Economics Unit-1

Why is Economics a social science

Economics is a social science as there is an inability to conduct scientific experiments

Who uses economic models

Economic models are used by economists to predict behavior

Ceterus paribus

All variables remain constant

What is a Positive statement

Are factually based comments that can be proven to be true or false

What is a normative statement

Are based on value judgements and contain words like should and believe

What are value judgements

They are opinions put forward by individuals

What is the Economic problem

The economic problem is that there are unlimited wants and finite resources

What are Economic goods

Economic good are that are scarce and have an opportunity cost

What are free goods

Free good is something that is unlimited in quantity and has no opportunity cost

What is opportunity cost

Opportunity cost is the loss of the next best alternative when making a decision

What is a Renewable source

Is a source that can be replenished

What is a non renewable source

A source that cannot be replenished and will eventually run out

What is scarcity

Is something that is limited in quantity

What is Production Possiblity frontier (PPF)

The PPF curve shows the maximum potential level of output of two goods in an economy when all the resources are fully and efficiently employed given the technology available over a period of time

What are the Pros of specialization and division of labour

Higher labour productivity

Lower cost per unit can be passed to the consumer

Lower cost per unit therefore higher profits for firms

Can sell to international markets

What are the Cons of specialization and division of labour

Increases boredom as work is repetitive

Lower worker motivation could lower quality of products

Increases worker turnover rates

If worker loses their job they may find it difficult to find a job as they are only trained in one skill

What are the Pros of specialization and division of labour In trade

Lower cost per unit for firms

Can increase exports leading to economic growth

Economic growth can improve standard of living

What are the Cons of specialization and division of labour in trade

Over dependency on other country’s resources

Using own country’s resources could lead to depletion of resources

Structural unemployment

5 roles of financial markets

Facilitate exchange

Make funds available

Facilitate saving

Provide forward markets

Provide market for equites

What are Functions of Money

Medium of exchange

A measure of value

Store of value

Method of deferred payment

What is a Command Economy

an economy where the government makes decisions on how resources are allocated including what is produced and how much

Advantages of a Command economy

Less inequality

All workers receive the same wage

Less unemployment

Essential goods are provided

Disadvantages of Command economy

No competition

Less innovation

Black markets increase

Lack of efficiency

Personal freedom is restricted

What is a Mixed economy

Where resources are allocated partly through markets and partly by the government

Advantages of Mixed Economy

Reduces inequality

Provides essential services

Balance of efficiency

Disadvantages of Mixed economy

Taxes reduce incentives

Public sector inefficiency

Regulation increases firm costs

What is Free Market economy

An economy where resources are allocated through demand and supply no government intervention

What are the advantages of Free market economy

Competition lowers prices

More innovation

Greater consumer choice

What are the disadvantages of Free market economy

Income and wealth inequality

Resources depletion

Worker exploitation

Monopolies

What is maximizing utility

we assume that economic agents aim for maximum utility

What is Irrational decision making

is when economic agent do not behave in a way that maximizes utility

What is demand

is the amount that consumers are willing and able to buy at a given price over a period of time

What is consumer surplus

is the difference between how much buyers are prepared to pay for a good and how much they actually pay

What is effective demand

for demand to be effective consumers must willing and able

What is contraction of demand

when price increases demand decreases

What is extension of demand

when price decreases demand increases

What is Rational decision making

choosing the option with the highest net benefit

Why do consumers act irrationally

Influence of other people- this is when their decisions are based on what other people do

Habitual behaviour- only buying from a particular brand

Interia- knowing that other cheap alternatives exist but not putting the effort to investigate

Poor computational skills- finding it difficult to compare and find the best deal

Framing and bias- when decisions are influenced by thee wording of the product

What causes shifts in the demand curve

Changes in taste

Changes in fashion

Changes in real income

Changes in advertising

Changes in the law

Changes in the size and age of the population

What causes a movement along a curve

A movement is only caused by a change in the price

What is price elasticity of demand (PED)

measures the responsiveness of demand for a good or service when there is price change

Why is the demand curve sloping downwards

it is sloping downwards as price and quantity are inversely proportional

What does perfectly inelastic mean? include the value

This is when the price of a product increases the quantity of demand remains the same

Value of 0

What does perfectly elastic mean? include the value

This is when buyers are prepared to buy all they can obtain at given price but none at a higher price.

