Topic 1 - Introduction To Microeconomics Flashcards
What are economic goods?
Have an opportunity cost
Are scarce
Takes time and resources to produce them, most/all goods under this category
What are free goods?
0 opportunity cost
Can be produced in as much quantuty as needed with little-zero effort
Not normally regarded as scarce
(Air, by-products, intellectual ideas, water?)
What is the economic problem?
Problem of scarcity
People have unlimited wants in face of limited resources
No country can meet all needs (necessities to sustain human life) and wants (would like to consume)
What is a positive statement?
“What is” can be tested against facts, can be right or wrong
What are normative statements?
“Should be” “ought to be” involves a value of judgement
What are economic agents?
Responsible for making decisions, assume these decisions are rational, what are their objectives?
Objectives are set which set incentives that affect behaviour
There are 3 economic agents: households, firms, governments
Households as an economic agent
Choices about expenditure, income needed so also decide where to supply labour (provide service)
What are households’ objectives?
Maximise satisfaction from expenditure and income from working/ supplying labour
Firms as an economic agent
Choice on what goods or services to produce
What technique to use
How much land?
Price to sell at?
What are firms’ objectives?
Maximise profit
Governments as economic agents
Choices on types of taxation, how to spend tax revenue, regulate markets, need to ensure stability and growth of market and the economy
Reach environmental targets
Make sure theres no excessive unemployment
What are governments’ objectives?
Maximise welfare for society
What are factors of production?
Resources used to produce goods and services
Human and physical resources
Land as a factor of production
Input provided by nature, natural physical resources (raw materials) eg-farmland, water/rainfall in place depending on climate, renewable energy
What is the reward for land?
Rental income
Labour as a factor of production
Human resource, workers/employees and their productivity
Different skill levels, working in different ways (brain surgeon, web designers
Increase in size and quantity vital to achieve growth
May change immigration policies or increase retirement age to help with growth
What is the reward for labour?
Wages/income/salary from giving up leisure time
Capital as a factor of production
Man made things used to make something else, can be reused
(Plant and machinery, transport and equipment)
Working capital is components of things and new items of capital (newer versions of machinery to boost productivity)
Eg-infrastructure such as “cross rail” “high speed rail project”
What is the reward for capital?
Interest (letting other firms use capital) from savings, dividends from shares.
Entrepreneurship as a factor of production
Intellectual, organises other factors, take on risks, invest own money
What is the reward for entrepreneurship?
Profit
What is resource allocation?
Way in which society’s productive assets are deployed across their alternative uses
Determined by actions of economy
What are incentives?
Change behaviour (motivates certain behaviour)
Eg- discounts, seatbelts
If incentives not given properly, resources are misallocated
What are disincentives?
Discourages from taking certain actions
Eg- fines, taxes
The free market as an economic system
No government intervention, determined by what producers and consumers seek, market forces of supply and demand allocate scarce resources
Prices determined by “spending votes”
Greatest purchasing power able to buy in economy
Planned/command economy as an economic system
Governments allecate resources where they think they’re greatly needed
Determined by what governments prefer
Mixed economy as an economic system
Market controlled by government and forces of supply and demand (most common)
Government provides public and merit goods
Determined by what both prefer
Advantages of the free market
Firms are efficient Better use of scarce resources Increased output of economy Bureaucracy from government intervention avoided (decisions madeby governments rather than elected representatives) More personal freedom
Disadvantages of the free market
Only benefits those with most wealth
No social security for those on low income
Monopolies could exploit markets by increasing prices
Overconsumption of demerit goods
Public goods not provided
Merit goods underprovided
Advantages of planned/command economy
Easier to coordinate resources
Gov can compensate for market failure
Inequality reduced, welfare maximised
Abuse of monopoly power could be prevented
Disadvantages of planned/command economy
Government failure = market failure
May not be fully informed on what to produce
May not meet consumer preferances
Limits democracy and personal freedom
Advantages of the mixed economy
Maximise welfare
Prevent monopolies
Free healthcare and education
Disadvantages of the mixed economy
Long waiting lines, under resourced
Government failure can effect markets
Tax issues can arise
Poverty levels can rise
What is economic efficiency?
Where both allocative and productive efficiencies are achieved
Society producing balance of goods consumers wish to consume at minimum cost (less waste)
What is productive efficiency?
Production achieved at lowest possible average total cost
Appropriate combination of inputs (costs)
Producing max output possible from inputs (technical)
What is allocative efficiency?
Right amount of right products and services produced where consumer satisfaction is maximised
What is opportunity cost?
The value or benefits forgone of the next best alternative when a choice is made
Forgo the benefits of the “thing lost”
What is the production possibility curve? (PPC)
Shows max quantities of different combinations of output of 2 products, given the current resources and the state of technology
What does the PPC look like?
What does points A, B, C and D mean?
What is trade off?
Calculation involved in deciding on whether to give up one good for another
Exam style question
Using the ppc of cars and tvs, show the trade off from increasing production of cars from 400 to 600
What is the law of diminishing returns?
Factors of production aren’t mobile between all uses, they aren’t good at everything
Each return from the factors will diminish after a certain point
What causes the ppc to shift outward (sometimes inwards) completely or just for one thing?
When resources aren’t fixed anymore and there’s technical advancements
Increase in productive potential of economy means a shift to right
Shift to left indicates productive capacity has decreased
What are capital goods?
Something used to make something else (machines)
Used to increase the future capacity of the economy
What are consumer goods?
For current use (tvs)
Exam style question
Use a ppc to illustrate the difficult choices facing sub saharan africa when it comes to investment and consumption
