Alevel economics

normative statement

an opinion that cannot be confirmed by referencing facts

positive statement

a statement that can be proved by referencing facts

why are economic models used?

theories cannot be tested in a controlled environment

the basic economic problem

scarcity - consumer wants are always greater than available resources

opportunity cost

the next best alternative foregone

factors of production

resources used by a firm in production

list and define the factors of production

labour - the human element, both mental and physical
capital - man made aids to production eg technology
land - any natural resource used in production
enterprise - combining above factors to make a profit, risk taking

how can a PPC be used?

shows the efficiency of a firm and its maximum potential efficiency
shows possible manufacturing combinations between two products and the opportunity cost of sacrificing each product

demand

amount of a product demanded by consumers who are willing and able to buy it at a certain price over a certain period of time

define determinants of demand
give examples

factors that determine the demand for a product.
consumer income, price of a substitute, quality, advertising, seasonal preference

complementary good

a good commonly purchased alongside another good

competitive demand

demand for alternative increases with price of original

joint demand

demand for complementary good decreases as price of original increases

derived demand

demand for a factor of production is influenced by demand for the product itself

composite demand

demand for a product comes from multiple groups of consumers

substitution effect

customers from a substitute product are attracted by a lower price

real income effect

customers can afford to buy more items alongside a lower priced item

diminishing marginal utility

extra utility gained from consumption decreases as more is consumed

a movement up the demand cure means

contraction of demand, a decrease

a movement down the demand curve means

extension of demand, an increase

a shift left of the demand curve means

a decrease in demand

a shift right of the demand curve means

an increase in demand

supply

the amount of a product a producer is willing and able to sell at a certain price over a certain period of time

list some determinants of supply

price, availability of factors of production
natural events
revenue generated by other products
consumer confidence
production technology
tax levels

equilibrium price

the intersection of the demand and supply curves

why do prices settle at equilibrium?

either firms must reduce prices to sell enough or firms increase price due to excess demand

time lags

a delay in an economy's response to changes in variables

boom

fast economic growth, low unemployment

downturn

economic growth slower than in a boom

recession

contraction of the economy for at least two consecutive quarters

recovery

economic growth after a recession, increased activity

price elasticity of demand

the responsiveness of demand to a change in price

ped \=

%change in qd/%change in price

ped \> 1

elastic - demand for an item will change more than proportionately to a change in price

ped \= 1

unitary - demand for an item will change proportionately to a change in price

ped < 1

inelastic - demand for an item will change less than proportionately to a change in price

income elasticity of demand

responsiveness of demand to a change in consumer income

yed \=

%change in qd/%change in income

consumer surplus

difference between what a consumer expects to pay and what they actually pay

producer surplus

difference between how a producer expects to price their product and how they can actually afford to price it

invisible hand

consumers dictate the price of goods and services through their purchases

free market economy

no public sector, no government sector, production dictated by invisible hand

command economy

no private sector, government dictates production

mixed economy

there is both a private and public sector

three functions of money

store of value, unit of account, medium of exchange

double coincidence of wants

two parties are willing to swap items because they have inferred an equal value on the items

specialisation

in a production process, each worker has only one job to do

advantages of specialisation

more efficient, less training, lower wages, standardised product, automation

disadvantages of specialisation

less transferable skills, absent worker stops production, lower motivation due to boredom

determinants of pes

how much surplus the producer has, availability of factors of production, time period

cross elasticity of demand

responsiveness of demand for one product to a change in price of another

xed formula

%change in qd of good A/%change in price of good B

xed value of a substitute

\>1

xed value of a complementary good

large divergence of xed from 0

strong relationship between two products

indirect tax

a tax passed onto consumers by producers

incidence of a tax if ped\>pes

less incidence on consumers

incidence of a tax if pes\>ped

less incidence on producers

monetary policy

policy which influences the supply of money in an economy

fiscal policy

policy that controls spending and taxation in an economy

expansionary fiscal policy

increasing ad/as and expanding real output through government spending and/or a decrease in net taxes

expansionary monetary policy

increasing ad, output and employment by reducing interest rates

contractionary monetary policy

reducing ad, output by increasing interest rates

contractionary fiscal policy

decreasing ad/as by decreasing government spending and/or increasing net taxes

foreign direct investment

a foreign company spends money in a country for a return, influenced by confidence

confidence

the degree of optimism that a consumer has in an economy and its future

allocative efficiency

every good or service is produced to the point where the last unit provides an msb\=msc of production

productive efficiency

production at the lowest possible cost

marginal social cost

the extra cost to society of producing one additional unit

marginal social benefit

the extra benefit to society of consuming one additional unit

crowding out

government spends more on public firms, private firms have lower confidence and lower output

resource crowding out

private sector firms lend to the government so have less to spend on themselves

crowding in

government spending boosts ad so private firms can make money by producing the goods

joint supply

two or more goods derived from a single product, eg milk produces both yoghurt and cheese

law of diminishing returns

short run - when variable factors of production are added to fixed factors of production total/margnial product will rise and then fall

short run

at least one fixed factor of production

long run

all factors of production are variable

explicit costs

what a business has to spend to function

implicit cost

a businesses opportunity cost

fixed costs

do not vary with output - must always be paid

variable costs

business costs that vary with output

TFC \=

AFC x Q

AFC \=

TFC / Q

economic growth on a ppf

outward shift

pros of free market

-incentive to produce the best products possible
-innovation, risk taking rewarded
-increased choice for consumers

cons of free market

-those who cannot work receive no income
-unprofitable goods such as drugs would not be made
-monopolies

pros of command economy

-prevention of inequality
-ensure production of merit goods
-reduced unemployment
-prevent monopolies

cons of command economy

-government has imperfect information about the market
-limited choice for consumers
-no incentive for innovation, risk taking

Adam Smith

free market, invisible hand, equilibrium price benefits all, low barriers to entry, specialisation

Karl Marx

criticised free market - enables bourgeoisie, proletariat are exploited, revolution would result in a command economy

margin

change in a variable caused by an increase of one unit in another variable

total utility

the overall benefit gained from consuming a good

why does a demand curve slope downwards

the law of diminishing marginal utility

producer economic objectives

profit maximisation - the firm survives, shareholders, staff, owners are rewarded, allows reinvesting
market share maximisation - a monopoly allows higher prices in the future
ethical objectives

consumer economic objectives

maximising utility - enjoyment, return on investment etc
maximise income from a job while having free time

government economic objectives

maximise public interest - economic growth, full employment, equilibrium in the balance of payments, low inflation

asymmetric information

one party has more information than the other

normal good

demand changes proportionally to real income

inferior good

demand decreases as real income increases

merit good

creates positive externalities, under consumed, often subsidised