Value- infinity

What does inelastic mean? include the value

This is when the price of a product increases demand decreases by a small percentage

Value- 0-1

What does elastic mean? include the value

This is when the quantity demanded of a product decreases by a larger percentage than the price does.

1-infinity

What is Income elasticity of demand (YED)

measures the responsiveness of demand for a product when there is a change in income.

What are normal goods

when income rises, demand rises

positive slope

what are inferior goods

when income increases, demand decreases

negative slope

What factors influence price elasticity demand (PED)

Availability of substitutes- more substitutes results in more elastic demand

Addictiveness of the product- addiction of a product will make demand more inelastic

Time period- short term consumer are less responsive so more inelastic demand. Long term consumers may look at substitutes making demand more elastic

Percentage of total expenditure- products taking up a larger percentage of income makes demand more elastic

Value of income inelastic demand

Between +1 and -1

Value of income elastic demand

Greater than +1 or less than -1

Value of luxury

greater than +1

Value of necessity

less than +1

What is cross elasticity of demand

measures the proportionate response of quantity demanded of one good to the proportionate change in price of another

What is a substitute

a good that can be replaced

positive XED

What is a compliment

a good that is demanded because it is used with another good

negative xed

Value for cross inelastic demand

Between +1 and -1

Value for cross elastic demand

Greater than +1 or less than -1

What is supply

supply is the quantity of goods that all sellers are prepared to sell at any given price over a period of time

Why is supply curve sloping upwards

This is because price and quantity are directly proportional as price increases producers want to sell more

What is producer surplus

is the difference between the market price that firms receive and the price they are prepared to supply

What happens when there is a decrease in supply

curve shifts to the left (inwards)

What happens when there is a increase in supply

curve shifts to the right (outward)

Conditions of Supply that cause a shift in the curve

Changes in cost of production

Indirect taxes

Subsides

New technology

Change in the number of firms

What is Price elasticity of supply

is measure of the responsiveness of supply to a change in price

PES coefficient of Perfectly Price inelastic

The business does change supply in response to a change in price

Value- 0

PES coefficient of Price inelastic

If price increases, supply will increase but less proportionate to the increase in price

Value- 0 to 1

PES coefficient of unitary

Increasing or decreasing price will lead to proportional change in supply

PES coefficient of price elastic

If price rises, supply will also rise but at a greater proportion to the increase in price

1- infinity

PES coefficient of Perfectly Price elastic

producers will supply any amount above a certain price

infinity

Factors that influence price elasticity of supply

Time- supply is more elastic in the long run because firms have more time to increase production

Availability of stock- if firms have more spare stock they can increase supply when prices rises

Mobility of factors of production- if factors of production can be moved easily supply is more elastic

Legal constraints- governments can restrict how much firms are allowed to produce. if firms face restrictions they are unable to increase output making supply inelastic. But if regulations are relaxed firms can increase output quickly making supply elastic

Capacity- if firms have spare production capacity they can increase output quickly making supply more elastic. But if firms are operating at full capacity it make supply more inelastic

What is market equilibrium

Market equilibrium is point at which supply is equal to demand. This means that the price at which consumers are willing and able to buy exactly matches the price at which producers are willing to sell at

What is excess supply

This means there is more supply than demand. There will be a surplus of products in the market

What is exces demand

This is when there is more demand than supply. There is a shortage of products in the market

Short run VS Long run for PES

Short run - supply is more inelastic as firms may be unable to increase output uihcly when prices increase

Long run- supply is more elastic as firma have more time to increase output when price increase making supply more elastic