Unit 1 The Market System Flashcards
What is the basic economic problem?
What To Produce
How to produce
For whom to produce
What is scarcity
high demand low supply
what is production possibility curve (PPC)
economic model used to illustrate what to produce
define microeconomics
microeconomics study of small economic systems that are part of national or international systems
define effective demand
Willingness and ability of consumers purchasing an item at a given price
What is the law of demand
Price and quantity demanded are inversely proportional
what is the elasticity of a good with an elasticity between 0-1
inelastic
what is the elasticity of a good with an elasticity of infinity
perfectly elastic
define ‘elastic’
change in demand / supply more proportionate to the change in price / income
4 factors which influences the elasticity of supply
availability of factors of production
availability of stocks
space capacity
time
what is the elasticity of a good with an elasticity of 0
perfectly inelastic
what is the elasticity of a good with an elasticity of 1
unitary elastic
what does an outward shift in the PPC indicate
positive economic growth
formula for PED
percentage change in quantity demanded / percentage change in price
define ‘wholesalers’
person or company that sells goods in large quantities to businesses, rather than to the general public
8 factors which may shift the demand curve
consumer incomes
taxes on incomes
price of substitutes
price of complements
change in tastes and fashion
advertising
population changes
other factors (such as weather, pandemic, etc)
what is the law of supply?
price and quantity supplied have a proportionate relationship
define ‘complement’
two things which go together (eg- car and petrol)
define equilibrium price (also known as market clearing price)
the price where supply and demand is the same
1 advantage of subsidies
moderation of supply and demand
define fast moving consumer goods (FMCG)
goods, especially food, that sell very quickly and in large amounts
what causes movement in the demand curve
change in price
what happens to the demand curve with a change in price?
expands if the price decreases, contracts if the price increases
1 disadvantage of subsidies
potential increase in taxes
what is the elasticity of a good with an elasticity between 1 and infinity
elastic
define ‘unitary elastic’
change in demand / supply proportionate to the change in price / income
what are The four factors of production
Land
Labour
Capital
Enterprise
define Opportunity cost
cost of the next best alternative given up (when making a choice)
what is positive economic growth
increase in the output of goods and services by a nation
what is a shift in the demand curve
change in quantity demanded at the same price
define the term ‘supply’
amount that producers are willing to offer for sale at different prices at a given period of time
define price elasticity of supply
the responsiveness of the quantity supplied to a change in price
define ‘perfectly inelastic’
change in quantity completely unresponsive to change in price/ income
define ‘inelastic’
change in demand / supply less proportionate to the change in price / income
define ‘perfectly elastic’
increase in price gets the demand to zero
define price elasticity of demand
the responsiveness of the quantity demanded to a change in price
5 factors which which may decrease supply
costs of production increase
technology becomes outdated
sellers expect bad things in the future
sellers leave the market
opportunities in different markets are good
4 factors of positive economic growth
New Technology
Improved efficiency
Improved Education and training
New resources
5 reasons why consumers can be irrational
Limited ability to calculate
emotion overtakes logic
importance of social networks
desire for instant rewards
people stick to default choices
what happens when the price of a product is not at its equilibrium?
there is either an excess supply or excess demand
define negative economic growth
increase in the level output by a nation
4 factors which affect PED
availability of substitutes
degree of necessity
proportion of income spent on a product
time period
what are subsidies?
fund given by government or any other authority in order to help an industry or business, or to pay for a public service
5 factors which shift the supply curve
cost of production
indirect taxes
subsidies
changes in technology
natural factors
define GDP (gross domestic product)
market value of all final goods and services produced in a period (usually yearly), an internationally recognised measure of national income
how does time period effect the elasticity of supply
the shorter time period, the more difficult firms find it to switch from making one product to another
how does existence of spare capacity effect the elasticity of supply
the more capacity there is in the industry, the easier it should be to increase output if price goes up, this makes supply more elastic
how does ease of storing stocks effect the elasticity of supply
if it is easy to store goods, then if price rises the firm can sell these stocks and supply is more elastic
how does length of production period effect the elasticity of supply
the quicker a good is to produce, the easier it will be to respond to a change in price
what is the income elasticity of a normal good
0-1
what is the income elasticity of a luxary good
> 1
what is the income elasticity of an inferior good
decimal value or less than -1
what is the formula for income elasticity of demand
change in quantity demanded / change in income
what is the relationship of inferior goods and change in income
inversely proportionate
what is a negative/ de-merit good, provide examples
goods with negative impact which tend to be inelastic
examples include alcohol, tobacco and illegal drugs
what leads to market failure
resources not being used effectively —> basic economic problem —> market failure
what are 5 causes of market failure
externalities
missing markets
lack of competition
factor immobility
lack of information
what are externalities?
cost or benefit incurred by external stakeholders based on the actions of a business
what are the two types of goods?
public goods
merit goods
what is a merit good
goods that are under-provided by the private sector
what is a public good
goods that are not likely to be provided by the private sector
what are the two characteristics of public goods
non rivalry
non excludability
what is non excludability in a public good
a good from which any consumer cannot be excluded from its consumption (eg- police service)
what is non rivalry in a public good
consumption of a public good by one individual cannot reduce the amount available to others (eg police)
define ‘economy’
system that attempts to solve the basic economic problem
define private sector
provision of goods and services by businesses owned by an individual or group of individuals
what are the aims 4 of a business in the private sector
survival, growth, profit, social responsibility
what are the 3 places ownership in the private sector derived from
sole trader, partnership, companies
define public sector
government organizations that provide goods and services for the economy
what are the 4 aims of the public sector
minimizing cost, social cost and benefit, profit in few nations, improving quality of services
what are the 4 places ownership in the public sector is derived from
central government departments
local authority
SOE or PC
other public sector organizations
what is the aim of an economic system
solve the basic economic problem
what are the 3 types of economy
Market / free enterprise economy (mostly private)
command / planned economy (mostly public)
mixed economy
define external costs (externalities)
negative spillover effects of consumption or production – they affect third parties in a negative way
define external benefits
positive spillover effects of consumption or production – they bring benefits to third parties
define private costs
costs of an economic activity to individuals and firms
define private benefits (externalities)
rewards to third parties of an economic activity, such as consumption or production
define social benefits
benefits of an economic activity to society as well as to the individual or firm
define social costs
costs of an economic activity to society as well as the individual or firm
