Theme 1: Introduction to markets and market failure Flashcards
Definitions
normative statement
a value judgement that is subjective
positive statement
a statement that can be tested to be proven true or false
the economic problem
resources are scarce but wants are unlimited
4 factors of production
- land
- labour
- capital
- enterprise
division of labour
specialisation on individuals to break down the production process into smaller tasks
opportunity cost
the value of the next best alternative foregone
free market economy
where markets allocate resources through the price mechanism
planned/command economy
where the government allocate all resources in an economy
mixed economy
where both the price mechanism and government allocate resources
4 functions of money
- medium of exchange
- store of value
- measure of value
- method of deferred payment
production possibility frontier (PPF)
shows the maximum output combinations an economy can produce when all its factors of production are fully employed
3 reasons why consumers don’t always behave rationally
- consideration of the influence of other people’s behaviour (herd mentality)
- the importance of habitual behaviour
- consumer weakness at computation
demand
the amount of a good or service consumers are willing and able to buy at any given price
supply
the amount of a product producers are willing and able to provide at any given price
price mechanism
the interaction of demand and supply to allocate resources
3 functions of the price mechanism
- rationing
- signalling
- incentive
consumer surplus
the difference between the price consumers are willing and able to pay and the market equilibrium price
producer surplus
the difference between the price that producers would be willing and able to provide a product and the market equilibrium price
price elasticity of demand (PeD)
measures the responsiveness of quantity demanded to a change in price
PeD formula
PeD = % change in quantity demanded ÷ % change in price
income elasticity of demand (YeD)
measures the responsiveness of quantity demanded to a change in income
YeD formula
YeD = % change in quantity demanded ÷ % change in income
cross price elasticity of demand (XeD)
measures the responsiveness of quantity demanded for one good following a change in the price of another good
XeD formula
XeD a = % change in quantity demanded a ÷ % change in price b
