KEY FACTS flashcards - microeconomics

main economic groups

consumers producers government

consumers aim

to maximise satisfaction

producers aim

to maximise profit

government aim

to maximise welfare

factors of production

land labour capital and enterprise

land

land used and natural resources on and below land

labour

human input into production process

capital

goods used to produce other goods and services

enterprise

having ideas and taking risks to organise the other factors of production

needs

what a consumer must have to survive

wants

what a consumer would like to have but is not essential for survival

opportunity cost

the next best alternative forgone when making a choice

economic sustainability

looks at impact of a decision on economic factors

social sustainability

looks at whether the decision will improve quality of life and wellbeing

environmental sustainability

looks at whether the decision is good for the environment and its impact on resources

the basic economic problem

scarce resources and infinite wants

primary sector

first stage of production when raw materials are extracted

secondary sector

when raw materials are manufactured into the final good

tertiary sector (service sector)

the provision of goods and services to businesses and the general public

market

where buyers and sellers meet to exchange goods and services

factor market

where the factors of production are bought and sold

product market

where the final goods and services are offered to consumers and producers

specialisation

the process by which individual firms regions and economies produce what they are best at producing

division of labour

form of specialisation whereby workers concentrate on doing a few small tasks so they become more efficient

exchange

the giving up of something in return for something you wish to have but do not possess

derived demand

when there is demand for a good or service so producers demand the factors of production to produce it

demand

the willingness and ability to purchase a good or service at the given price in a given time period

law of demand

consumers buy more when price decreases and less when price increases

contraction in demand

decrease in demand due to an increase in price

extension in demand

increase in demand due to a decrease in price

shift in demand

demand increases or decreases at any given price level

price elasticity of demand

the responsiveness of a change in quantity demanded of a good or service to a change in price

PED =

% change in quantity demanded / % change in price

causes of a shift in demand

population advertising complements and substitutes income fashion and trends interest rates confidence

supply

the quantity a producer is willing and able to supply at a given price level in a given time period

the law of supply

the higher the price the higher the quantity supplied as more producers enter the market as it becomes more profitable to do so

shift in supply

when supply increases or decreases at any given price level

contraction in supply

decrease in supply due to a decrease in price

extension in supply

increase in supply due to an increase in price

price elasticity of supply

the responsiveness of quantity supplied of a good of service to a change in price

PES =

% change in quantity supplied / % change in price

causes of a shift in supply

productivity indirect taxes number of firms in the market technology subsidies weather costs of production

what is market equilibrium

where the quantity demanded is equal to quantity supplied and the market clears

price fulfils 3 functions

signalling incentives and rationing

price

indicates worth but is not always accurate

market mechanism

always adjusts so the new price clears the market and reaches new equilibrium

competitive market situation has

large number of firms in the market and no barriers to entry and perfect knowledge of competitors

why do firms compete

to enter a market to survive in a market and to make profit

monopoly

sole producer or seller of a good or service

legal monopoly

when a firm owns over 25% of the market

oligopoly

when a small number 3-8 firms control the large majority of the market share and together have monopoly power

oligopolies compete through

non price competition or they collude

production

the total output of goods and services produced by a firm or industry in a given time period

productivity

measures the degree of efficiency in the use of the factors of production in the production process

productivity measures

total output / total input or output per worker / time period

fixed cost

does not change with output

variable cost

changes with output

total cost

variable costs + fixed costs

total revenue

all revenue generated by sales

economies of scale

the cost advantages a firm gains by increasing its scale of production leading to a long term fall in average costs

diseconomies of scale

when average costs rise due to a firm increasing its scale of production

wage

amount you are paid hourly or daily

salary

yearly wage

net pay

gross pay - deductions

income tax

tax levied from a persons wages

national insurance

contribution paid by workers towards the cost of state benefits

pension

a fixed amount paid at regular intervals to a person or their surviving dependants

bank deposits

current accounts and savings accounts that you have

cheques debit cards and credit cards

not money but are ways of transferring money between buyers and sellers

financial sector

consists of financial institutions and their products and involves the flow of capital

3 key financial institutions

banks building societies and insurance companies

central bank

sets base rate for interest which impacts other financial institutions and is the bank for commercial banks and the government

commercial banks

ensure money is used efficiently throughout the economy by using money people save to help businesses invest

building society

mutual financial institution owned by its members with the aim to receive money from members and lend members money to purchase property

insurance company

guarantees compensation for specified loss damage illness or death in return for an agreed premium

money

anything generally accepted as a means of payment and is a medium of exchange that sets value of goods and services acceptable to all parties

interest rates

% rate paid when money is borrowed or saved

annual equivalent rate

amount of interest a savings account will earn in a year

gross annual

annual income from a savings account before tax is deducted

compound interest

when a saving account earns by receiving interest on the interest it has already earned on the account

investment

the purchase of capital goods to produce future goods and services

credit provision

banks or building societies allow you to buy now pay later

liquidity provision

how easy it is to turn an asset into cash provided by banks

risk management

financial sector allows pooling and spreading of risk to encourage more savings and investment