Steedsy Theme 1 Flashcards
What does factors of production mean
the inputs used to produce a good or service in order to produce income.
What are the 4 factors of production
Land
Labour
Capital
Enterprise
Opportunity cost
the value of the next best thing you give up whenever you make a decision
Economic Sustainability
practices that support long-term economic growth without negatively impacting social, environmental, and cultural aspects of the community.
What is the basic economic problem
How to best use the limited resources to satisfy Unlimited wants of people
What is economic growth
an increase in the amount of goods and services produced per head of the population over a period of time.
A market definition
where buyers and sellers can meet to facilitate the exchange or transaction of goods and services
Factor market definition
all of the resources that businesses use to purchase, rent, or hire what they need in order to produce goods or services
product market definition
the marketplace where final goods or services are sold to businesses and the public sector
Specialisation definition
the process wherein a company or individual decides to focus their labor on a specific type of production
Division of labour definition
the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons
Exchange definition
a marketplace where securities, commodities, derivatives and other financial instruments are traded.
What are the 4 economic agents and what are the decisions they make
Governemnt - make decisions to try and maximise social welfare
Consumers - makes decisions to maximise social welfare
Firms - makes decisions to try and maximise profits
Workers - makes decisions to maximise their pay
What is an economic agent
A person, company, or organization that has an influence on the economy by producing, buying, or selling
What is the law of diminishing marginal utility
As the amount consumed of a commodity increases, the utility (satisfaction) derided by the customer from the additional units decreases
Total utility
The total satisfaction from a given level of consumption
Marginal utility
The change in satisfaction from consuming an extra unit
Demand definition
The amount of product people are willing to buy after a given price
What is the relationship between demand and price
As price goes down, demand goes up
If price decreases, what happens to the demand
There is an expansion of demand (increases)
If price increases, what happens to the demand
There is a contraction of demand (decreases)
What factors cause a SHIFT in demand
Income
population changes
fashion
changes in price of substitute goods
advertising
change in price of complimentary goods
Why would an increase in income cause a shift in demand and what happens to the shape of the graph
People can buy more of the product when the price of the product hasn’t actually changed. So the graph will shift to the right as price hasn’t changed but quantity has increases
What will happen to the demand of the product if a substitute product decreases its price
It will decrease for the product but increase for the substitute good
What is a substitute good
Does the same job
What does the supply curve show
A graph that shows the direct relationship between quantity supplied and prices
As price goes up, they will try and sell more
What are the factors affecting supply
- changes in cost of production
- natural factors e.g. effect of weather on crops
- government taxes and subsidies
Definition of subsidies
The government pays firms money to produce more (so the supply curve would shift right as more would be supplied)
Definition of equilibrium
Where the demand and supply curve meet : demand = supply
What will happen when the price is higher than the equilibrium price and why
There will be a surplus because firms will want to sell more - supply will increase but demand will fall
What will happen when the price is lower than the equilibrium price
When price drops demand increases, but suppliers supply less because the profit margin is lower so supply decreases. Therefore there will be a shortage of the good because firms will want to supply less on the market.
What is derived demand
Demand that comes from (is derived) from the demand for something else.
For example an increase in demand for oil is caused by an increase in demand for cars
What would happen to demand if interest rates decreased and why
Demand would increase because obtaining credit is cheaper so more people take out loans to buy the product
What is price elasticity of demand
The responsiveness of demand to changes in price
What is the price elasticity of demand formula
Ped = %change in demand / %change in price
In price elasticity of demand, what values would be determined as inelastic and what values would be determined as elastic
Elastic - -1 and below (e.g -1.7)
Inelastic - anything angling from -1 to 0
What are the determinants of elasticity of demand?
- Time period - the longer the time under consideration, the more elastic a good is likely to be
- Number and closeness of substitutes - the greater, the number of substitutes, the more elastic
- The proportion of income taken up by the product - the smaller, the proportion, the more inelastic. Therefore, a big price change for an expensive product will cause a greater shift in demand
- luxury or necessity (holidays are a luxury, but food is a necessity).
- Habit forming (for example an addictive drug)
Price elasticity of supply equation
PES = %Change in quantity supplied / %change in price
What does price elasticity of supply measure?
