Studied by 11 people
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.
