources don’t change as you produce more products
Fixed Resources
Resources change with how much more products are being produced
Variable Resources
The more workers there are, the more that is being manufactured. But if there are too much workers and the fixed resources can no longer accommodate, then the rate in which the goods are manufactured decreases.
Diminishing Returns