The responsiveness of supply to changes in price
As price increases, supply will want to increase, but it may take time
What values in price elasticity of supply will cause it to be elastic or inelastic?
> 1 = elastic
<1 = inelastic
What are the determinants of elasticity of supply?
- The availability of scarce resources - if an economy is using the majority of it, scarce resources, businesses will not be able to increase production and supply will remain stagnant (inelastic)
- Time - e.g because you have to build the buildings so the longer the time the more inelastic as they can’t react in short run but in long run it becomes more elastic as the buildings are built so more can be supplied
- Stock levels - The higher the stock levels, the more elastic, as it’s easier to increase the supply when prices increase
What are the likely reasons for the difference in price elasticities of demand for tobacco cigarettes and e-cigarettes? Cigarettes are more inelastic than E cigarettes
Tobacco cigarettes are addictive so a change in price won’t affect supply very much as people will keep buying them
There are also a lack of substitutes for tobacco cigarettes, so even if the price is too high, there will be no substitute good the customer can go to
What is the income elasticity of demand equation?
YED = %change in quantity demanded / % change in income
What is income elasticity of demand?
The responsiveness of demand of one good to changes in income
What values would determine the product as a normal good a luxury good or an inferior good
A positive sign denotes a normal good
A positive sign of +1 or higher, there is an even better normal good. It’s called a luxury good
A negative sign denotes an inferior good
What would a YED(income elasticity of demand) of -0.1 be determined as
An inferior good and inelastic
What is cross elasticity of demand?
The responsiveness of demand of one good to changes in the price of a related good. This is either a substitute or a complimentary good
How do you calculate cross elasticity of demand? And explain what it means if u get a high value
XED = %change in quantity demand of good A / %change in price of good B
The higher the value, the stronger the relationship. This means if price of a substitute good goes up, demand will increase for the good the higher the value it is. For example, Coke and Pepsi have a strong relationship so if the Coke price goes up you will buy Pepsi.
What is the price mechanism
The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated by prices. Resources move towards where they are in shortest supply, relative to demand, and away from where they are least demanded
What is the rationing function
Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of such a price rise is to discourage demand and conserve resources. The greater the scarcity, the higher the price and the more the resource is rationed as they know demand will fall.
What is the signalling function
Higher prices send messages to consumers to reduce consumption or withdraw from the market completely and they give a signal to potential producers to enter the market. Vice versa
What is the incentive function
Higher prices provide an incentive to producers to produce more, whereas for customers the incentive is to consume less. The incentive function of a price rise is associated with an extension of supply along the supply curve.
Why aren’t we rational consumers
- incomplete information
- limited capacity to calculate all costs and benefits of a decision (computation)
- influence by their social networks
What is complete market failure
Occurs when the market simply doesn’t supply goods at all
What is partial market failure
Occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price
What is market failure
When the market fails to allocate resources effectively
What are public goods
Public goods provide an example of market failure as a result of missing markets
Characteristics of pure public goods
Non-excludable
Non-rival consumption
Non rejectable
Definition of non-excludibility
The benefits derived from pure public goods cannot be confined solely to the person who paid for it
Definition of non-rival consumption
Consumption by one consumer does not restrict consumption by other consumers
Definition of non rejectable
The collective supply of a public good for all means that it cannot be rejected by people
For example a nuclear defence system
What is the free rider problem
When people benefit from the good but do not pay for it
Reasons against the government providing public goods
Not everyone benefits but everyone pay through taxes
Opportunity cost
What is a quasi public good
A near public good such as beaches - they can be rejected and once it’s full you can’t use it
what is a merit good
Goods and services that the government feels that people will under consume and which ought to be subsidised or provided free
What is a demerit good
Goods which are thought to be ‘bad’ for you and leads to a negative externality
What are principle agents
An arrangement in which one entity legally appoints another agent to act on its behalf
E.g appointing a lawyer
What is asymmetric information
When one individual or party has much more information than another individual party, and uses that advantage to exploit the other party
For markets to work there needs to be symmetric information where they have a similar level of knowledge about the products
What values would be determined as a substitute good or complimentary good in cross elasticity of demand
+ value is a substitute good
- value is a complimentary good
