Theme 1 Flashcards
ceteris paribus
all other things being equal
normative statements
those which are value based and involve opinions
positive statements
a statement which can be supported with experience and fact
absolute advantage
being able to produce more of something than another country
comparative advantage
being able to produce something at a much lower opportunity cost than another country
advantages of specialisation
-increased output
-less wastage
-lower unit costs
-encourage investment
disadvantages of specialisation
-increased boredom
-finite recourses
-political
-overreliance
advantages of division of labour
-best quality
-efficient
-wide range of expert
disadvantage of division of labour
-boredom
-overreliance
positive of Adam Smith
a free exchange should be created because both countries are better for exchange
negative of Adam Smith
over-emphasised the material aspects of well being and ignored non-material aspects
reasons why karl
marx is right
-much less poverty
-helps explain conflict and change
-prevents exploitation
reasons why karl marx is wrong
-class struggle is not as important as marx suggests
-overlooks alternative ideas that might shape behaviour
-too much focus on class conflict, other issues affecting behaviour like gender, race and individuals are not given attention
functions of money
-a medium of exchange (between suppliers and customers)
-a measure of value (price tags)
-a store of value (weekly wages)
-a method of settling debts
total utility
the total satisfaction from a given level of consumption
marginal utility
the change in satisfaction from consuming an extra unit. standard economic theory believes in the idea of diminishing returns
shifts in demand curve
-trends
-interest rates
-change in price of substitute
-wealth
-change in price of complementary goods
-social+emotional factors
-advertising
-population
shifts in supply curve
-technology
-cost of production
-raw materials
-government
-taxes
-wages
-flood
excess supply
more supply than demand
excess demand
more demand than supply
derived demand
this is where the demand for one item is related to the demand for another item
ped calculation
% change in quantity demanded / % change in price
determinants of elasticity of demand
-time period
-number of substitutes
-the proportion of income taken up by the product
-luxury or necessity
-habit forming
determinants of elasticity of supply
-4 factors of production (land,labour,capital,enterprise)
-time
-spare capacity
-spare stock and components
Pes calculation
% change in quantity supplied / % change in price
Yed
Income elasticity of demand. % change in quantity demanded / % change in income
Normal good
Demand rises as income rises and vice versa
Inferior good
Demand falls as income rises and vice versa
Cross elasticity of demand
The responsiveness of demand of one good to changes in the price of a related good - either a substitute or a complement
Price mechanism
Interaction of buyers and sellers in free markets, enables goods, services and recourses to be allocated by prices.
The rationing function
Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of such a price rise is to discourage demand and conserve recourses
The signalling function
Price changes send contrasting messages to consumers and producers about whether to enter / leave a market
The incentive function
Motivates a producer to follow a course of action or to change behaviour. Higher prices provide incentive to existing producers to supply more so they get more revenue and profit.
Complete market failure
Occurs when the market simply doesn’t supply products
Partial market failure
Occurs when market does actually function but produces either a wrong quantity of a product or at the wrong price
Public goods
an example of market failure resulting from missing markets
Non excludability
The benefits derived from pure public goods can’t be confined solely to those who have paid for it
Non rival consumption
Consumption by one does not restrict consumption by another consumer
Non rejectable
The collective supply of a public good for all means it can’t be rejected by people
Free rider problem
Because public goods are non excludable it is difficult to charter people for benefitting from a good once it is provided
Quasi public good
Semi non rival and semi non excludable
Merit good
Those goods and services that the government believe people will under consume
De merit goods
Thought to be bad for you. They are over consumed, bad for you, bad for negative externalities
The principal agent
Arrangement in which one entity legally appoints another to act on its behalf
The principal agent problem
Asymmetric information
Negative externalities
A product which has a negative impact on the third party
Positive externalities
A product which has a positive impact on a third party
Regressive tax
Low income person is affected more than a high income tax
London contesting charging
Paying to be able to drive through central London to reduce traffic in central London
Asymmetric information
Producer and consumer don’t know the same info. Producer may have more detailed info than consumer
