Theme 1 Flashcards
what’s the basic economic problem
the problem of scarcity because of consumers unlimited needs and wants and their being limited resources
what is ceteris paribus
assuming everything else being. equal
what’s a positive statement
one which can be supported with evidence and facts
what’s a normative statement.
one which is value based and involves opinions
understand the distinction between renewable and non-renewable resources
renewable resources are ones which never run out whereas non-renewable are ones that are finite and can run out
what do the 4 economic agents aim to maximise ( businesses, government, consumers, workers )
businesses - profit
government - social welfare
consumers - satisfaction. from the product
workers - income
what’s a production possibility frontier
shows the maximum possible combination of 2 good or services an economy can achieve when all resources are fully and efficiently utilised
ways to increase the PPF long-term
pay workers more
apprenticeships
immigration
entourage innovation
better software
explain a capital good
physical assets a company uses to produce goods and. services for consumers
explain a consumer good
Goods bought and demanded by household and individuals
explain absolute advantage
being able to produce more of something than another country
explain comparative advantage
being able to produce something at a much lower opportunity cost than another country
explain specialisation
each employee in the workforce focuses on one area of the production and becomes efficient at it
benefits of specialisation
greater economic efficiency
consumer benefits
opportunities for growth for competitive sectors
surplus can be exported
increases scale of production
drawbacks of specialisation.
rise of worker alienation
risk of disruption to production ( if a worker is ill )
competition
becomes boring / repetitive
risk of over-specialisation
resources can run out
explain division of labour
the specialisation of labour into separate tasks to ensure high worker productivity
drawbacks of division of labour
liability of workers
absences in the workforce
staff want higher wages
less versatility
can become repetitive / boring
can be expensive to train workers.
benefits of division of labour
increased output
less waste
lower unit costs
what are the 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
explain law of diminishing marginal utility
as the amount consumed of a commodity increases, the utility. derived by the consumer declines
explain marginal utility
the change in satisfaction from consuming an extra unit
explain total utility
the total satisfaction from a given level of consumption
what causes a shift in the demand curve
income / wealth
population
price of substitutes and compliments
seasonality / fashion / trends
interest rates
what causes a movement up or down the demand curve.
a change in price
what causes a shift in the supply curve
cost in production - wages
government - taxes
natural factors - recent flooding
technology - changes / improvements
what does it mean if the market is at equilibrium
where producers and consumers are happy with a price
explain derived demand
demand for one. item is related to the demand for another item
what’s the price mechanism
the interaction of buyers and sellers in free market which enables goods services and resources to be allocated by prices
explain the rationing function
resources are scarce so demand EXCEEDS supply so prices rise
explain the signalling function
prices rise so it signals to firms to produce more but consumers buy less
explain the incentive function
higher prices provide an incentive to EXISTING producers to supply more because they provide the possibility of more revenue and profits
what’s price elasticity of demand
the. responsiveness of demand to a change in price
what’s the formula for price elasticity of demand
% change in price
unitary elastic figure
1
perfectly elastic figure
infinte
perfectly inelastic figure
0
determinants of price elasticity of demand
time period. - the longer the time the more elastic
number of substitutes - the more of them the more elastic
proportion of income - the smaller the more inelastic
whether its a. luxury or necessity good
habit forming
what’s price elasticity of supply
the responsiveness of supply to a change in price
price elasticity of supply formula
% change in price
unit elastic figure
1
elastic figure
less than 1
inelastic figure
greater than. 1
determinants of price elasticity of supply
land - availability of raw materials
Labour - training of employees
capital - availability and accessibility to technology
enterprise - skills of managers
time
spare capacity
spare stock and components
what’s income elasticity of demand
the responsiveness of demand to a change in income
income elasticity of demand formula
% change in income
what’s a normal good
demand rises as income rises
POSITIVE value
what’s an inferior good
demand falls as income falls
NEGATIVE value
luxury good figure
greater than 2
what’s cross elasticity of demand
the responsiveness of demand of one good to changes in the price of a related good
cross elasticity of demand formula.
%. change in price of good B
substitute good figure
positive value
complement good figure
negative value
explain why economic agents may not be rational
limited capacity to calculate all costs and benefit off a decision
often act reciprocally than in self interest
lack self control and seek immediate satisfaction
explain consumer surplus
the difference between what. consumers are willing to pay and what they actually pay
explain producer surplus
the difference between what price producers are willing to accept and what they actually receive
explain asymmetrical information
one party has more knowledge than another and use it to influence the market
ways to solve asymmetrical information.
find a second opinion as a consumer government carry out inspections on the business, start introducing fines
enforce quality standards they have to meet
explain information gaps
one party in an industry has a real lack of good knowledge
explain equity issues
when some people have considerably unequal access to income and wealth
explain wealth
measures the value of all the assets of worth owned by a person
explain income
a flow of money going into factors of production.
explain what a negative externality is
a negative effect on a third party outside the externality
explain what a positive externality is
a product which has a positive impact on the third party, at the moment they are under valued and under consumed
explain subsidies
the direct payments that governments provide businesses to offset some of their operating costs
advantages of subsidies
keeps the price down
encourages merit goods and positive externalities
reduces the cost of capital investment
drawbacks of subsidies
firms may become dependent on them
very expensive for the government
opportunity cost elsewhere - investment in education
risk of fraud
explain minimum pricing.
setting a floor price. which the market isn’t allowed to go under
explain maximum pricing
when a price is set which the. market aren’t allowed to go above
explain a public good
a good that if you provide for one, you provide the good for everyone
explain complete market failure
market doesn’t supply products at all
explain potential market failure
the market does function but produces the wrong quantity or price of the product
explain non-excludability
When you can’t stop someone from accessing the good and someone can’t choose not to access the good
explain non-rival consumption
One persons use of the good doesn’t stop someone else from using the good
explain non-rejectable
the collective supply if a public good for all means that it cant be rejected by people
explain the free rider problem
when someones benefitting from the consumption of a public goods wihtout paying for it - street lights
explain quasi-public goods
one that has some of the characteristics of a public good but not all - public beach / playing field
explain merit goods
those goods and. services that the government feels that people will under-consume
explain de-merit goods
a good that if it isn’t regulated it will be over-consumed
