Theme 1 Flashcards
Microeconomics definition
A branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and interactions among these individuals and firms.
Scarcity definition
A situation that arises when people have unlimited wants in the face of limited resources.
What are the factors of production?
Capital
Enterprise
Land
Labour
What is meant by Capital?
Man maid aids to production such as machinery.
What is meant by Enterprise?
Entrepreneurship - risk takers who innovate and make profit.
What is meant by Land?
Natural land where good can be produced.
What is meant by Labour?
Human resources- workers.
How do businesses decided to allocate scarce resources?
CHOICES:
- What to produce (businesses decide based on consumer demand in a market economy).
- How to produce (businesses decide based on what’s most cost effective. To minimize use of scarce resources).
- For who to produce for (those who can afford product/good).
Opportunity Cost Definition
The cost of the next best alternative foregone when a choice is made.
How to know if a good choice has been made?
If the value of our current choice is greater than our opportunity cost.
How to know if a bad choice has been made?
If the value of our opportunity cost is greater than our current choice.
What do Production Possibility Frontiers (PPF) show?
1) Maximum possible production of 2 goods/services with the given factors of production.
2) The various combination of 2 goods/services that can be produced with the given factors of production.
Axis on Micro PPF?
2 specific goods and services.
Axis on Macro PPF?
Axis labelled ‘Goods and Services’ or ‘Consumer goods and Capital goods (entire economy)’
What does a PPF concave curve show?
Law of increasing opportunity cost.
What is the Law of increasing opportunity cost?
The more we produce of something - the more that has to be given up each time. Meaning a business’s factors of production are more suited to a particular good.
What does a Linear PPF show?
Constant Opportunity Cost
3 types of Efficiency?
- Productive
- Allocative
- Pareto
Productive efficiency definition
Using up all factors of production to their maximum levels. No waste.
Allocative efficiency definiton
Is whether what’s being produced is satisfying consumer demand/wants.
Pareto efficiency definition
The idea that nobody can be made better off without making somebody worse off.
What points on the PPF curve are productively efficient?
All points on the curve.
What points on the PPF curve are productively inefficient?
Points inside the curve. And in a Macro PPF it could show unemployment of labour or capital.
What points on the PPF curve are pareto efficient?
Every point on a PPF is pareto efficient.
What points on the PPF curve are allocative efficient?
No points on the PPF is allocative efficient as we don’t consumer demand on a PPF.
Ways to increase production?
1) Use factors of production more productively efficient by using more labour/ideal capital.
2) For those who are productively efficient/ on the PPF curve. They can reallocate factors of production to specialise in a particular good - move along the PPF curve. E.g. Move machinery to specialise.
3) Shift the PPF curve - they don’t have to give up particular goods to do so. The curve is shifted by a business increasing the quantity and/or quality of their factors of production (Q^2CELL).
4) PPF curve shift to favour one good instead of the other.
Ways to increase Quantity and/or quality of factors of production?
- Increase quantity of labour (more workers).
- Increase quality of labour (train workers up better)
- Increase quantity of capital (more machinery)
- Increase quality of capital (upgrade machinery)
- Increase quantity of land (more land for agriculture).
Demand definition
The quantity of a good/service consumers are willing and able to buy at a given price in a given time period.
Law of Demand
There is an inverse relationship between price and quantity demanded. As price increases, quantity decreases and vice versa. To get to this law, we assume Ceteris Paribus.
When do we move along the demand curve?
When price changes to get to the law of demand theory and make the Ceteris Paribus assumption we move along the demand curve.
What is Ceteris Paribus?
When price changes, all other factors remain equal and unchanged.
How do we show change in demand?
We move along the demand curve.
What is a Contraction of Demand?
As price increases, quantity increases.
What is a Extension/Expansion of Demand?
As price decreases, quantity decreases.
What explains the inverse relationship between price and quantity of demand?
- Income Effect- as prices go up, quantity goes down as our income can’t stretch as far and our purchasing power of our income can’t go as far. Therefore we are less able to buy the same number of goods and services as before, so our demand contracts. And vice versa if price goes downs.
- Substitution Effect- as prices go up, more goods and services become more price competitive so we switch our demand to buy these goods and services, again explaining why demand contracts. And vice versa if prices go down.
What happens to the demand curve as demand increases?
It shifts to the right.
What are the Non-Price Factors that can affect demand?
- Population- more population, more demand.
