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Economics > The basic economic problem > Flashcards

The basic economic problem Flashcards

1
Q

supply

A

Want or willingness of producers to supply a good or service at a given price

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2
Q

What is increase in supply due to

A

change in price called extension of supply

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3
Q

What is decrease in supply due to

A

A change in price called contraction of supply

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4
Q

What is increase supply of product due to

A

A change in other factors excluding price causes supply curve to shift to the right

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5
Q

What is decrease supply of product due to

A

A change in factors causing supply curve to shift to the left

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6
Q

law of supply

A

An increase in price leads to a increase in Quantity supplied and a decrease in price leads to a decrease in quantity supplied

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7
Q

Factors causing shift in supply curve

A
  • Change in costs of production: cost of factors to produce good falls so curve shifts right. Subsidy production cost lowers leading to increase in cost of production supply curve shifts to the left
  • Change in quantity of resources available: Amount resources available increases supply increases. vise versa
  • Profitability of other products: Certain products are more profitable producers increase supply of that product decrease in supply of the other product
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8
Q

Market equilibrium price

A

demand & supply in a given market meet

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9
Q

Disequilibrium price

A

Demand & supply in a given market don’t meet

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10
Q

Surplus

A

The price is above equilibrium meaning there is excess supply

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11
Q

Shortage

A

when price is below equilibrium price

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12
Q

PED

A

responsiveness of quantity demanded for it to change in it’s price

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13
Q

Formula

A

% change in demand / % change in price

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14
Q

Inelastic demand

A

when %in quantity demanded is lower then % change in price

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15
Q

Elastic demand

A

when %in quantity demanded is higher then % change in price

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16
Q

Factors that affect PED

A
  • N.o of substitutes: Elastic demand, Change in price will have a greater change in demand
  • Time period: demand for product elastic in long run. Price increases costumers search for cheaper sub. longer they have more likely they will find one
  • Portion of income spent on commodity: If price of rise Increases - inelastic - change in price won’t affect demand
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17
Q

Revenue

A

Amount of money producer/firm generates from sales

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18
Q

PED & Revenue

A
  • If product has elastic demand they can decrease the price to increase revenue
  • If product inelastic they can increase the price and make more revenue
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19
Q

What causes outward shift in PPC

A
  • Discover/develop new materials
  • Employ new technology & production methods to increase productivity
  • increase labour force
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20
Q

What causes inward shift in PPC

A
  • natural disasters
  • low investment in technology, decrease productivity
  • Running out of resources
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21
Q

Economy

A

Area where people and firms produce and trade goods and services

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22
Q

Micro

A

Study of individual markets EG: Studying effect of price change on demand for a good.
Micro decision makers are producers & consumers

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23
Q

Macro

A

Study of the entire economy. Decisions are made by government

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24
Q

Recourse allocation

A

How economies decide what goods and services to provide & how & who to produce them for

25
Q

Economic Agents

A

see who is buying and what part of pop. is buying the good

26
Q

Market

A

Arrangement that brings together producers and consumers of a particular good or service so they can engage in exchange

27
Q

Price mechanism

A

goods and services bought and sold in a market are bought and sold at equilibrium price

28
Q

Demand

A

want and willingness of a consumer to buy a good or service

29
Q

Effective demand

A

willingness of a good or service is backed up by the ability to pay

30
Q

Quantity demanded

A

Effective demand for a particular good or service

31
Q

Individual demand

A

demand from 1 consumer

32
Q

Market demand

A

total aggregate demand for the product/ sum of all individual demand of consumer

33
Q

law of demand

A

an increase in price leads to decrease in quantity demand & decrease in price leads to increase quantity demand

34
Q

Extension in demand

A

increase in demand is because change in price

35
Q

contraction in demand

A

decrease in demand due to a change in price

36
Q

Demand curve shift right

A

rise in demand due to other factors excluding price

37
Q

Demand curve shift left

A

fall in demand due to other factors excluding price

38
Q

Factors that cause shift in demand curve

A
  • Consumer income: increase in consumer income increases demand causing shift to the right. vice versa.
  • Taxes on Income - increase in taxes decreases demand shifting curve to the left. vice versa.
  • price of substitute: Price of substitute good decrease then demand will decrease on the other good shifting demand to the left. vice versa.
  • Price of complementary good: If price decrease on one product then demand increases on the other causing shift to the right. vice versa.
  • Change in consumer fashion: If taste in a good has fallen demand decreases causing shift to left. vice versa.
  • degree of Ad: if good is advertised good demand increases causing shift to right
  • Change in pop. - increase in pop. increase in demand causing shift to right. vice versa
39
Q

