Unit 1- Markets in Action Flashcards
What are the basic economic problems?
Scarcity, choice and the allocation of resources.
Define opportunity cost.
This is the next best alternative forgone when a choice is made.
What is a positive statement?
A positive statement is a fact-based and testable statement.
What is a normative statement?
A normative statement is an opinion bases statement that involves value judgements and uses words like should and can.
What is the difference between positive and normative statements?
Positive statements are fact-based and testable while normative statements are opinion-based and involve value judgements.
What are the main types of economies?
Free Market Economy
Mixed Economy
Planned Economy
What is a free market economy?
A free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers.
What is a planned economy?
This is an economy in which production, investment, prices, and incomes are determined centrally by the government.
What is a mixed economy?
A mixed economy is an economic system that has both private businesses, and nationalized government services.
What are the characteristics of a planned economy?
Government owns resources
Central planning for allocation
A lack of competition or profit motive.
What are the characteristics of a free market economy?
Private ownership of resources
Price mechanism is the prime method of allocation
Minimal government intervention
High competition between firms.
What are the characteristics of a mixed economy?
Co-existence of private and public sectors
Government intervention in certain industries
The use of the price mechanism alongside planning
Policies to address market failures.
What is demand?
Demand is the willingness and ability of a consumer to buy goods and services at a specific price.
Define Price Elasticity of Demand
PED measure the responsiveness of quantity demanded to a change in price.
What is the formula for PED?
%ΔP
Explain the factors that shift the demand curve.
Income
Population
Tastes and Preferences
Price of Substitutes and Complements
Future Expectations
What is Supply?
This is the total amount of a specific good or service that is available to consumers.
What factors cause shifts in the supply curve?
Changes in production costs
Technology
Taxes and Subsidies
Prices of Related Goods
Future Expectations
Weather Conditions
The Number of Producers in the Market
What is Price Elasticity of Supply?
PES measures the responsiveness of quantity supplied to a change in price.
How is PES calculated?
%ΔP
What are the determinants of Price Elasticity of Supply?
Time Period
Availability of Spare Capacity
Level of Stocks
Mobility of Factors of Production
Length of the Production Process
Define Market Failure
Market failure occurs when resources are not allocated efficiently.
Give two examples of market failure.
Negative externalities such as pollution
Public goods such as national defense
What are public goods?
A public good is a commodity or service that is provided without profit to all members of a society, either by the government or by a private individual or organization.
What are private goods?
Public goods are items that yield positive benefits to people that is excludable.
What is the difference between public goods and private goods?
Public goods are non-excludable and non-rivalrous and private goods are excludable and rivalrous.
Explain the concept of externalities
Externalities are the spillover effects of production or consumption.
Give examples of externalities
Positive externality: Education
Negative externality: Air pollution.
What is the price mechanism?
This is the system where the forces of demand and supply determine the prices of commodities and the changes therein.
What are the main functions of the price mechanism?
These include allocating resources, signaling changes in supply and demand, and providing incentives to producers and consumers.
What is producer surplus?
Producer surplus is the difference between what producers are willing to accept for a good and what they actually receive.
How is producer surplus calculated?
It is calculated as the area above the supply curve and below the price level.
What is consumer surplus?
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
How is consumer surplus calculated?
It is calculated as the are below the demand curve and above the price level.
What is government intervention?
Government intervention involves actions like subsidies, taxes and regulations to correct market failures, reduce inequalities, or ensure resource allocation efficiency.
What are government interventionist policies?
This is a policy perspective that favors government intervention in order to correct any market failures present and in the process increase the level of economic welfare in society.
What are examples of government interventionist policies to correct market failures?
Taxation: Used to discourage negative externalities
Subsidies: Provided to encourage positive externalities
Regulations: Laws and rules to control negative behaviors
Provision of public goods: Direct government funding for goods like defense and infrastructure.
Tradable permits: Allow firms to trade pollution rights, encouraging efficient pollution reduction.
Price controls: Setting price ceilings to make goods affordable or price floors to support producers.
State provision of merit goods: Direct government provision of education and healthcare to increase consumption.
Competition Policy: Preventing monopolies and encouraging competition through antitrust laws
