Theme 1 Flashcards by Elgan Purser

What does Ceteris Paribus mean

All other things being equal

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What is normative and positive

Positive -Fact and can be backed up with evidence
Normative-opinionated may not be true

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What are the 4 factors of Production

Capital Enterprise Land Labour

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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

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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

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What is Ad valorem Tax

Percentage tax for example VAT

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What is the basic economic problem

There are unlimited wants and needs and limited resources

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What are the 3 economic questions

What to produce ?
How to produce ?
For whom to produce ?

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What is demand

How much you want something for a given price

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What does the demand curve show

The amount of a product that consumers would buy at different prices

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What is the law or pf diminishing marginal utility

The more of a product pr service that is consumed , the amount of satisfaction diminishes

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What causes shifts in the supply curve

Floods / natural events
Wages
Raw materials
Technology
Taxes
Drought

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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

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What is derived Demand

Demand for a product or service is from from demand for another product or service

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What is absolute and comparative advantage

Comparative

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Elastic meaning

Answer is greater than 1 so it’s elastic

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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