everything all at once

economics version

the margin and change

once the best possible decision has been made under given conditions, any further change would lead to a worse outcome—unless external factors change.

short run

a time period where only one factor of production can be changed

long run

it is possible for all factors of production to change

very long run

where all factors of production can change and other inputs e.g. innovation of technology and governemental legislation

production possibility frontier

shows the maximum combinations of two goods that an economy can produce in a given period of time with all its resources fully and efficiently employed

what causes an increase in productive potential?

better machinery/technology has been discovered, workers have been skilled through training, more resources

capital consumption

fixing/replacing capital goods which are worn out from producing

specialisation

process by which individuals, firms and economies concentrate on producing those goods and services where they have an advantage over others.

division of labour

the specialisation of labour on a particular task

advantages of specialisation

improved productivity, effieciency and quality, reducing costs, economy can become more competitive, surplus allows for trade

disadvantages of specialisation

workforce needs to be flexible or risks unemployment, other economies may be able to produce cheaper, changes in taste may reduce demand, natural distasters may disrupt output

advantages of divisons of labour

higher productivity and effiency, encourages investment in specific capital - economies of scale, lower unit costs leading to higher profits

disadvantages of division of labour

high labour turnover due to boredom, lack of satisfaction and motivation, staff are less flexible, recruitment costs might be high, unemployment risk if you are too specialised

quaternary

provide information services such as computing, consultancy and R&D

sectoral change

when a country’s output and employment moves across the sectors

added value

the value of the output is greater than the costs of production, thereby earning a profit for the business

impacts of primary sector

countries grow richer and acquire physical and human capital — machanisation. raw materials echausted. workers prefer better paid and less demanding jobs

impacts of secondary sector

more jobs become automated, businesses move to cheaper land and labour

impacts of tertiary sector

more disposable income spent on services, people move into urban areas, skill shortages occur

market economy

The decisions on resource allocation are made by households and firms. The household demand for goods/services and the firms allocate their resources to supply them. The government plays a small part in this economy

market mechanism

where decisions on price and quantity are made based on demand and supply

advantages of market economy

because suppliers have an incentive to maximise profit, they will be careful to minimise waste by operating efficiently, they will also produce what consumers demand. there will be a greater variety of choice for consumers, also a greater likelihood for inventions and innovations

disadvantages of market economy

consumers must have the ability to pay for the products they demand, this may result in poverty, homelessness and income gaps (inequality), demerit goods may be over produced and consumed, merit goods tend to be under provided and may not be available at all to the poorest, resources may be used up top quickly and overproduction may occur

planned economy

government regulates economy completely

free market

where prices, production, and distribution of goods and services are determined by supply and demand with minimal government intervention.

advantages of planned economy

income equality, unemployemnt is not an issue

disadvantages of planned economy

no price system so resources are not used efficiently, shortages of goods and surpluses of unwanted goods, no profit motive so no incentive for efficiently

mixed economy

involves both private and public sectiors to aid resource allocation through the market mechanism

how does the governement prevent market failure in an economy?

to provide public goods, to provide under provisioned merit goods, to surpress demerit goods, to prevent monopolies, to control externalities, to redistribute income

how does the governement intervene?

tax, regulate, subsidise

free rider problem

a concept of market failure, receives benefits that others have paid for without making any contributions.

quasi public good

non excludable, rival

non rivalry

consumption by one person does not reduce the amount available for others

non excludable

no one can be prevented from consuming it (a private good is excludable)

merit good

provide external benefits but often unprofitable for private firms to supply, they are under provided and under consumed

effective demand

the intention to buy must be backed by purchasing power

joint demand

complementry goods

derived demand

demand for a good comes from a demand for another good

what are the determinants of demand?

population, advertisment, substitutes, income, fashion/trends, interest rates, complimentary goods, external costs (PASIFICE)

what are the determinants of supply?

productivity, inirect taxes, number of firms, technology, subsidy, weather, changes in cost of production. (PINTS WC)

indirect tax

paid by supplier on goods, causing supply to decrease

why would a good or service be inelastic?

if it is a necessity or addictive good and if there are no substitute goods

what is the formula for PED?

percentage change in quantity demanded divided by percentage change in price

when is PED considered elastic?

when PED is greater than 1

when is PED considered inelastic?

when PED is less than 1

when is PED considered perfect;y elastic?

when PED is infinite

when is PED considered unitary elastic?

when PED is 1

when is PED considered perfectly inelastic?

when PED is 0

what are the determinants of PED?

substitutes, percentage of income, luxury/necessity, addictive, time period

what does it mean when XED>0 ?

Goods are substitutes

what does it mean when XED<0 ?

Goods are complements

what does it mean when XED = 0 ?

Goods are unrelated

what does it mean when YED < 0 ?

inferior good

what does it mean when YED > 1 ?

luxury good

what does it mean when 0 < YED < 1 ?

necessity good

normative statement

expresses a value of judgement or opinions

positive statement

deal with facts and can be tested

cyclical unemployment

occurs during recession where demand delclines

frictional unemployment

occurs during a change of jobs

structural unemployment

when the skills of the workers are no longer needed e.g. the industry they worked in dies

demand side policy

these aim to increase AD so that firms produce more and hire more

expansionary fiscal policy

increasing government spending/cutting taxes to boost AD

expansionary monetary policy

lowering interest rates/increasing monetary supply

exchange rate policy

depreciating the currency to make exports cheaper and imports more expensive

inflation impacts (consumers)

shoe leather costs, change of purchasing power → affects standard of living, consumer confidence decreases so there is less borrowing, easier to pay back money

inflation impacts (firms)

cost of production increases, costs increase, wage price spiral, menu costs

aggregate demand

total demand of goods and services in the economy

what is the formula of AD/GDP ?

C + I + G (X-M)

market failure

where the free market does not make the best use of scarce resources (demerit goods)

national income

the total output for a country - economic activity. people earn an income from producing output. this income is then spent (expenditure) on the output. an increase in output is seen as good and an improvement in people’s living standards.

GDP

the main measure of national income. it is used to assess what is produced, earnt and spent (total value of output).

what indicates economic growth?

an increase in a country’s production of goods and services over time, measured by the percentage change in real Gross Domestic Product.

foreign direct investment

when a big company invests in a company

transfer payments

money given by the government

supply side policies

focuses on increasing AS in the long run by improving the quality and quantity of factors of production through investment inR&D, education and training, low direct taxes (income and corporation), privatisation, deregulation, and increase in the number of firms to allow for an increase in output

the budget

where the government states its annual intentions for spending or taxes

cyclical deficit

may occur during times of recession, the governemnt will have to spend on welfare and creating jobs but will balance later because of the tax revenues gained during boom

structural deficit

governemnt spend their way to economic growth by creating jobs but it doesnt work

current spending

goods and services used to provie state financed services

capital spending

infrastrucure such as state schools and hospitals

balance of payments

record of all financial transactions between one country and the rest of the world over a period of one year

what does current account consist of?

balance of trade of goods, balance of trade of services, primary income, secondary income

financial account

transactions in financial assers

capital account

debt forgiveness and other small terms

appreciation

value of currency goes up against another currency

depreciation

value of a currency goes down against the currency of another

consumer surplus

difference between how much they are willing to pay vs the actual price paid

producer surplus

difference between the price the producer would be willing to sell for vs the actual selling price (market price)