Test 1: Markets, Equillibrium and Demand Elasticity Flashcards
Define Microeconomics
Micro means small perspective. Microeconomics deals with economic problem from an individual point of view. Refers to trying to understand how consumers and producers make decisions and concentrates on supply and demand.
Describe economic problem
Economic problem refers to the fact that there are unlimited wants and limited resources. Therefore choices must be made which involve an opportunity cost (real cost of the next best alternative foregone).
Consumers have unlimited wants relating to how they want to spend their personal time, income and energy. However they will not have enough of these 3 things to satisfy all their wants. Give example.
Producers may want to produce a number of different products however only have enough profit to make a certain number of profit a. Give example.
The government has to deal with unlimited wants of the community, however must decide on behalf of the community what the best way is to satisfy these collective wants. Give example.
Explain opportunity cost, how does it affect consumers, producers and the government.
Opportunity cost refers to the real cost of the next best alternative foregone.
Consumers experience opportunity cost everyday, when deciding how to use their personal time, income and energy. Give example.
Producers must choose how they are going to use their profit to create a product. Give example.
Government must decide how they are going to use their tax revue to benefit the communities collective goals. Give example.
Characteristics of market economy
Government does not intervene therefore no public services such as healthcare.
Economic decides are made by private sectors and driven by individual profit motive.
Forces of supply and demand affect economic decision making therefore determines prices (consumer is king)
Large amount of competition within
Poverty increases (survival of the fittest)
Characteristics of planed economy
Economic decision making is done by a central agency (government) in interest of the state.
Collective goals
Government owns all resources and sets all prices.
Consumers have very little power over how economic decisions are made.
Overall goal of equality.
Characteristics of mixed economy
Provide public services such as healthcare.
Provide goods not provided by private firms such as roads and parks.
Ensuring businesses do not gain total market power.
Reducing fluctuations in the business cycle
Taxing goods with negative impacts on society.
Invest in research and development.
Demand and Law of Demand
Amount of a good or service a consumer is both willing able to buy at a particular price and time. There is a negative relationship between demand and price. As price rises demand contracts.This is as consumers are less willing and able to buy a product as higher price and vice versa.
Supply and Law of Demand
The amount of a good or service a producer is both willing and able to produce at a particular price and time. There is a positive relationship between supply and price. As price rises supply expands. This is as producers are more willing and able to supply a product at a higher price to maximise their profit.
Income effect and substitute effect?
When price of a product rises, consumers are not willing to buy as much of the good as their real income or purchasing power decreases.
When the price of a good rises, other goods become more attractive as they are similar but relatively cheaper.
Price of substitute good?
Refers to a good very similar that can be used in place of another food (a good that can satisfy the same want).
Price of complementary good
A good that can be used in conjunction with another good.
Income
How much money a person earns determines how much a person can buy.
Advertising and Media
Marketing of a product and the product reviews
Trends and preferences
Individuals attitudes towards a product which can be due to fashion or celebrity endorsement.
Population
The size of population can determine the size of the market also demographics.
