Econ B1 & B2

What is the economic problem?

Unlimited wants and limited resources (scarcity)

What is scarcity?

The condition where resources are limited relative to unlimited human wants

What is economics?

The study of how scarce resources are allocated to satisfy unlimited wants

What are the three economic questions?

What to produce; how to produce; for whom to produce

What is opportunity cost?

The value of the next best alternative foregone

What are the three factors of production?

Natural resources

What are natural resources?

Resources provided by nature and used in production

What are human resources?

Labour and entrepreneurial skills used in production

What are capital resources?

Man-made goods used to produce other goods and services

What is investment?

Spending on capital goods that increase future productive capacity

What is microeconomics?

The study of individual consumers

What is macroeconomics?

The study of the economy as a whole

What is ceteris paribus?

All other factors are held constant

What is positive economics?

Economics based on facts and what is

What is normative economics?

Economics based on opinions and value judgements about what should be

What is a Production Possibility Frontier (PPF)?

A model showing all possible combinations of goods and services that can be produced using available resources and technology

What does the PPF demonstrate?

Scarcity

What does a point on the PPF represent?

Efficient use of resources

What does a point inside the PPF represent?

Unemployment or underutilised resources

What does a point outside the PPF represent?

An unattainable level of production

What causes a PPF to shift outwards?

Economic growth

What is economic growth?

An increase in an economy's productive capacity

Why is a PPF bowed outward?

Due to the law of increasing opportunity cost

What is the opportunity cost shown on a PPF?

The amount of one good that must be sacrificed to gain more of another

What is demand?

The willingness and ability of consumers to purchase a good or service

What is the law of demand?

As price rises

What relationship exists between price and quantity demanded?

An inverse (negative) relationship

What is quantity demanded?

The amount of a good consumers are willing and able to buy

What is the income effect?

When a lower price increases consumers' purchasing power

What is the substitution effect?

Consumers switch to relatively cheaper alternatives

What causes movement along the demand curve?

A change in the good's own price

What causes a shift in the demand curve?

A change in a non-price factor

What is a normal good?

A good whose demand increases when income increases

What is an inferior good?

A good whose demand decreases when income increases

What are substitute goods?

Goods that can replace each other in consumption

What are complementary goods?

Goods consumed together

How does higher income affect demand for normal goods?

Demand increases

How does higher income affect demand for inferior goods?

Demand decreases

How does population growth affect demand?

Demand increases

How do favourable tastes and preferences affect demand?

Demand increases

How does an increase in the price of a substitute affect demand?

Demand increases

How does an increase in the price of a complement affect demand?

Demand decreases

What happens if consumers expect future prices to rise?

Current demand increases

What is supply?

The amount producers are willing and able to sell at a given price and time

What is the law of supply?

As price rises

What relationship exists between price and quantity supplied?

A positive (direct) relationship

What is quantity supplied?

The amount producers are willing and able to sell

What causes movement along the supply curve?

A change in price

What causes a shift in the supply curve?

A change in a non-price factor

How do higher production costs affect supply?

Supply decreases

How does improved technology affect supply?

Supply increases

How does an increase in sellers affect supply?

Supply increases

How do expected higher future prices affect current supply?

Current supply decreases

How does a tax affect supply?

Supply decreases

How does a subsidy affect supply?

Supply increases

What is market equilibrium?

The point where quantity demanded equals quantity supplied

What is equilibrium price?

The market-clearing price where quantity demanded equals quantity supplied

What is market clearing?

A situation where all goods supplied are sold and there is no shortage or surplus

What is disequilibrium?

A market situation where demand and supply are not equal

What is a shortage?

When quantity demanded exceeds quantity supplied

What happens to price during a shortage?

Price rises

What is a surplus?

When quantity supplied exceeds quantity demanded

What happens to price during a surplus?

Price falls

Income rises. What happens to demand for cars?

Demand shifts right; equilibrium price and quantity increase

Technology improves for car manufacturers. What happens to supply?

Supply shifts right

The government places a tax on cigarettes. What happens to supply?

Supply shifts left

Population increases. What happens to demand?

Demand shifts right

The price of a substitute good rises. What happens to demand?

Demand increases

The price of a complement good rises. What happens to demand?

Demand decreases

What is the price mechanism?

The interaction between buyers and sellers that determines prices and allocates resources

What is a product market?

A market where goods and services are bought and sold

What is a factor market?

A market where factors of production are bought and sold

What is a competitive market?

A market with many buyers and sellers where firms are price takers