Theme 1 Flashcards
What does Ceteris Paribus mean
All other things being equal
What is normative and positive
Positive -Fact and can be backed up with evidence
Normative-opinionated may not be true
What are the 4 factors of Production
Capital Enterprise Land Labour
What is the Production Possibility Frontier ( capital and consumer goods )
Capital goods are the machinery or any physical goods used for production ( e g tractors ) which produce the consumer goods ( corn barley crop) which have no future production use
What is specialisation
when an individual, company, or country focuses their resources and labor on a specific type of production or skill to increase efficiency
What is Ad valorem Tax
Percentage tax for example VAT
What is the basic economic problem
There are unlimited wants and needs and limited resources
What are the 3 economic questions
What to produce ?
How to produce ?
For whom to produce ?
What is demand
How much you want something for a given price
What does the demand curve show
The amount of a product that consumers would buy at different prices
What is the law or pf diminishing marginal utility
The more of a product pr service that is consumed , the amount of satisfaction diminishes
What causes shifts in the supply curve
Floods / natural events
Wages
Raw materials
Technology
Taxes
Drought
What is equilibrium and disequilibrium
Equilibrium - state of balance where things are equal
Disequilibrium- when things are not equal so there is a surplus or a shortage
What is derived Demand
Demand for a product or service is from from demand for another product or service
What is absolute and comparative advantage
Comparative
Elastic meaning
Answer is greater than 1 so it’s elastic
What would happen if price was increased or decreased (elasticity)
Increasing price would reduce total revenue
Reducing price would increase total revenue
Elastic and Inelastic values
Elastic greater than 1
Inelastic between 0 and -1
What determines elasticity
Luxury
Necessity
Habit / addiction
Time period
Availability
Better value for money
Price elasticity of supply
Responsiveness of supply to change in price
Income elasticity if demand
Responsiveness of demand to changes in income
Cross elasticity of demand
Some goods are substitutes (positive )
Some goods are complements (negative )
Bigger the value the closer the substitute or bigger the value the closer the complementary nature
Cross elasticity of demand equation
Xed = %change in quantity demanded of good A / %change in price of good B
What is the price mechanism
The interaction of buyers and sellers in free markets enables goods,services and resources to be allocated by prices .
What’s Rationing Function (price mechanism )
Resources are scarce because demand exceeds supply and prices are driven up (higher prices ration who can buy) eg Lamborghinis
Whats rational decision making
We assume we make decisions to maximise our welfare based of income
What is a public good
Provided by the government
What are the characteristics of public goods
Non excludable - can’t be confined solely to the buyer / s
Non rival - the marginal cost for one other person is zero
Non Rejectable - can’t be rejected by the people eg flood defence system
Private good is the opposite
What’s a quasi public good
Near public good
Semi non rival and semi non excludable
What is the consumer surplus
Difference between total amount that consumers are willing to pay
What’s the producer surplus
Difference between amount producer is willing to supply and the actual amount they receive
Negative externality
When a third party is negatively affected by a transaction
Positive externality
When a third party is positively affected by a transaction
What are subsidies
Direct payments that governments provide businesses to offset some of their operating costs
Hopefully lowering prices and increases output
Maximum pricing
When a price is set which the market will not be allowed to go above
Minimum pricing
When a price is set which the market will not be allowed to go below
What’s a Free , centralised ( command ) and Mixed economy
Free = buyers and sellers decide ( you and can buy and sell whatever you want )
Command = Government decide on production and distribution
Mixed = some government intervention when needed the rest is Free Market
Karl Marx
Ideas : capitalists control the capital , motivated by profit , long term capitalists fail , a better idea is sharing the wealth ( communism )
Why he was right : capitalist control the capital / wealth gap / rich are richer / firms Manopalised markets / inequality / Boom Bust in Economy
Why he was wrong : better idea was sharing the wealth ( it wasn’t ) / capitalism would cause the wealth gap to not change ( yes people are richer but there’s less people in absolute poverty)
Adam smith
Ideas = self interest / risk and reward / invisible hand / things don’t have to be planned to be organised.
Right : free market only produces what’s wanted / encourages trade / lots of innovation
Wrong : one person or firm controls everything / cuts of the poor / what about charities ?
Friedrich Hayek
Government intervention changes people’s behaviour
