Studied by 0 peopleEconomics
Study of how society organises scarce productive resources to satisfy ppl’s unlimited wants
Social Science
Studies Human Behaviour
Economic Agents
Households, firms, government
Ceteris Paribus
The assumption that everything else remains constant
Positive economic statement
Objective statement that can be verified as T/F by using the scientific approach. They as value-free
E.g. An rise in NMW will cause u/e
Normative Economic Statement
Subjective statements that cannot be proven T/F. They are value judgements
E.g. Lowering income tax from 25% to 20% is fair
Economic Problem
Limited resources and unlimited wants meaning decisions have to be made
Scarcity
Finite resources and infinite wants
Needs
Goods necessary for survival (limited)
E.g. water
Wants
Not essential for survival but make life more comfortable (infinite)
E.g. Sports car
Factors of Production
Resources used in the production process
Land, Labour, Capital, Enterprise
Land
All natural resources in the production process
Labour
All workers involved in the production of G+Ss. Involves all human efforts (mental and physical)
Capital
Any man-made aid to production
Enterprise
Person who organises production, identifies projects and undertakes the risk of the activity
Renewable Resources
Rate of Consumption < Rate of Replenishment
Non- renewable resources
Rate of Consumption > Rate of Replenishment
Opportunity Cost
The cost of the next best alternative foregone when a choice is made
Economic Goods
Goods created from resources that are in limited S. They carry a P that reflects their scarcity
Free Goods
Gs w/ unlimited S so consumption by one does not limit consumption by another. They carry a zero-price + no oppo cost in C
Production Possibility Frontier
PPF
Shows max potential output of 2 G+Ss that an econ can achieve when all resources fully and efficiently used (given lvl of tech available)
Trade-off
Capital Goods
Used to produce other G+Ss to incr the future capacity of the econ
Consumer Goods
Directly provides utility to the consumer + are for present use
Productive efficiency
When econ produ G+Ss at lowest possible cost, given existing tech+resources
Specialisation
When an individ, firm, region or country concentrates on the produc of a limited range of G+Ss
Division of Labour
Dividing the production process into a no. of tasks + assigning each worker a specific task
Double Coincidence of Wants
Where both parties want the G/S the other party offers
Medium of Exchange
Store of Value
Measure of Value
Means of Deferred Payment
Free Market Economy
No government intervention, has a price mechanism, privately owned firms
Mixed Economy
Have some resources owned and allocated by private firms yet others govt
Command Economy
Centrally Planned Economy
All FofP except labour is owned by state and labour is directed by the state
Market
Where consumers and producers come into contact with one another to exch. G+Ss. A P is agreed for the exch. to take place
Rational Decision Making
Consumers allocate their inc. to max their utility from the G+Ss they purchase
Firms use their resources to max profits from the G+Ss they produce
Total Utility
Represents the satisfaction gained by a consu as a result of their overall C of a G
e.g. eating a whole bar of chocolate
Marginal Utility
Represents a change in the satisfaction resulting from the c of an extra unit of the G
Demand
The Q of G/Ss consumers are willing and able to purchase at a given P over given period of t
Effective Demand
Consumer willing to buy a G/S, and has the purchasing power to do so
Latent Demand
Consumer willing to buy a G/S, but lacks purchasing power to afford the product
Income Effect
As P decr, consumer has more income left that enables them to buy more goods
Substitution Effect
As P decr, consumers switch to cheaper product away from expensive substitutes, so incr D
Derived D
Joint D
Composite D
Competitive D
Arises due to D for another product
D for goods that are interdependent (Ded together)
D for a good with multiple uses
D for Gs in competition with one another
Diminishing Marginal Utility
As Q consu incr, marginal utility derived from each extra unit decr.
Total utility maximised when MU=0
PED
Measures the responsiveness of demand to a change in P
PED =
%changeQD
%changeP
XED
Measures the responsiveness of QD of one G to a change in P of another G
XED =
%changeQD of Good A
%changeP of Good B
YED
measures the responsiveness of QD to a change in real inc
YED =
%changeQD
%change Real Inc.
