Theme 1 Flashcards
Whats are the 4 factors of production? (the inputs available to supply goods and services in an economy)
and what are they?
- Land - the resource that encompasses the natural resources used in production
- Labour - amount of physical, mental and social effort used to produce goods and services
- Capital - the assets - physical tools, plants and equipment
- Enterprise - making the other 3 factors of production into something useful often takes creativity and some risk
Whats the basic economic problem?
resources have to be allocated between competing uses because wants are infinite whilst resources are scarce (infinite wants with finite resources)
what are scarce resources?
resources that are limited in supply so that choices have to be made about their use
What do economists do to simplify reality?
Ceteris paribus - all other things being equal
Whats a normative statement?
Statements which cannot be supported or refuted. Opinions about how economies and markets should work.
Whats a positive statement?
A statement which can be supported or refuted by evidence.
What are the economic agents and what do they want to maximise?
(rational decision-making)
- Consumers wish to maximise utility
- Producers wish to maximise profits
- Government wish to maximise overall level of utility of its citizens
Whats the opportunity cost?
the benefit lost of the next best alternative when making a choice or the next best alternative foregone
Whats a renewable source?
Ones that can be replenished
Whats a non-renewable source?
In finite supply and therefore will run out
Whats specialisation?
specialisation is when economic units such as individuals, firms, regions or countries concentrate on specific goods or services.
Whats specialisation by individuals is and who came up with it?
Division of labour - Adam Smith - pins factory - 1 worker if to do all processes himself makes 20 pins but 10 workers together specialising in a variety of tasks could make 48000 pins
How does division of labour come about?
Workers specialise in different tasks - leads to enormous increase in productivity (output per unit of input employed) arises from both increases in labour productivity (output per worker) and capital (output per unit of capital employment)
Why division of labour is productive?
Makes it cost-effective to provide workers with specialist tools
Time is saved as workers are specialised in to those tasks which they are best suited.
What are the 3 sectors of the economy?
Primary - raw materials are extracted and food is grown
Secondary - raw materials are transformed into goods
Tertiary - produces services
Adam Smith say about economic activity?
Less government or control over businesses and consumers will lead to a thriving society.
Derived from the self-interest objectives (consumers and production), operation of price mechanism which leads to optimum resource allocation and therefore best outcome of society
Invisible hand leads to more competitiveness and self interest so consumers get best price to max utility and firms receive best price to max profit.
Whats allocative efficiency?
A state in the economy where production represents the consumers preferences. Where the last unit provides a marginal benefit equal to the marginal cost of producing.
Whats productive efficiency?
Where the economy or economic system cannot produce any more of one good without sacrificing production of another good and without improving the production technology.
What would a fall in price in a demand curve mean?
As the price of the product has fallen, the utility maximising behaviour of consumers would lead to an extension of demand along the demand curve from A to B and Q2 would be demanded.
Whats utility maximisation?
the consumer should buy a good up to the point where the last £ spent on a good provides the same marginal utility (satisfaction) as the last £ spent on every other good.
What does a production possibility frontier show?
Shows the maximum potential output of an economy
A growth in the economy will do what to the PPF and vice versa?
- Shift outwards (quantity of resources available for production increases. e.g. more workers) and inwards if the production potential decreased.
How do you calculate opportunity cost?
.
What is utility?
The satisfaction gained from consuming a good
What is marginal utility?
Is the increase is satisfaction consumers gain from consuming an extra unit of a good
What is diminishing marginal utility?
Occurs when marginal utility gained from consuming a product is less than the marginal utility gained from consuming the previous unit.
What are the assumptions of rational economic decision making?
Consumers aim to maximise utility
Producers aim to maximise profit
The social factors affecting demand?
Social awareness - health risks
Social norms - norms of behaviour
Social pressures - peer pressure
The emotional factors affecting demand?
Emotional arousal - health insurance at times of crisis
Binge drinking and eating at times of personal insecurity
Emotional attachment to products
Whats bonded rationality?
Most consumers do not have sufficient information to make fully-informed judgements when making their decisions.
Complexity of products also makes life difficult
Suggests that consumers opt to satisfied rather than maximise
Rules of thumb and approximates when active in different markets
What are heuristics?
Are mental shortcuts or rules of thumb for decision-making to help people make a quick, satisfactory, but perhaps not perfect, answer to a complex question.
Behaviour
.
What is demand?
Demand is the quantity of goods and services that will be bought at any given price over a period of time.
When does a market exist?
Whenever there are buyers and sellers of a particular good. Buyers demand goods from the market whilst sellers supply goods to the market.
What does the demand curve show?
Effective demand. It shows how much would be bought at any given price and not how much buyers would like to buy if they had unlimited resources.
What will an increase in income do to a normal good (demand curve)? Conditions of demand
Cause a shift to the right of demand curve.
What will the price of other goods be known as?
Condition of demand - complement and substitutes
Other factors of conditions of demand?
- Income
- Price of other goods
- Changes in population
- Changes in fashion
- Changes in legislation
- Advertising
What is consumer surplus?
The difference between the value to buyers and what they actually pay. Is a measure of the welfare that people gain from consuming goods and services.
Indicated by the area under the demand curve and above the market price.
Indirect factors that would increase rail travel?
If oil price increased, less people would be less likely to travel by car and therefore increasing sales of rail travel (shift right)
What is PED?
Measure of the change in the quantity demanded or purchased of a product in relation to its price change.
PED zero means?
PED 0-1 means?
PED 1 means?
PED >1 means?
PED infinity means?
Perfectly inelastic - quantity demanded does not change at all as price change - revenue increases as price increases
Inelastic - unresponsive to a change in price - revenue increases as price increases (PERFECT no Q change)
Unit elasticity - responsive to a change in price (according to same percentage as the change in price) - no change
Elastic - highly responsive to a change in price - revenue decreases as price rises (PERFECT no P change)
Perfectly elastic - there is one price at which consumers are prepared to pay. - no change
The equation for PED?
dP/P
What is YED?
income elasticity of demand is the responsiveness of the quantity demanded for a good to a change in consumer income
What is XED?
A measure of the responsiveness of demand for one good, x to a change in price of another good, y
XED formula?
% change in quantity demanded by good x
/
% change in price of good y