Theme 1 Flashcards
What is a positive economic statement
Statements that describe real world phenomenons and are objective
What is a normative statement
Statements that involve judgments or personal opinions about how things should be
What is opportunity cost
The cost of a decision based on the benefits of the next best alternative
What is economic growth
Increase in the level of GDP or economic activity
What is a free market economy
Economy based on supply and demand where prices are set by sellers and consumers. No government intervention
What is a command economy
Where all resources are controlled by the government who decide what to produce and at what prices
What is diminishing marginal utility
The consumption and satisfaction of a good increases but eventually decreases to the point where it reaches 0
What is price elasticity of demand
A measure of how much a products demand changes in response to a change in price
What is the formula for price elasticity of demand
Percentage change in quantity demanded / Percentage change in price
What is cross price elasticity
When the price of one product can change the quantity demanded of another product
What is the formula for cross price elasticity
Percentage change in quantity demanded of A / Percentage change in price of B
What is the price mechanism
A change in price based on a shift in supply or demand
What are the functions of the price mechanism and their meanings
Signalling - price signals were resources are needed
Incentive - consumers provide an incentive of what quantity and price they want
Rationing - limiting good or services at high demand or low supply
What are the 3 reasons for market failure
No public goods - goods that cannot be sold and simply exists (e.g information, public parks. People can use it even though they didn’t contribute to its provision
Information gaps - buyers or sellers have little information of the market
Externalities - a cost or benefit caused by a producer that they do not receive
What’s the difference between symmetric and asymmetric information
Symmetric is where all parties have the same information. Asymmetric is where parties have different levels of information
What are subsidies
Money given by the government/state to incentivise production and consumption
What is the specialisation and the division of labour
Specialisation - refers to a worker performing one specific task
Division - different workers performing different tasks in the making of a certain good or service
3 advantages and 3 disadvantages of a free market economy
+ increased competition
+ product variety
+ resource allocation by producers and consumers
- monopolies emerge
- no government intervention to provide goods or subsidies
- wealth not distributed equally
Factors that may shift demand curve
- consumer income
- consumer preferences
- price
- substitute goods (price and quality)
What is the formula for income elasticity of demand
Percentage change in quantity demanded / Percentage change in income
What is an elastic good
Goods where a change in price has an effect demand. PED is equal to or more than 1. (-1.5 and 1.5 are both elastic)
What is an inelastic good
A good where a change in price does not affect demand. PED is less than 1
Factors may effect supply curve
- production costs (factors of production)
- competition with substitutes
- tax on production
- technological advances
Difference between private external and social benefits
Private - benefits that effect the buyer or seller of a good or service
External - benefits that effect people who are not the buyer or seller or a good or service
Social - the benefits for society as a whole
Difference between non rivalrous and non excludable goods
Non excludable - costly or impossible to exclude/prevent others from using a good
Non rivalrous - the consumption of a good does not reduce the amount available for others
What is the free rider problem
Market failure where people are benefiting from goods or services that they are not paying for
What are the methods of government intervention
- indirect taxes
- subsidies
- minimum and maximum pricing
What is an indirect tax
Placing an additional tax on the price of a specific good or service (VAT)
What are the consequences of government failure
- deadweight loss
- reduced consumer surplus
- decreased economic welfare
What is a deadweight loss
Cost or benefit to society created by the behaviour of producers or consumers (mainly negative)
