Theme 1 Flashcards
1
Q
Microeconomics definition
A
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.
2
Q
Scarcity definition
A
A situation that arises when people have unlimited wants in the face of limited resources.
3
Q
What are the factors of production?
A
Capital
Enterprise
Land
Labour
4
Q
What is meant by Capital?
A
Man maid aids to production such as machinery.
5
Q
What is meant by Enterprise?
A
Entrepreneurship - risk takers who innovate and make profit.
6
Q
What is meant by Land?
A
Natural land where good can be produced.
7
Q
What is meant by Labour?
A
Human resources- workers.
8
Q
How do businesses decided to allocate scarce resources?
A
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).
9
Q
Opportunity Cost Definition
A
The cost of the next best alternative foregone when a choice is made.
10
Q
How to know if a good choice has been made?
A
If the value of our current choice is greater than our opportunity cost.
11
Q
How to know if a bad choice has been made?
A
If the value of our opportunity cost is greater than our current choice.
12
Q
What do Production Possibility Frontiers (PPF) show?
A
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.
13
Q
Axis on Micro PPF?
A
2 specific goods and services.
14
Q
Axis on Macro PPF?
A
Axis labelled ‘Goods and Services’ or ‘Consumer goods and Capital goods (entire economy)’
15
Q
What does a PPF concave curve show?
A
Law of increasing opportunity cost.
16
Q
What is the Law of increasing opportunity cost?
A
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.
17
Q
What does a Linear PPF show?
A
Constant Opportunity Cost
18
Q
3 types of Efficiency?
A
- Productive
- Allocative
- Pareto
19
Q
Productive efficiency definition
A
Using up all factors of production to their maximum levels. No waste.
20
Q
Allocative efficiency definiton
A
Is whether what’s being produced is satisfying consumer demand/wants.
21
Q
Pareto efficiency definition
A
The idea that nobody can be made better off without making somebody worse off.
22
Q
What points on the PPF curve are productively efficient?
A
All points on the curve.
23
Q
What points on the PPF curve are productively inefficient?
A
Points inside the curve. And in a Macro PPF it could show unemployment of labour or capital.
24
Q
What points on the PPF curve are pareto efficient?
A
Every point on a PPF is pareto efficient.
25
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.
26
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.
27
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).
28
Demand definition
The quantity of a good/service consumers are willing and able to buy at a given price in a given time period.
29
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.
30
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.
31
What is Ceteris Paribus?
When price changes, all other factors remain equal and unchanged.
32
How do we show change in demand?
We move along the demand curve.
33
What is a Contraction of Demand?
As price increases, quantity increases.
34
What is a Extension/Expansion of Demand?
As price decreases, quantity decreases.
35
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.
36
What happens to the demand curve as demand increases?
It shifts to the right.
37
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.
38
What is a Normal Good?
As income increase, demand for them will increase. E.g. luxurious cars, fine dining, designer clothes. And vice versa.
39
What is an Inferior Good?
As incomes increase, demand for them decrease such as fast food, public transport. And vice versa.
40
Supply definition
The quantity of a good/service producers are willing and able to produce at a given price in a given time period.
41
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.
42
What is an Extension of Supply?
As we move up the supply curve when price increases, supply increases.
43
What is a Contraction of Supply?
As we move down the supply curve when price decreases. Supply decreases.
44
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.
45
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
46
How to show how Non-Price Factors increased supply?
The demand curve shifts to the right. At the same price.
47
How to show how Non-Price Factors decreased supply?
The demand curve shifts to the left. At the same price.
48
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.
49
Market definition
Any place where buyers meet suppliers to change/exchange goods.
50
Equilibrium definition
Where demand=supply in a market. The Market clearing price- cleared from excess demands and supplies.
51
Where can you find Market Equilibrum?
Where the Supply and Demand Curve cross.
52
When is there Market disequilibrium?
Where demand doesn't equal supply. By excess supply or excess demand.
53
What is Excess Supply?
