Theme 1 Flashcards
Positive Economics
Factual economics that is able to be proven
Normative Economics
Opinionated economics with no factual evidence to back it up
Utility
Amount of satisfaction gained from the use of a product/service
Diminishing Marginal Utility
Decreasing change in satisfaction from consuming extra units
Production Possibility Frontier
The maximum output combinations of two goods and economy can achieve when resources are fully utilised and employment is maximum efficiency
Factors of production
Resources that are the building blocks of the economy : Land, Labour, Capital, Enterprise
Basic Economic Problem
Problem of scarcity- unlimited wants but limited resources
3 Main Market Systems
Command economy (Government controlled), Free Market ( No government intervention), Mixed economy
Demand
Amount of a product consumers will buy at a certain price
Impact on demand curve if price of good changes
You move along the curve
Expansion of demand
Rise in demand only due to a fall in price
Contraction of demand
Fall in demand due to a rise in price
Impact of demand curve due to any factor other than price
Shift in the curve
Factors that could shift the demand curve
Population, Advertising, Seasonality, Interest Rates
Price Elasticity of Demand
The responsiveness of demand due to a change in price
Price elastic for demand
Where %change in demand is greater than %change in price (-1 or less)
Price inelastic of demand
Where %change in price is greater than %change in demand (between 0 and -1)
Price elasticity of demand calculation
% Change in Quantity Demand divided by % Change in Average Price
Supply
Amount of a product producers will supply at a certain price
Impact on supply curve if price of good changes
Move along the curve
Expansion of supply
Increase in supply due to a rise in price
Contraction of supply
Decrease in supply due to a decrease in price
Impact on supply curve if any factor other than price changes
Shift in the curve
Factors that could shift the supply curve
Costs of production (Wages), Government (taxes/subsidies), Natural factors (flood), Technology
Price elasticity of supply
Responsiveness of supply due to a change in price
Price elastic of supply
Where % change in supply is greater than a % change in price ( greater than 1)
Price inelastic of supply
Where % change in supply is less than % change in price ( between 0 and 1)
Price elastic of supply calculation
% change in quantity supplied divided by % change in average price
Excess demand
Where demand is greater than supply
Excess supply
Where supply is greater than demand
Impact on price and output if government taxes production
Prices will increase as taxes will be passed on, decreasing output as demand will increase
Ceterus Paribus
Everything else being equal
How does the government use price elasticity of demand?
To make decision on taxation and regulation - inelastic products can be taxed more ( cigarettes )
The Market mechanism
The decisions of consumers/businesses interacting to determine the allocation of resources
3 Functions of the Price Mechanism
Rationing function, Signalling Function, Incentive Function
Rationing Function
Greater scarcity, higher the price, more rationed the product is
Signalling function
Price increases, more produced but less demand. Price decreases, less produced but more demand
Incentive function
Higher price, incentive to produce more. Lower price, incentive to purchase more
Substitute good
An alternative good that is very similar( or the same but different brand) that would effect the price of a good
Complementary good
A good that works well or is used with a certain product
Income elasticity of demand
The responsiveness of demand to a change in income
Cross elasticity of demand
Responsiveness of demand of one good to changes in price of a related good
Income elasticity of demand calculation
% change in quantity demand divided by % change of income
What does a negative value in income elasticity of demand mean?
Good is inferior, when income increases demand is likely to decrease
What does a positive value mean in income elasticity of demand?
Good is normal or luxury, increase in income increases demand ( any value 2+ is a luxury good )
Cross Elasticity Calculation
% change of quantity demand for Good A divided by % change of price for Good B
Negative value in cross elasticity meaning
The goods are compliments for each other
Positive value in cross elasticity meaning
The goods are substitutes for each other
3 Ways firms can use elasticity’s
Determine risks, know the quality of good, know if they are diversifying goods
Public goods
Goods that if provided for one, are provided for everyone
Characteristics of a public good
Non-excludable, Non-rejectable, Non-rival consumption
Merit Good
Goods/services that will benefit both the individual and the society - government feels that they’ll be under consumed
Asymmetric information
Where one party has greater knowledge of the market than another ( and uses it to manipulate it to their advantage )
Principal Agent
An arrangement where one entity legally appoints another to act on its behalf
Positive Externality
A positive effect on a third party outside the product
Negative externality
A negative effect on a third party outside the externality I.e drunk driving on alcohol
Demerit good
Goods /services that will have negative impacts on the individual and society and the government feels if not regulated will be over consumed
Ways the government can promote a positive externality
Advertisement, offer deals to use them, increase costs of alternatives
Free rider problem
Public goods being overused by people who underpay for them
Consumer surplus
Difference between the prices the consumer is willing to pay and the price they actually pay
Government failure
When government intervention leads to a net welfare loss in society
Producer Surplus
The difference between the price the produce is willing to charge against the price they actually charge
