Economics unit 1&2

wants

desire for goods and services

resources

factors used to produce goods and services

economic problem

unlimited wants exceeding finite resources

scarcity

a situation in which there is not enough to satisfy everyone's wants

economic good

a product which requires resources for production and therefore has an opportunity cost

free good

a product which does not require resources for production and therefore has no opportunity cost

land

gifts of nature available to us

labour

human effort used in production

capital

human made goods used in production

enterprise

risk taking and decision making

mobility of land

occupationally mobile, geographically immobile

mobility of labour

depends on prices of goods, salary, family, education

mobility of capital

geographical depends on the capital, occupationally immobile

mobility of enterprise

depends on the entrepreneur

quantity and quality of land

quantity cannot change, quality can be improved with fertilisers, etc.

Quantity of Labour

Depends on population, age, and attitudes.

Quality of Labour

Depends on education, increases productivity.

Quantity of Capital

Depends on level of investment.

Quality of Capital

Influenced by technology and efficiency.

Gross Investment

Total investment before depreciation.

Net Investment

Gross investment minus depreciation.

Quantity of Enterprise

Depends on education and entrepreneurial skills.

Opportunity Cost

Next best alternative forgone.

Production Possibility Curve (PPC)

Shows maximum output combinations of two products.

Movement Along PPC

Reallocation of resources between products.

Shift of PPC

Change in quantity or quality of production factors.

Microeconomics

Study of individual market behavior and decisions.

Macroeconomics

Study of the entire economy's performance.

Economic Agents

Decision makers in the economy.

Allocation Decisions

What, how, and for whom to produce.

Planned Economic System

Government allocates resources via directives.

Mixed Economic System

Both public and private sectors involved.

Market Economic System

Consumers allocate resources through price mechanism.

capital intensive

using more capital than labor in the production process

Labour intensive

Production methods that make more use of labour than machinery

Demand

Willingness and ability to buy a product.

relationship between demand and price

inverse

causes for change in demand

change in income, change in price of related products, ads, change in population, change in taste

Supply

Willingness and ability to produce a product.

relatinship between supply and price

proportional

causes for changes in supply

changes in cost of production, improvements in technology, taxes, subsidies, weather, price of other products(diversion of resources), discovery/depletion of resources

Equilibrium Price

Point where demand equals supply.

excess supply

below equilibrium

excess demand

above equilibrium

increase in both demand and supply

depends on the greater one

Price Elasticity of Demand (PED)

Responsiveness of quantity demanded to price change.

formula for ped

percentage change in quantity demanded/percentage change in price

Elastic Demand

PED greater than 1, large quantity change.

Inelastic Demand

PED less than 1, small quantity change.

Unit Elasticity

PED equals 1, equal quantity and price change.

shift of demand curve to the right in ped

less ped

shift of demand curve to the left in ped

more ped

implications of ped on decision making for consumers

prefer elastic with lower price and higher quality

implications of ped on decision making for producers

prefer inelastic to control the price

Price Elasticity of Supply (PES)

Responsiveness of quantity supplied to price change.

determinents of pes

time taken for production, cost of altering supply, feasibility of storage

market economic system

an economic system where prices are determined by the price mechanism.

price in a market economic system

determined by price mechanism.

importance of competition

should result in low prices.

actual competition

firms already in the market.

potential competition

if it is easy to enter and exit the market.

how does the market economic system encourage efficiency

it rewards entrepreneurs and workers who respond to market signals and punishes those who do not.

private sector

businesses that are owned by shareholders and individuals, profit motivated.

public sector

state owned enterprises, welfare motivated.

privatisation

sale of public sector assets to private sector firms.

advantages of market economic system

sovereign consumers choose what is produced, price mechanism decides the price, provides incentives for resources to move in response to demand, have choice, quality may be high by putting pressure on firms with profit incentive.

disadvantages of market economic system

consumers and firms may only take into account personal cost and benefits, might be little competition, firms may not make products if they think they cannot charge for them, advertising can distort consumer choice, differences in income will increase over time.

allocative efficiency

when resources are allocated to produce the right type of good in the right quantity.

productive efficiency

when products are produced at the lowest possible cost and making full use of resources.

dynamic efficiency

efficiency occurring over time due to investments and innovation.

market failure

market forces fail to produce the products that consumers demand in the right quantities and at the lowest possible cost.

causes of market failure

failure to take into account all costs and benefits, information failure, abuse of monopoly power, immobility of resources and short termism.

third parties

those not directly involved in producing or consuming a product.

social benefit/cost

total benefit/cost to a society of an economic activity.

private benefit/cost

cost/benefit borne by those directly consuming or producing the product.

external cost

cost borne by third parties.

socially optimum output

social cost = social benefit.

information failure

the situation where consumers or producers are not fully informed about the product or market.

monopoly

only 1 firm selling a product.

disadvantages of monopoly

the firm can set any price and the consumer, out of lack of a better option, will be forced to buy it.

immobility of resources

it is necessary for resources to move away from a product whose demand is falling and towards a product whose demand is rising.

short termism

there is a risk that market forces may not allocate enough resources towards capital goods.

goal of a mixed economy

seeks to gain the advantages of both planned and market economies without any of the disadvantages.

advantages of a mixed economy

government can encourage/discourage the consumption of merit and demerit goods, prevent very high prices for basic necessities, more resources devoted towards capital goods, help vulnerable groups and create a more even distribution of income.

disadvantages of a mixed economy

price ceilings can cause shortages and rationing, price floor can create a surplus that has to be bought up by the government or someone else.

government measures to address market failure

taxes and subsidies, competition policy, environmental policies, regulation, nationalisation and direct provisions.

increase revenue from taxes

tax inelastic goods.

decrease consumption

tax elastic goods.

competition policy

seeks to promote competitive pressure.

regulations

regulate the target audience for the product, the quality of the product & staff management by firms but checking the regulations can be difficult and expensive.

soe

state owned enterprises.

advantages of soe

base decisions on costs and benefits, can be used to influence economic activity, would not abuse market power, ownership of a whole industry makes communication easier, important to ensure basic necessities are cheap.

disadvantages of soe

difficult to manage and control, may become inefficient, need to be subsidised if loss making.

direct provisions

government producing essential goods.

effectiveness of government intervention

decisions can be influenced by corruption, can reduce effeciency by reducing incentives

government failure

overestimation of the extent of personal benefit of the consumption of merit goods and miscalculation of total no of public goods to be supplied.