Where supply is greater than demand (market disequilibrium). With the price being higher than the equilibrium price.
54
What is Excess Demand?
Where demand is greater than supply (market disequilibrium). With the price being lower than the equilibrium price.
55
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.
56
Free Market Definition
A market where there is no government intervention at all. Just the interaction of producers and consumers.
57
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.
58
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.
59
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.
60
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.
61
Where do you find Consumer Surplus?
Below the demand curve and above the price line. It's the shape of a right angled triangle.
62
Producer Surplus Definition
The difference between the price producers are willing and able to supply a good/service for and the price they actually receive.
63
Where do you find Producer Surplus?
Above the supply curve and below the price line. It's the shape of an upside down triangle.
64
Society Surplus
Consumer Surplus + Producer Surplus
65
What happens to Consumer Surplus as the Supply Curve shifts?
As the supply curve shifts to the right, consumer surplus decreases and vice versa at a higher price.
66
What happens to Producer Surplus as the Demand Curve shifts?
As the demand curve shifts to the right, producer surplus increases at a higher price and vice versa at a lower price.
67
Interrelated markets-
| What happens to the demand of a complement when the demand/price changes for the other complement?
Joint Demand-
For complementary goods- as the price for one decreases (more demand), the demand curve for its complement will shift to the right (more demand) at the same price. And vice versa, if the price for one goes up (less demand) there will be less demand for the other (demand curve will shift to the right).
AS DEMAND FOR A PRODUCT INCREASES, THE DEMAND FOR THE COMPLEMENT INCREASES AT THE SAME PRICE.
68
Examples of Complements?
1) Printers and Ink
2) Coffee machines and capsules
3) Razors and Blades
69
Interrelated markets-
| What happens to the demand of a product if it's complement's price/demand changes?
Competitive Demand-
As the price of a substitute goes up (contraction of demand/less demand) the demand for the other will go up at the same price(demand curve will shift to the right). And vice versa.
70
Examples of Substitutes?
1) Coke and Pepsi
2) Big Mac and Whopper
3) Iphone and Samsung Galaxy
71
What is Derived Demand?
When the demand of a good or service comes from the demand of something else.
72
Input Demand Relationship
Derived demand is input demand which means when demand for something increases, the demand for the input also increases (demand curve shifts to the right).
73
Real life examples of Input Demand?
1) Cars and Aluminium
2) Good/services and labour - in economic growth reducing unemployment
3) Holidays ad Airline Travel
74
Composite (demand) meaning?
The idea that two goods require the same input to make them.
75
Examples of Composites?
1) Bread and Livestock (both require wheat)
| 2) Cheese and Butter (both require milk)
76
Interrelated Markets-
| What happens to the supply of the composite when the demand of one of its composite goods go up?
If there is an increase in production of one composite good there will be a decrease in supply of the other because there is less input available to make the other good.
77
Interrelated Markets-
| What is meant by Joint Supply?
The idea that the increase production of one good will increase the supply of another good.
78
Reasons for the Joint Supply Relationsship?
- Bi product of each other
| - One good needs the other to be produced
79
Examples of 2 good in Joint Supply?
1) Honey and Beeswax
| 2) Crude Oil and Petroleum/Paraffin
80
Price Elasticity of Demand (PED)
Measures the responsiveness of quantity demanded given a change in price.
81
PED Equation
(%change in quantity of demand) / (%change of price)
82
% change equation
(New-old) / (old) x100
83
Why will PED always be negative?
Due to the law of demand. Inverse relationship.
84
What does it mean if PED is >1?
Demand is Price Elastic
85
What does it mean if price is elastic?
For any given price change, there is a greater proportion of change in quantity of demand.
86
What does it mean if PED is <1?
Demand is price inelastic
87
What does it mean if price is inelastic?
When the price changes, quantity of demand will change but less than change in price.
88
What does it mean if PED is =0?
Demand is perfectly price inelastic
89
What does it mean if price is perfectly inelastic?
Regardless of price change, quantity of demand won't change at all.
