test 1

What is the basic economic problem?

How can we best allocate resources in the world when there are limited resources to fulfil infinite human needs and wants

What is a PPF?

A curve showing all alternative combinations of the maximum possible output of two products given the current level of resources and state of technology.

If a point is within a PPF, what does this mean about the economy?

The economy is inefficient at this point as it is not producing the most it possibly could be with its currently available resources and technology

If a point is outside the PPF, what does this mean about the economy?

That point is unobtainable in the economy given the current level of resources and state of technology

What is marginal analysis?

Analysing the impact of a change in a situation

What does a curved PPF show?

Opportunity cost of resource reallocations increasing as production of a given product increases. This shows “imperfect factor mobility”. This means that there are diminishing marginal returns to allocating more and more resources to a given product

What does a straight line PPF show?

Constant opportunity cost as resources are reallocated along it, shows “perfect factor mobility” - all resources are equally useful for producing both products

Why do PPF’s shift outwards?

Quality or quantity of its available resources increases and vice verca for inwards

When PPF’s shift outwards, what is your application mark?

Diagram shows change - economy can now produce a higher maximum possible output of a good

What is production?

A measure of the quantity of output produced e.g. GDP

What is productivity?

A measure of the efficiency, and is measured by dividing the amount of output by the amount of input used to make it

What is division of labour?

The breaking down of a complex process into a number of small simpler tasks 

What is specialisation?

Focusing on one, or a narrow range of, skills, activities or products

What are the benefits and drawbacks of DoL and specialisation?

Each stage is done better - could increase production

Lower cost per unit due to the greater efficiency

Lower motivation due to repetitive work

People move to less boring jobs

Absentees increase

What is demand?

The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period

What happens to the demand curve when price decreases?

An extension or expansion of demand, contraction when price increases

What is the law of diminishing marginal utility?

As one consumed additional units of a good or service, the marginal utility derived from consumption will fall. You will be willing to pay less for later units than the first

What is marginal utility?

The extra utility derived from consuming one more unit of that good or service

What shifts demand curves, P?

Population - more consumers, higher demand for goods and services

I?

Income effect - if income rises, consumers can afford to buy more products at each and every price, therefore demand increases

As income rises, entire demand for luxury (normal) goods shifts right as increase in demand

When income rises, entire demand for inferior goods shifts lefts

R?

Related goods - If the demand for a product goes up, the price of its substitute goes up (vice verca)

When two products are complements, if the price of 1 goes up, the demand for the other also decreases

A

Advertising effect - adverts promote demand for something

T

Taste - new products emerge as tastes and styles change e.g. wimbledon increases demand for tennis rackets

E

Expectations - If people expect a price of a good to increase in near future, people pay stock on it causing an increase in demand

Simarly, consumers may be reluctant on buying something if a new version is about to come out

S

Seasonality - demand may increase in a season e.g. winter

What is supply?

The quantity of a good or service that producers are willing to sell at a given price level, within a given time period

What causes supply curve to shift, A?

Advancements in technology - firms can produce the same output with fewer resources or produce more with same inputs - increases profits and as a result firms are willing and able to supply more

S

Subsides - financial support from the government that reduced costs of production - with lower costs firms can increase output profitability and are willing and able to supply more

C

Cost of production - if wages, raw materials or energy decreases, supply can increase - vice verca

E

External shocks -Unexpected events such as natural disasters could reduce productivity

N

Number of producers - if more producers enter the market, supply will increase as more producers are offering more goods

T

Taxes - can raises firms cost of production, leading them to reduce their output of a good to protect profits 

What is equilibrium price and quantity? (brief)

When the demand is equal to the supply

What does equilibrium price mean?

The quantity consumers are willing and able to buy is exactly equal to the quantity firmsw are willing and able to sell - this price is called the market clearing price

What does equilibrium quantity mean?

Market equilibrium, quantity demanded is equal to quantity supplied - forces of demand and supply are in balance

What does price higher than equilibrium mean?

Excess supply or surplus

What does price lower than equilibrium mean?

Excess demand

What is signaling?

Prices provide information to producers about the potential money they could make by selling the product, and to consumers about how much they will need to pay for the marginal utility of the products

What is rationing?

Change in price will cause producers to increase or decrease the amount of products supplied, and will cause consumers to change the amount of product they consume