-YED Demand falls when income increases

+YED Demand increases when income increases

Theme 1 Flashcards by Tiara F

Ceteris paribus

All things being equal

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Basic Economic problem

Wants are unlimited but resources are finite = choice need to be made

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Capital goods

Goods that are used in production of other goods

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Choice

The alternative uses of scarce resources

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Scarce resources

Limited in supply = choices need to be made

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Entrepreneurs

Seek profitable opportunities and take risks to combine the other factors of production

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Free goods

Unlimited supply = no opportunity cost

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Consumer goods

Goods/services used to satisfy their needs + wants

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Barter

Swapping goods without use of money

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Division of labour

Specialization of workers who perform different tasks to make a good/service

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Specialization

Production of limited range of goods = not efficient = have trade surplus with others

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Economic welfare

Level of well-being of living standards people have

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Utility

The satisfaction derived from consuming a good

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What are the conditions of demand?

Factors other than price, e.g. income and price other goods = change in demand = shift demand curve

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Consumer surplus

Difference between the price the consumer is willing to pay and the price they actually pay

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Diminishing marginal utility

When the extra benefit gained from consumption of a good declines as more units are consumed

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Elastic demand

PED greater than 1

* The responsiveness of demand is proportionally greater than the change in price

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Inelastic demand

PED less than 1

* The responsiveness of demand is proportionally less than the change in price

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Inferior good

-YED

* Demand falls when income increases

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Normal good

+YED

* Demand increases when income increases

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Substitute good

+XED

* Good that can be replaced by another to satisfy a want

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Complementary good

-XED

* A good which is bought with other goods to satisfy a want

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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.