90
What does it mean if PED is infinite?
Demand is perfectly price elastic
91
What does it mean if PED is =1?
Demand is unit price elastic
92
How would you draw the demand curve if price is inelastic (PED<1)?
Draw a steep demand curve
93
How would you draw the demand curve if price is elastic (PED>1)?
Draw a shallow demand curve
94
How would you draw the demand curve if price is perfectly inelastic (PED=0)?
Draw a straight vertical demand curve
95
How would you draw the demand curve if price is perfectly elastic (PED=infinite)?
Draw a straight horizontal demand curve
96
When is demand for a good or service price elastic/inelastic?
Substitutes (no.)- more substitutes demand is more price elastic. And vice versa.
Percentage of Income- Great % of income a price change takes, demand is more price elastic. And vice versa.
Luxury/Necessity- for luxury, more price elastic demand and for necessity, more price inelastic demand
Addictive/Habit Forming- Demand is price inelastic
Time period-
In the short run: demand is price inelastic as buyers don't have much time to see substitutes.
In the long run: demand is more price elastic as ore substitutes become available.
97
Why is PED so important for businesses?
It is crucial to make pricing decisions to increase total revenue (initial and new revenue).
98
What is the relationship between PED, price change and total revenue?
If demand is price is elastic- the opposite will happen with total revenue (e.g. a price increase, will lead to a decrease in total revenue and vice versa).
If demand is price is inelastic- the same will happen (e.g. if price goes up, so will total revenue and vice versa).
99
How does Price elasticity change along the demand curve?
Elasticity varies along the demand curve. The top half of the demand curve is price elastic and the bottom half is price inelastic, with the centre being unit price elastic (PED=1).
100
Why is the top half of the demand curve price elastic and the bottom half of the demand curve price inelastic?
For the top half of the demand curve- the percentage changes for quantity demanded are always going to be greater than the percentage change in price.
Whereas on the bottom half, the percentage changes of quantity demanded are always going to be less than the percentage change in price.
101
How to maximize total revenue?
- It's going to be maximized at unit elasticity (PED=1)- midpoint of demand curve.
- If demand is price inelastic- keep decreasing price to increase total revenue. But in the inelastic section, if we keep reducing price, revenue will decrease.
Therefore to maximize total revenue. You want elastic demand. At that point don't change price either way.
102
What is Price Elasticity of Supply (PES)?
It measures the responsiveness of quantity supplied given a change in price.
103
PES Equation
PES= % change of quantity supply /% change of price
104
Why is PES always positive?
Law of Supply
105
What does it mean if PES is >1?
Supply is price elastic
106
What does it mean if supply is price elastic?
For any price change, the change in quantity supplied will be proportionally greater than the change in price.
107
What does it mean if PES is <1?
Supply is price inelastic
108
What does it mean if supply is price inelastic?
For any price change, quantity supplied will change but proportionally less than the change in price.
109
What does it mean if PES is =0?
Supply is perfectly price inelastic
110
What does it mean if supply is perfectly price inelastic?
Regardless of change in price, quantity supplied will never change.
111
What does it mean if PES is infinite?
Supply is perfectly price elastic
112
What does it mean if PES is =1?
Supply is unit price elastic
113
What does anything divided by 0 equal?
infinite
114
What does infinite divided by another number equal?
infinite
115
What does any number divided by infinite equal?
0
116
How would you draw the supply curve if price is elastic (PES>1)?
Draw a shallow supply curve
117
How would you draw the supply curve if price is inelastic (PES<1)?
Draw a steep supply curve
118
How would you draw the supply curve if price is perfectly elastic (PES=infinite)?
Draw a horizontal supply curve
119
How would you draw the supply curve if price is perfectly inelastic (PES=0)?
Draw a vertical supply curve
120
What determines whether price for a good or service is supply price elastic or inelastic?
- Production Lag- the longer the production lag the more price elastic and vice versa.
- Stocks- the larger the level of stocks, the more price elastic supply is. Vice versa.
