Theme 1 Flashcards
Ceteris paribus
All things being equal
Basic Economic problem
Wants are unlimited but resources are finite = choice need to be made
Capital goods
Goods that are used in production of other goods
Choice
The alternative uses of scarce resources
Scarce resources
Limited in supply = choices need to be made
Entrepreneurs
Seek profitable opportunities and take risks to combine the other factors of production
Free goods
Unlimited supply = no opportunity cost
Consumer goods
Goods/services used to satisfy their needs + wants
Barter
Swapping goods without use of money
Division of labour
Specialization of workers who perform different tasks to make a good/service
Specialization
Production of limited range of goods = not efficient = have trade surplus with others
Economic welfare
Level of well-being of living standards people have
Utility
The satisfaction derived from consuming a good
What are the conditions of demand?
Factors other than price, e.g. income and price other goods = change in demand = shift demand curve
Consumer surplus
Difference between the price the consumer is willing to pay and the price they actually pay
Diminishing marginal utility
When the extra benefit gained from consumption of a good declines as more units are consumed
Elastic demand
- PED greater than 1
* The responsiveness of demand is proportionally greater than the change in price
Inelastic demand
- PED less than 1
* The responsiveness of demand is proportionally less than the change in price
Inferior good
- -YED
* Demand falls when income increases
Normal good
- +YED
* Demand increases when income increases
Substitute good
- +XED
* Good that can be replaced by another to satisfy a want
Complementary good
- -XED
* A good which is bought with other goods to satisfy a want
YED
Measure of responsiveness of QD to change in income ( given in %)
XED
Measure of responsiveness of QD of one good to change in price of another good (given in %)
What are the conditions of supply?
Factors other than price e.g. income or price of other goods = change in supply
Long run
Period of time when all factor inputs can be varied but the state of tech is constant
Short run
Period of time when at least one factor input to the production process is varied
PES
Measure of responsiveness of QS to change in price
Producer surplus
Difference between price the producer is willing to charge and the price they actually charge.
Firms
A for-profit business
Unitary price elastic good
PED/PES = 1
Free market forces
Act to reduce price when excess supply and increase price when excess demand
Equilibrium price/quantity
Where demand = supply … no more market forces bringing change in price
What are the functions of the price mechanism?
- Incentives
- Rations goods
- Signals to firms
Incentive function
Incentives (encourages) to change price to increase profit
E.g. increase price = buyers buy less and sellers produce more; vice versa
Rationing function
More or less being produced= changes in price… increasing or limiting quantity demanded by buyers
Rations excess demand/supply
Signaling function
Changes in price = Signals to/ information given to buyers + sellers influence decisions to buy + sell
Market failure
An inefficient allocation of scarce resources in a free market due to not allocating resources in best interest to society
Externalities
The cost/benefit a third party receives from an economic transaction outside of market mechanism
External cost/benefit
Cost/benefit to a third party not involved in the economic activity
Private cost/benefit
Cost/benefit to individual participating in economic activity
Negative externalities of production
Social costs of producing one good are bigger than the private cost of producing the good
Positive externalities of production
Social benefits of consuming a good are bigger than the private benefits of consuming the good
Private cost
Any cost that person/firm pays in order to buy/produce goods
Social cost
Total cost to society
Free rider
Person which receives benefits that others have paid for without making any contribution
Private good
Is rivalry and excludability
Public good
Is non-rivalry and non-excludability
Asymmetric informationq
Buyers + sellers have different amounts of infomation
Price Mechanism
The interaction of demand + supply to allocate resources
Demand
The quantity of a good/service consumers are willing and able to buy and a given price in a give time period
Supply
The quantity of a good/service producers are willing and able to produce at a give price in a given time period
What are the non- price factors that shift the supply curve?
Productivity Indirect taxes No. of firms Tech Subsidy Weather Cost of production
What are the non- price factors that shift the demand curve?
Population Advertising Substitutes price Income Fashion/tastes Interest rates Complements price
Derived demand
a demand for a commodity, service, etc. which is a consequence of the demand for something else.
