Theme 1 - Introduction to markets and market failure Flashcards
what is the basic economic problem
there are unlimited wants and limited resources. this leads to scarcity
define scarcity
a situation that arises when people have unlimited wants in the face of limited resources
define opportunity cost
the benefits of the next best alternative forgone as a result of a particular choice
what are the 4 factors of production
land (-rent)
labour (-wages)
capital (-interest)
enterprise (-profit)
what does the PPF (productivity possibility frontier) show
the maximum possible output combinations an economy can produce with a given set of resources (FoPs)
define specialisation
occurs when societies engage in trade, and thus do not have to produce all the goods and services they need
define division of labour
the delegation of tasks to individuals
what causes the PPF to shift
a change in the quality or quantity of the factors of production
define demand
the amount of a good or service that consumers are willing and able to purchase at any given price
what causes a movement along the demand curve
change in price
what causes a shift of the demand curve
non-price factors such as change in taste/preferences, income of consumers, price of substitutes/complements, population.
define supply
the quantity of goods or services that suppliers are willing to sell at any given price
what causes a movement along the supply curve
change in price
what causes a shift of the supply curve
change in cost of production
define market
a place where buyers and sellers exchange goods or services
what are the three functions of price
- rationing - consumers and firms will only be wiling and able to buy the gods they can afford. the price therefore limits demand for both consumers and producer goods, eliminating excess demand.
- incentive - low prices give buyers an incentive to purchase a good, high prices give sellers an incentive to make goods available. this interaction of different incentives lead to equilibrium, where the price matches demand with supply.
- signaling - the price of a good is an important piece of information for both buyers and sellers; they reflect market conditions and changes in these conditions and the decisions of all agents will depend on the signals sent and received.
explain the rationing function of price
consumers and firms will only be wiling and able to buy the gods they can afford. the price therefore limits demand for both consumers and producer goods, eliminating excess demand.
explain the incentive function of price
low prices give buyers an incentive to purchase a good, high prices give sellers an incentive to make goods available. this interaction of different incentives lead to equilibrium, where the price matches demand with supply.
explain the signaling function of price
the price of a good is an important piece of information for both buyers and sellers; they reflect market conditions and changes in these conditions and the decisions of all agents will depend on the signals sent and received.
what are the five types of interrelationships between markets
- complements - goods that are consumed together, e.g. bread and butter.
- substitutes - goods that are consumed instead of each other, e.g. cows milk or oat milk.
- derived demand - refers to the situation where a good is demanded not for its own intrinsic characteristics, but because it allows the consumption of another good, e.g. a chef and sandwich - you don’t demand the chef for its own intrinsic value, but you do demand the chef because he can make a tasty sandwich.
- composite demand - occurs when a good is demanded for more than one use, e.g. a vacant plot of land may be used for residential or commercial development. the two goods would be indirectly proportional.
- joint supply - occurs when a good is supplied for more than one use (or by-products are present), e.g. a sheep can be used for meat and material for a fashion coat. the two goods would be directly proportional.
explain the complements type of interrelationships between markets
goods that are consumed together, e.g. bread and butter.
explain the substitutes type of interrelationships between markets
goods that are consumed instead of each other, e.g. cows milk or oat milk.
explain the derived demand type of interrelationships between markets
refers to the situation where a good is demanded not for its own intrinsic characteristics, but because it allows the consumption of another good, e.g. a chef and sandwich - you don’t demand the chef for its own intrinsic value, but you do demand the chef because he can make a tasty sandwich.
explain the composite demand type of interrelationships between markets
occurs when a good is demanded for more than one use, e.g. a vacant plot of land may be used for residential or commercial development. the two goods would be indirectly proportional.
explain the joint supply type of interrelationships between markets
occurs when a good is supplied for more than one use (or by-products are present), e.g. a sheep can be used for meat and material for a fashion coat. the two goods would be directly proportional.
define consumer surplus
the difference between the amount consumers are willing to pay, and the amount they actually pay for a good or service.
define producer surplus
the difference between the amount producers are willing to sell the food for, and the actual price they receive (market price)
what is the equation for price elasticity of demand
PED = % change in quantity demanded / % change in price
define price elasticity of demand
the responsiveness of demand to a change in price