Perfectly Inelastic Demand
D does not change at all with a P change
PED = 0
Unitary Elasticity D
Demand responds in the same proportion to a change in P = (-)1
Perfectly Elastic D
D will fall to 0 with a change in P
PED = infinite
Elastic D
D is very responsive to a change in P
PED > 1
Inelastic D
D is not very responsive to a change in P
PED < 1
Normal Good
Incr Inc. = incr D
0<YED<1
Inferior Good
incr inc. = decr D
YED < 1
Luxury Good
incr inc. = bigger %incr D
YED > 1
Supply
The amount of a commodity that firms are willing and able to sell at a given P range in given P of t
Firm
An organisation that brings together FofP in order to produce output
PES
Measures the responsiveness of QS to a change in P
Short-run
At least one of the FofP remains fixed
Long-run
All FofP are variable
Equilibrium
The Price where QD =QS for a G/S in a market
Excess Supply
Where QS exceeds QD for a G/S at the current market P
(Also known surplus or glut)
Excess Demand
Where QD exceeds QS for a G/S at the current market P
(Also known as shortage)
Rationing
When D>S, P incr so the G/S is rationed to only those who can afford it, allowing D to meet S
Incentive
When P incr, gives firms incentive to incr S for profits + vice versa
Signalling
Incr P tells firms D prob high = firms incr production.
Prices used to signify where + how resources allocated.
Consumer Surplus
Diff. btw how much consumers are willing + able to pay and what they actually pay
Producer Surplus
Diff btw amount producers willing + able to sell a G for vs. P actually receive
Economic Welfare
(Community surplus)
Total benefit available to society from an economic transaction or situation
Indirect Taxes
A tax imposed on expenditure. Incr costs to firms + cause S curve shift
Ad valorem taxation
A tax on the % of a product’s P
E.g. VAT
specific taxes
A flat rate tax (set amount / unit)
E.g. 50p per item
Incidence of Tax
How the burden of a tax is distrabuted btw firms + consumers
Depends of elasticity of S and D
Dead weight Loss
A cost to society created by market inefficiency whereby D and S are out of equilibrium
Subsidy
A govt grant to a produ that decr CofP so encges incr production (incr S)
Behavioural Economics
Combines elements of psychology and economics to understand why people behave the way they do
Habitual Behaviour
Frequency of our past behaviours influence our current behaviours
Inertia
Consumers, when purchasing unimportant items, will stick to the same products and product brands w/out making effort to change
Poten due to info overload
Weakness at Computation
When consumers fail to calculate the probability of effects of a purchase
E.g. eating lots of fast food
Market Failure
Occurs when market forces of S and D do not result in an efficient allocation of resources. Arises bc P Mech no take into account all costs+benefits in production+C of G/S
Externalities
Costs/benefits to 3rd parties who were not involved in the initial economic transaction
Private Costs
Costs to the individual. They are internal
External Costs
Harmful effects on a 3rd party who was not involved in the initial transaction
Social Costs
Costs (harmful effects) to society as a whole
social costs = external costs + private costs
Private Goods
Excludable, Rival and rejectable
e.g. new car
Public Goods
non-excludable, non-rival
e.g. street lighting
Non-rivalry
C by one does not limit C by another
Non-excludability
Once G is available to 1, it is impossible to exclude anyone from the C of the G
Free Rider Problem
If G = non excludable, no incentive to pay for the G
Leads to firms not S bc no profit incentive
e.g. fare dodging
Information Gaps
Occurs when consu/produ/govt have insufficient kn to make econ decisions.
Decisions don’t max utility/profit/social welfare
Symmetric Information
Consu + produ have same info abt G/Ss in the market
Asymmetric Information
Consu + produ have unequal info abt a G/S in the market
Indirect Tax
Tax imposed on expenditure. They incr costs to firms (shift S left)
Ad Valorum Tax
tax is a % of the P
Specific Tax
flat rate tax
Note
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