The basic economic problem Flashcards
supply
Want or willingness of producers to supply a good or service at a given price
What is increase in supply due to
change in price called extension of supply
What is decrease in supply due to
A change in price called contraction of supply
What is increase supply of product due to
A change in other factors excluding price causes supply curve to shift to the right
What is decrease supply of product due to
A change in factors causing supply curve to shift to the left
law of supply
An increase in price leads to a increase in Quantity supplied and a decrease in price leads to a decrease in quantity supplied
Factors causing shift in supply curve
- 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
Market equilibrium price
demand & supply in a given market meet
Disequilibrium price
Demand & supply in a given market don’t meet
Surplus
The price is above equilibrium meaning there is excess supply
Shortage
when price is below equilibrium price
PED
responsiveness of quantity demanded for it to change in it’s price
Formula
% change in demand / % change in price
Inelastic demand
when %in quantity demanded is lower then % change in price
Elastic demand
when %in quantity demanded is higher then % change in price
Factors that affect PED
- 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
Revenue
Amount of money producer/firm generates from sales
PED & Revenue
- 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
What causes outward shift in PPC
- Discover/develop new materials
- Employ new technology & production methods to increase productivity
- increase labour force
What causes inward shift in PPC
- natural disasters
- low investment in technology, decrease productivity
- Running out of resources
Economy
Area where people and firms produce and trade goods and services
Micro
Study of individual markets EG: Studying effect of price change on demand for a good.
Micro decision makers are producers & consumers
Macro
Study of the entire economy. Decisions are made by government
Recourse allocation
How economies decide what goods and services to provide & how & who to produce them for
Economic Agents
see who is buying and what part of pop. is buying the good
Market
Arrangement that brings together producers and consumers of a particular good or service so they can engage in exchange
Price mechanism
goods and services bought and sold in a market are bought and sold at equilibrium price
Demand
want and willingness of a consumer to buy a good or service
Effective demand
willingness of a good or service is backed up by the ability to pay
Quantity demanded
Effective demand for a particular good or service
Individual demand
demand from 1 consumer
Market demand
total aggregate demand for the product/ sum of all individual demand of consumer
law of demand
an increase in price leads to decrease in quantity demand & decrease in price leads to increase quantity demand
Extension in demand
increase in demand is because change in price
contraction in demand
decrease in demand due to a change in price
Demand curve shift right
rise in demand due to other factors excluding price
Demand curve shift left
fall in demand due to other factors excluding price
Factors that cause shift in demand curve
- 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
PES
responsiveness of quantity supplies to change in price
Formula pes
% change in quantity supplied/ % change in its price
What affects PES
- 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
Market economic System
All resources are allocated by the market - Private producers & consumers with very little government intervention
Features
-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
Market economic System Advantages
- 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
Market economic System Disadvantages
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
Public good
-good that is free and can be used by the general public has positive externalities, It is non excludable and non rival
Merit good
positive externalities and should be consumed more
Subsidies
Financial grant made to make firms lower cost of production producing a good or service
Private cost
Cost to producers and consumer due to production and consumption respectively
Private benifit
Benefit to producer or consumer due to production and consumption respectively
Social cost =
External cost + private cost
Social benifit =
External benifit + private benifit
Market failure
occurs when price mechanism fails to allocate resources effectively
Causes of market faliure
- 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
Mixed economic system
Market and government co - exist
Mixed economic system Advantages
- 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
Mixed economic system disadvantages
- 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
ways government can correct market failures
- 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.
Drawbacks of govt. Intervention in economy
- 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
