test 1 Flashcards
Scare resources
finite or limited resources
economic goods
scarce goods
free goods
goods that are not scarce as they are unlimited in supply and therefore have zero opportunity cost towards society e.g. sunlight
needs
what people require in order to survive
wants
are the desire for the consumption of goods and services
basic economic problem
the allocation of resources between competing uses because wants are infinite but resources are scarce
opportunity cost
the benefit of the next best alternative being given up
Factors of production
The inputs to production being :
- land
- labour
- capital
- enterprise
non-renewable resources
resources that once used will never be replenished and will run out one day.
renewable resources
resources that can be used and replaced/recreated. Won’t run out e.g. trees and water
labour
the workforce of an economy
Human capital
the value/quality of the labour
Capital (econ definition)
Man-made aids to production. There are two types of capital:
- working capital
- fixed capital
working/circulating capital
stocks of raw materials, semi-manufactured goods, and finished goods that are waiting to be sold. These stocks circulate or move through the production process until they are sold to a consumer
fixed capital
the stock of factories, offices, and machinery. This is used to transfer working capital into finished products
production possibility frontier
a curve that shows the maximum potential level of output of two goods or services with given factors of production. It illustrates the production level if all resources in the economy are used efficiently
Margin
a point of possible change on the PPF
consumer goods
goods and services that are used by people to satisfy their needs and wants
capital goods
goods that are used in the production of other goods, such as factories, offices, roads, machines, and equipment.
Productive efficiency
production takes place at the lowest cost. This occurs when a given set of resources produces the maximum number of goods. All points on the boundry (on the PPF) are productively efficient.
Allocatively efficient
when social welfare is maximized
Specialization
the production of a limited range of goods by an individual, firm or country in co-operation with others so that together a complete range of goods is produced
Globalization
is the tendency for the world economy to work as one unity, led by large international companies doing business all over the world
division of labour
the specialization of workers who perform different tasks, at different stages of production, to make a good or service in co-operation with other workers.
productivity
output per unit of input employed
labour productivity
output per worker
capital productivity
output per unit of capital employed
Primary sector
the sector of the economy where raw materials are extracted and food grown
Secondary / manufacturing sector
Where raw materials are transformed into goods
Tertiary/ service sector
the service sector e.g. education and retailing
Public sector
the state or government sector of the economy
Private sector
the part of the economy owned by private individuals, firms, and charities
Markets
Where buyers and sellers meet to exchange goods and services (another name for this is the price mechanism)
Sub-markets
markers within a larger market
self-sufficiency
being able to provide all the things you need without help from other people
Money
anything that is widely accepted as payment for goods and services performed or repayment of past debt.
What are the functions money have to fulfill
- Medium of exchange
- Measure of value
- A store of value
- A method of deferred payment
Barter economy
an economy that has no money rather exchange is conducted directly by swapping one good with another.
Double-coincidence of wants
Where each party to the transaction wants what the other has to trade
Cash
token money that can be in the form of notes and coins
Near monies
assets that fulfill some but not all the functions of money
Liquidity
the ease to change an asset into cash.
Assets
resources owned by a business or an economic entity
Financial assets
a non-physical asset whose value is obtained from a contracted claim such as bonds and stocks
Financial market
any convenient set of arrangements where buyers and sellers can buy or trade a range of services or assets that are fundamentally monetary in value
Monetary in value
the property of having material worth
Market mechanism
is what allocates resources through bringing together buyers and sellers who agree on a price for the product or resource being sold
Planning ( in the means of allocation of resources)
allocates resources through administrative decisions
Free-market economies
where the majority of resources are allocated through the markets rather than through government planning
Mixed economies
are where typically half of the economies’ resources are allocated through government planning
Command economies
is where most resources are allocated by the state and the market mechanism only plays a small part
Consumer welfare
is the level of well-being or prosperity or living standards if an individual or group of individuals such as a country
Utility
the satisfaction or benefit derived from consuming a good or a set of goods
resources (econ)
Production inputs/factors of production
Enterprise (as a resource)
an organization that brings all the other factors of production together and is started by an entrepreneur who is an innovator and a risk-taker who is seeking out to make a profit and taking risks in attempting to do so.
Land (resource)
includes all-natural resources that may be extracted from it. These may be non-renewable or renewable. It also includes the area at which business activities take place.
Labour (resource)
The workforce of an economy that produces goods or services
productively inefficient
is where it is possible to produce more without an opportunity cost as resources aren’t fully and/or efficiently used up
Pareto efficient
as the economic situation when the circumstances of one individual cannot be made better without making the situation worse for another individual. This only takes place on the boundary of the PPF.
How do PPF curves shift outwards (increase production)?
Increase the quantity and/or the quality of their factors of production
Demand (effective)
The quantity of a good or service consumers are willing and able to buy at a given price in a given time period
Why is there an inverse relationship between price and quantity?
This is due to the income and substitution effects
Ceteris paribus
all other factors (other than price) remain the same
Contraction
is when there is a said decrease in quantity due to a change in price (movement along the curve)
Expansion
is where there is a said increase in quantity due to a change in price (movement along the curve)
Income effect
the ability of consumers to purchase goods is related to their purchasing power which is proportional to their income. This is because income affects consumers’ ability to purchase a good. Which is a factor of effective demand.
Substitution effect
As prices change for a certain good or service, demand switches between substitutes as other goods/services may be more appealing and derive greater utility
Supply
The quantity of a good or service suppliers are willing to produce at a given price in a given time period
what is there an upward sloping supply curve with a direct relationship?
This is due to the profit motive of suppliers however suppliers want higher prices as quantity goes up due to the increase in costs of production-related to producing more
What affects the supply curve?
