Theme 1 - Markets and Market Failure

Ceteris paribus

All other things being equal/remaining constant

Positive statement

Factually based

Normative statement

Opinion based

Scarcity

Resources are limited

Renewable resource

Replenished by natural processes

Non-renewable resource

Not replaced naturally

Basic economic problem

Resources finite, human wants infinite. Choices must be made

4 factors of production

Land

Labour

Entrepreneurship

Capital

Reward for each factor of production

Rent

Wages

Profit

Interest

Opportunity cost

Measures value (benefit) of next best alternative use of resources foregone

Why opportunity cost exists

Scarcity of resources

Production Possibility Frontier/Curve (PPF)

Shows ability of a country to make g&s (productive capacity), & is used to illustrate opportunity cost

Capital goods

Useful, not in themselves, but are valued because they help produce items in the future

Consumer goods

Satisfy wants and needs now

4 causes of an outward shift in the PPF

Improvements in productivity & efficiency (perhaps due to introduction of new technology)

More factors of production available (due to inward migration or increased capital available)

Better management of existing resources

Discovery of new natural resources (such as shale gas)

4 causes of an inward shift of the PPF

Military conflict

Natural disaster

Emigration

Failure to invest/resources run out

Specialisation

System of organisation where economic units (such as households or nations) aren’t self-sufficient but concentrate on producing certain g&s and trading the surplus with others

Division of labour

Specialisation by workers where production of a good is broken up into many separate tasks each performed by one person

4 advantages of specialisation/division of labour

Better quality products

More productive/efficient

Reduces unit costs

Standardised products (all reliably the same)

4 disadvantages of specialisation/division of labour

More susceptible to economic shocks (risk of redundant skills)

Salaries cost more

Not self-sufficient

Needs to have high production

5 functions of money

Medium of exchange

Unit of account

Store of value

Facilitates exchange

Standard of deferred payment

3 fundamental questions of economics

What to produce, how to produce, for whom to produce

Free market economist

Adam Smith

Free market economy

Economic system where resources are allocated by price mechanism (demand and supply)

4 advantages of free market economies

Greater choice

Consumer sovereignty

Greater productivity

Innovation

4 disadvantages of free market economies

Less equality

Unemployment

Some key services & basic necessities not provided

Consumer exploitation by producers

Command economist

Karl Marx

Command economy

Economic system where government, through a planning process, allocates resources in society

4 advantages of command economies

Greater equality

Full employment

Key services & basic necessities provided

Prevents consumer exploitation by producers

4 disadvantages of command economies

Less choice

Less consumer sovereignty

Less productivity

Less innovation

Mixed economy

Economic system where resources are partially allocated by the price mechanism and partly by the government

What is utility

What do consumers seek to maximise

What do firms seek to maximise

What is irrational behaviour

3 reasons why agents may behave irrationally

Demand

3 reasons why the demand curve is downward sloping

What causes a movement in demand (extension or contraction)

Extension in demand

Contraction in demand

Increase in demand on a graph

Decrease in demand on a graph

What factors can cause a shift in demand

Law of diminishing marginal utility

Supply

3 reasons the supply curve is upward sloping

What causes a movement in supply (extension or contraction)

Extension in supply

Contraction in supply

Increase in supply on a graph

Decrease in supply of a graph

What factors can cause a shift in supply

Equilibrium

Equilibrium price and quantity of a product on a graph

What is a shortage (& what is it also known as)

How a shortage occurs on a graph

What is a surplus (& what is it also known as)

How a surplus occurs on a graph

3 functions of the price mechanism

Consumer surplus

Producer surplus

Consumer surplus on a graph

Producer surplus on a graph

What happens with consumer surplus when price increases

What happens with consumer surplus when price decreases

What happens with producer surplus when price increases

Wha happens with producer surplus when price decreases

Price elasticity of demand definition

PED formula

What is meant by price elastic demand (what is the effect)

What values would constitute price elastic demand

What is meant by price inelastic demand (what is the effect)

What values would constitute price inelastic demand

What is meant by perfectly price elastic demand (what is the effect)

What values would constitute perfectly elastic demand

What is meant by unit elastic demand (what is the effect)

What value would constitute unit elastic demand

Price elastic on a graph

Price inelastic on a graph

Perfectly price inelastic on a graph

Perfectly price elastic on a graph

What 5 letter mnemonic is for what influences the PED of a product

SPLAT

How Substitutes influence the PED of a product

How percentage of income influences the PED of a product

How luxury or necessity influences the PED of a product

How addictiveness or habitual behaviour influences the PED of a product

How time influences the PED of a product

What happens to revenue when price inelastic and price increases

What happens to revenue when price inelastic and price decreases

What happens to revenue when price elastic and price increases

What happens to revenue when price elastic and price decreases

Definition of cross price elasticity of demand

Formula for XED

Definition of substitute goods

What values of XED would constitute a substitute (what about weak and strong)

Definition of complementary goods

What values of XED would constitute complementary goods (what about weak and strong)

What would an XED of 0 indicate

Complement XED on a graph