economic problem + Demand, supply, consumer and producer surplus, elasticity (micro)

what is a characteristic of a free good

what about an economic good

-free goods have no opportunity cost

-economic goods are scarce

What is the basic economic problem?

What questions would economists ask to decide how to allocate resources?

-the basic economic problem is how we go about allocating scarce resources where wants are unlimited and resources are finite

-to do this, economists ask three questions:

what should be produced?

how should it be produced?

for whom should it be produced?

define what a positive statement is

define what a normative statement is

positive statements are factual and be tested

normative statements are opinion-basaed

What are the 3 economic agents?

what is rationality?

-the three economic agents: governments, firms, households

-rationality is the assumption that each economic agent acts in their own best interest

name and describe the three types of economies

planned economy - the government controls the factors of production and decides on the allocation of resources

mixed economy - a combination of market forces and government policies that controls the allocation of resources

market economy - allocation of resources is decided by the interaction of supply and demand (market forces)

what is economic efficiency?

economic efficiency is when an economic system achieves both allocative efficiency and productive efficiency

define allocative efficiecy

what point on graphs does it occur?

Allocative efficiency - occurs when resources are distributed in such a way that maximises overall welfare in an economy.

achieved when supply = demand AND when P = MC

define productive efficiency

what point on graphs does it occur?

productive efficiency occurs when a firm produces at the lowest possible cost, meaning it is operating at maximum capacity

occurs on the lowest point on the AC curve or any point on the PPF

what is opportunity cost?

what is a trade-off?

-Opportunity cost is the cost of the next best alternative foregone when a decision is made

-trade-off is a sacrifice that is made in order to gain something

what is specialisation?

- specialisation is focusing on one activity to be able to produce more efficiently

- each of the factors of production can be specialised to make it more efficient

define division of labour

division of labour refers to the process where the production of goods or services is broken down into several distinct tasks, and each worker or group of workers focuses on one specific task

adv and disadv of division of labour and specialisation

advantages:

-quicker production process

-able to produce more goods and services

-lower average cost of production

disadvantages:

-demotivating for workers focusing on one small task

-A single worker absent or a piece of capital equipment missing can stop the whole production process

-may be a barrier to entry for smaller firms that cannot afford the investment

what is a barter system?

-The barter system is a system of exchanging one product for another without the use of money as a medium of exchange

what are the 4 types of demand?

define all of them

derived demand - when the demand for one good is due to the demand for a related good

joint demand - when products are demanded together as they are complements for one another

competitive demand - the demand for substitutable goods

composite demand - when a product is demanded for multiple uses

shifts in demand are caused by PIRATES, what is each cause?

shifts in demand:

Population

Income

Related goods - substitutes or complements

Advertising

Tastes and fashions

Expectations - future price changes

Seasons

what are the three types of supply?

define each one

joint supply - when the production of one good automatically leads to the production of another good, as is often as a by-product

composite supply - when a good or service can be supplied for multiple purposes

competitive supply - when two or more goods compete for the same resources so an increase in the supply of one results in a decrease int eh supply of the other

shifts in supply is caused by PINTSWC, what is each cause?

shifts in the supply curve:

Population

Indirect taxes

Number of firms

Technology

Subsidies

Weather - usually for agricultural produce

Costs of production

define demand

define supply

demand - a consumer's ability and willingness to purchase goods and services at a specific price

supply - ability and willingness of a firm to sell products at a given price

define consumer surplus

define producer surplus

where are they on a graph?

consumer surplus - the difference between the price consumers are willing and able to pay and the market price

producer surplus - the difference at which producers are willing and able to supply a product and the market price

what does PED represent?

formula?

PED =

- 0?

- ∞?

- 0-1?

- >1?

PED shows the degree to which demand responds to a change in price

percentage change in demand/percentage change in price

PED=0 - perfectly inelastic

PED = ∞ - perfectly elastic

0

determinants of PED (SPLAT)?

determinants of PED (SPLAT):

Substitutes (no.)

Percentage of income taken up

Luxury/neccessity

Addictive

Time Period

what is YED representing?

formula?

YED shows the degree to which demand responds to a change in income

%change in demand/ %change in income

if YED +ve then what type of good?

if YED -ve?

if 0

if -1

if YED = +ve then normal good

if YED = -ve then inferior good

normal goods:

- neccesities, 0

inferior goods:

- inelastic inferior goods, -1

what does XED represent?

formula?

XED shows the degree to which demans responds to change in the price of another good

%change in demand of A / % change in price of B

if XED +ve then what type of good?

if XED -ve?

if 0

if -1

if XED = +ve then substitue

if XED = -ve then complement

substitute:

- 0

complement:

-1

what does PES represent?

formula?

PES shows the degree to which supply responds to a change in price

%change in supply / %change in price

PES = 0 ?

PES = ∞ ?

0

PES = 0 - perfecly price inelastic

PES = ∞ - perfectly price elastic

0

use and significance of PED

PED - allows for revenue forecasting and pricing strategy

use and significance of YED

YED - allows forecasting demand across different economic conditions in the business cycle

use and significance of XED

XED - can find the strength of relation between products, can signal merger and aquisition decisions if XED is high between 2 substitutes, they may merge

use and significance of PES

PES - helps firms assess how quickly they can increase or decrease production