PES

A

responsiveness of quantity supplies to change in price

40
Q

Formula pes

A

% change in quantity supplied/ % change in its price

41
Q

What affects PES

A
  • Time of production: product can be quickly produced - Elastic supply as product can be supplied at any price. Products that take longer to produce (cars) price inelastic because it takes longer for supply to adjust to the price
  • Availability of resources: More resources meaning it’s easier for elastic supply. Not enough resources meaning it’s harder to adjust price change for elastic change supply then become price inelastic
42
Q

Market economic System

A

All resources are allocated by the market - Private producers & consumers with very little government intervention

43
Q

Features

A

-All resources are owned and allocated by private individuals
- Very less government intervention
What to produce is solved by demand of the good
- Producing for people that can pay

44
Q

Market economic System Advantages

A
  • wide variety of goods and services-firms want to satisfy consumer wants & needs
  • Firms respond quickly to consumer changes in demand they quickly allocate resources to satisfy demand
  • Easy to start a business - No government intervention
45
Q

Market economic System Disadvantages

A

Only profitable goods gets produced
- Only produced for costumers that can pay for them
- Only profitable resources will be produced. Some resources will be left unused
- Harmful demerit goods will be produced
- Negative externalities are ignored by producers as they want profit
- Monopolies can be made

46
Q

Public good

A

-good that is free and can be used by the general public has positive externalities, It is non excludable and non rival

47
Q

Merit good

A

positive externalities and should be consumed more

48
Q

Subsidies

A

Financial grant made to make firms lower cost of production producing a good or service

49
Q

Private cost

A

Cost to producers and consumer due to production and consumption respectively

50
Q

Private benifit

A

Benefit to producer or consumer due to production and consumption respectively

51
Q

Social cost =

A

External cost + private cost

52
Q

Social benifit =

A

External benifit + private benifit

53
Q

Market failure

A

occurs when price mechanism fails to allocate resources effectively

54
Q

Causes of market faliure

A
  • When social cost exceed social benefit - increase in negative externalities
  • Over provision of de-merit good - external cost from de-merit good aren’t reflected in market
  • Lack of public goods
  • Immobility of resources - resources can’t move and hence aren’t used to max.
  • Information failure - Info between consumers & producers & government isn’t communicated properly
  • Abuse of monopoly - monopolistic businesses use there power to increase price and produce what they wish and consumers have no choice but to buy from them
55
Q

Mixed economic system

A

Market and government co - exist

56
Q

Mixed economic system Advantages

A
  • Govt. can provide merit goods and public goods
  • Govt. helps keep externalities, monopoly & harmful goods in control
  • Govt. provide jobs in public sector
  • Govt. can provide financial help to collapsing private organisations
57
Q

Mixed economic system disadvantages

A
  • Taxes will be imposed which increases price and decreases work initiative
  • Laws and regulation increase production cost decrease production in community
  • Public sector organisation will be inefficient & produce low quality goods & services
58
Q

ways government can correct market failures

A
  • Legislation & regulation - Govt. can make laws to regulate market activity
  • Govt. set a min wage (above equilibrium price) increase in wage causes a contraction in labour. Increase in supply of labour, decrease in demand causing excess supply known as unemployment
  • Max price of good set so low income tenants can afford a house. Rent decreases then people stop renting homes increase in homeless people
  • Direct provision- little initiative for price mechanism to supply these goods govt. provides them
  • Taxation - Imposing tax on negative externalities can discourage production and consumption.
59
Q

Drawbacks of govt. Intervention in economy

A
  • political incentives - clash between politics and economy
  • lack of intensives - public sector incentives are absent govt. provide them with goods
  • Time lag/info failure - Govt. employees/offices don’t have enough initiative to provide timely services or give accurate info leading to inefficient systems
  • Welfare effect of policy - Govt. policies eg: tax & welfare payment distort the market

Economics (4 decks)

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