- Spare Capacity- the more spare capacity that can be utilized the more price elastic and vice versa
- Substituability of FoPs- the more substituability of FoPs, the easier to respond so the more price elastic
- Time- In the short run: supply is price inelastic as there is at least one fixed factor of production (e.g. land and capital). In the long run, factors of production are variable- easier to increase production.
121
What is Cross Elasticity of Demand (XED)?
It measures responsiveness of quantity demanded of a good/service given a change in price of another.
122
Cross Elasticity of Demand (XED) Equation
XED= % change of quantity demanded of A/ % change of price of B
123
If Cross Elasticity of Demand (XED) is positive, what does it mean?
The goods are substitutes
124
If Cross Elasticity of Demand (XED) is negative, what does it mean?
The goods are complements
125
What does it mean if XED >1?
Demand between goods is price elastic (strongly related)
126
What does it mean if XED <1?
Demand between goods is price inelastic (weakly related)
127
What does it mean if XED =0?
Demand between goods is perfectly price inelastic (no relationship between goods)
128
What does it mean if demand between goods is price elastic?
When the price for one good changes, quantity demanded for the other will change proportionally more than the change in price for the other. STRONGLY RELATED GOODS.
129
What does it mean if demand between goods is price inelastic?
When the price for one good changes, quantity demanded for the other will also change but proportionally less than the change in price for the other. WEAKLY RELATED GOODS
130
How would you draw the demand curve if demand between complements is price elastic (XED>1)?
Draw a downwards, shallow demand curve due to inverse relationship.
131
How would you draw the demand curve if demand between complements is price inelastic (XED<1)?
Draw a downwards, deep demand curve due to inverse relationship.
132
How would you draw the demand curve if demand between substitutes is price elastic (XED>1)?
Draw an upwards, shallow demand curve due to positive relationship.
133
How would you draw the demand curve if demand between substitutes is price inelastic (XED<1)?
Draw an upwards, deep demand curve due to positive relationship.
134
What is Income Elasticity of Demand (YED)?
Measures the responsiveness of quantity demanded given a change in income
135
Income Elasticity of Demand (YED) Equation?
% change of quantity demanded / % change of income
136
What does it mean if Income Elasticity of Demand (YED) is a positive number?
It is a normal good
137
What does it mean if Income Elasticity of Demand (YED) is a negative number?
It is an inferior good
138
Relationship between income and demand for a normal good?
Positive relationship- as incomes rise so does demand
139
Relationship between income and demand for an inferior good?
Inverse relationship- as incomes rise, demand falls
140
What does it mean if YED >1?
Demand is income elastic
141
What does it mean if YED <1?
Demand is income inelastic
142
What does it mean if demand is income elastic?
If incomes go up, demand will go up, proportionally more than increase in income.
143
What does it mean if demand is income inelastic?
If incomes go up, demand will go up, proportionally less than increase in income.
144
What does it mean if demand is income elastic for a normal good (YED>1)?
The good is a normal luxury.
145
What does it mean if demand is income inelastic for a normal good (YED<1)?
The good is a normal necessity
146
What does it mean if YED=0?
Demand is perfectly income elastic
147
What does it mean if demand is perfectly income elastic (YED=0)?
No relationship between demand and income of the good
148
How would you draw the demand curve if demand for a normal good is price elastic (YED>1)?
Draw an upward, shallow demand curve
149
How would you draw the demand curve if demand for a normal good is price inelastic (YED<1)?
Draw an upward, deep demand curve
150
Why would you draw an upward demand curve for a normal good?
For a normal good's positive relationship between income and demand
151
How would you draw the demand curve if demand for an inferior good is price elastic (YED>1)?
Draw a downwards, shallow demand curve
152
How would you draw the demand curve if demand for an inferior good is price inelastic (YED<1)?
Draw a downwards, deep demand curve
153
Why would you draw an downwards demand curve for an inferior good?
For an inferior good's inverse relationship between income and demand