PINTS WC : Productivity Indirect Tax No. Firms Technology Subsidy Weather Cost of production
price mechanism
is the market and performs 4 functions: ARSI
it ALLOCATES scarce resources by RATIONING excess demand/supply by signaling to suppliers that prices are either too high or too low, who have the incentive to change prices in hopes to maximize profit rates
price mechanism
is the market and performs 4 functions: ARSI
The market would first SIGNAL that prices are either too high or too low. This would be quite clear to suppliers. The INCENTIVE suppliers have of maximizing profit would ration excess demand/supply by increasing or decreasing prices accordingly this then results in a perfect allocation for scarce resources when taking into account private costs and benefits.
Consumer surplus
This is the difference between the price consumers are willing and able to pay for a good/service and what they actually do pay. This is the region under the demand curve and above the price line. This illustrates the extent of consumer welfare.
Producer surplus
The difference between the price producers are willing and able to supply a good/service for and the price they actually receive. It is the region above the supply curve and under the price line. This illustrates the extent of producer welfare.
Society surplus
society surplus is the sum of consumer and producer surplus (Consumer surplus + producer surplus)
What are the factors affecting the elasticity of demand?
SPLAT: Substitutes Percentage of income Luxury/necessity Time period
what is PED?
PED measures the responsiveness of quantity demand for a certain good given a change in price
When demand for a good is price elastic, what will the effect be if price increases on total revenue?
Revenue will decrease
When demand for a good is price inelastic, what will the effect be if the price increase on total revenue?
Revenue will increase
NOTE: ElASTICITY IS NOT THE GRADIENT
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Why is it said that elasticity changes throughout a (demand/supply) curve?
For the top half of the (demand/supply) curve, the percentage change of quantity demanded is greater than the percentage change of price, and that is why we get the elastic figure on the top part. For the bottom half of the (demand/supply) curve, the percentage change in quantity demand is less than the percentage change in price. The middle point is always going to be unitary elastic wherein the demand curve it’s going to be -1 and the supply curve +1.
Where would profit be maximized?
At the point of unitary elasticity as a curve is inelastic in its bottom half and elastic in its top half. We know that in order to increase profit in an inelastic curve, we increase the price and in order to increase profit in an elastic curve, we decrease price.
what is PES?
It measures the responsiveness of quantity supplied given a change in price
What affects the elasticity of supply?
Pssst : Production Lag Stocks Spare Capacity Substitutability of Factors of production Time
production lag
Time lags occur in production, particularly in agriculture, when decisions about the quantity to be produced are made well ahead of the actual sale. Demand and the price may change in the interval, creating a problem for the producer.
Stock
Stock refers to the total quantity of the commodity available with the producer for the present or future sale
Spare Capacity
the ability of a supplier to produce more of a product that is ow being produced
XED (cross elasticity of demand)
measures the responsiveness of a good or service given a change in the price of another
bumper yields
occurs within agriculture where crop yields an unusually productive harvest. This may be due to good weather.
Note: When looking at the XED for good X then the equation would be %change in demand for good X / percentage change in the price of good Y
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Substitutes
these are goods that can be replaced by another to satisfy a want. These have a positive XED with each other.
Complements
These are goods that are purchased with other goods to satisfy a want. These have a negative XED.
If the XED of two goods is > 1 then :
If the XED of two goods is < 1 then :
If the XED of two goods is 0 then:
- Demand between the two goods is price elastic (strongly related)
- Demand between the two goods is price inelastic (weakly related)
- Demand between the two goods is perfectly inelastic (no relationship)
Buffer Stock
Buffer Stock is a policy used by the government to stabilize fluctuating commodity prices to protect both producers (if the price goes too low) and consumers (if the price goes too high)
rational consumers
are assumed in behavioral economics to make decisions in accords to maximizing utility
minimum price
The lowest price firm can charge on consumers. This is done to protect suppliers from low prices and therefore income, this also may lead to an expansion within the market.
It may also be used to affect profitability where a non-garunteed minimum price is placed and profitability
is affected by the business causing firms to exit the market/
what are the disadvantages of price floors
- inefficiency and dip in quality as farmers income are guaranteed
- the opportunity cost for the government as money could be used for other goods or services
- misallocation of resources with excess supply within the marker
reduce consumer surplus hence welfare as prices rise for them
^ factors all depend on whether governments will be willing to purchase an excess stock that would arise and the overall elasticity of the product
what are the advantages of price floors :
- increase producer surplus hence welfare
- increase revenue and output resulting in a reduction in unemployment rates
- increases producer revenue
all depends on the overall elasticity and whether the government is willing to purchase excess supply
leisure time
the time when you’re not working or occupied; free time
de-merit good
a good or service whose consumption is considered to be bad for you
merit good
a good or service whose consumption is considered to be good for you
indirect tax
a tax on expenditure that increases costs of production, this may be put in order to discourage the production of the good or service.
ad valorem tax
a tax charged as a percentage of the good and so increases as price increases
specific/unit tax
a tax charged on volume
External cost
cost external to an exchange where a negative third part effect is invoked as a spillover from production or consumption. This is a cost that the price mechanism fails to take into account and is the difference between social and private costs.
External Benefits
where third parties of a transaction are positively affected by a transaction and are where social benefits exceed private benefits
Government Failure
is where government intervention in a market leads to a less efficient allocation of resources and greater welfare loss as he cost related to the government intervening is greater than the benefits derived
Maximum price
This is the highest price firms are able to charge on consumers and is set in order to make a good/service more affordable to consumers.
Information Gaps
where buyers or sellers do not have access to the information needed to make a fully informed decision
Asymmetric information
where one group has superior information to other groups in a transaction.
Subsidies
government payments/ grants to encourage the production of a good