- Advertising- increases willingness to buy, more demand
- Substitute’s price- if a rival price goes down,more demand
- Income- depends on normal and inferior goods.
- Fashion/tastes- Affects willingness. If something is in fashion, demand goes up.
- Interest rates- If interest rates go down, easier to borrow money for houses and furniture, increase in demand.
- Complement’s price- if the complement’s price increase their complement demand decreases. E.g. printer price increase= less demand for printer ink.
What is a Normal Good?
As income increase, demand for them will increase. E.g. luxurious cars, fine dining, designer clothes. And vice versa.
What is an Inferior Good?
As incomes increase, demand for them decrease such as fast food, public transport. And vice versa.
Supply definition
The quantity of a good/service producers are willing and able to produce at a given price in a given time period.
What is the Law of Supply?
There is a direct relationship between price and quantity supplied. As price increases, quantity increases and vice versa, assuming Ceteris Paribus.
What is an Extension of Supply?
As we move up the supply curve when price increases, supply increases.
What is a Contraction of Supply?
As we move down the supply curve when price decreases. Supply decreases.
What explains law of supply?
Profit Motive-
- If price goes up for a good or service, there is potentially more profit to be made if they can produce more and sell more. So there is a strong incentive to produce/supply more as prices go up.
- If quantity goes up, cost of production is going up to produce those extra units, so suppliers want a higher price to cover this and maintain their profit margins.
Non price factors that affect supply?
- Productivity- of labour (output per worker in a given time) or capital. Will increase supply (less cost of production) and vice versa.
- Indirect Tax- If it is implemented or increased will increase cost of production and vice versa if it decreases or is taken away.
- Number of Firms- More firms= more supply and
Less firms=less supply - Technology- New technology= lower cost of production
Old/outdated technology= higher cost of production - Subsidy- Increase in subsidy= lower cost of production
Decrease/take away of subsidy = higher cost of production - Weather- Good weather=increase in supply
Bad weather=decrease in supply - Cost of Production- Transport, labour, oil, raw materials, regulation, utilities, rent.
THEY WILL AFFECT COST OF PRODUCTION
How to show how Non-Price Factors increased supply?
The demand curve shifts to the right. At the same price.
How to show how Non-Price Factors decreased supply?
The demand curve shifts to the left. At the same price.
What can a business do with a low cost of production?
They can afford quantity of supply at the same price easily. Supply curve shifts to the right, More willing and able to produce.
Market definition
Any place where buyers meet suppliers to change/exchange goods.
Equilibrium definition
Where demand=supply in a market. The Market clearing price- cleared from excess demands and supplies.
Where can you find Market Equilibrum?
Where the Supply and Demand Curve cross.
When is there Market disequilibrium?
Where demand doesn’t equal supply. By excess supply or excess demand.
What is Excess Supply?
Where supply is greater than demand (market disequilibrium). With the price being higher than the equilibrium price.
What is Excess Demand?
Where demand is greater than supply (market disequilibrium). With the price being lower than the equilibrium price.
Why will disequilibrium never last in a Free Market?
Price mechanisms- the market has functions that can take away any problems in the form of excess supply or excess demand.
Free Market Definition
A market where there is no government intervention at all. Just the interaction of producers and consumers.
The Price Mechanism Functions
- It will- Allocate scarce resources
- By- Rations excess demand/supply
- How-Signals that price is too high/low
- Provides- incentives to producers to change and increase profit.
Price Mechanisms Functions if there is Excess Supply?
1) Signals that price is too high/low e.g. stacked shelves, not busy. Not shifting stock.
2) Then the market provides incentives to producers to decrease the price and increase profit. PROFIT MOTIVE.
3) The excess supply has been rationed as the price has been lowered. By expansion of demand and contraction of supply.
4) Then we have a perfect allocation of scarce resources at equilibrium.
Price Mechanisms Functions if there is Excess Demand?
1) Signals that price is too high/low e.g. excess queuing, long waiting lists, huge customer competition.
2) Then the market provides incentives to producers to increase the price and increase profit. PROFIT MOTIVE.
3) The excess demand has been rationed as the price has been lowered. By expansion of supply and contraction of demand.
4) Then we have a perfect allocation of scarce resources at equilibrium.
Consumer Surplus Definition
The difference between the price consumers are willing and able to pay for a good/service and the price they actually pay.
Where do you find Consumer Surplus?
Below the demand curve and above the price line. It’s the shape of a right angled triangle.
