microeconomics evaluación 1

microeconomics

the economics of individual markets and firms

economics

the study of how people allocate their limited resources to satisfy their unlimited wants

positive statement

a statement that can be proven or disproven by facts

normative statement

a statement that shows an opinion or a view

scarcity

a situation in which the population has unlimited wants and needs but limited resources (the economic problem)

incentives

motivate people and firms towards a particular course of action

examples of incentives

subsidies, taxes

examples of economic objectives

making more money, sustainability, work life balance

opportunity cost

the value of the options you must give up when making a choice

economic goods

goods where resources are used to produce them (eg car)

free goods

do not require scarce resources (eg sunlight)

why must economic goods have an opportunity cost

because you give up something to produce something else

why don't free goods have an opportunity cost

no resources required so no choices made

four types of economic resource

land, labour, capital, enterprise

land

all natural resources used to produce goods and services. Land use may change but amount of land doesn't

labour

all human effort (physical and mental) used to produce goods and services

types of sectors

primary (extracting), secondary (manufacturing), tertiary (services)

what is labour supply affected by

immigration, birth rates, retirement ages

what is labour quality affected by

training, education, age

a well educated work force is more

productive

types of labour mobility

occupational mobility and geographic mobility

occupational mobility

how easily workers can move between different types of jobs

geographical mobility

how easily workers can move to new areas in search of work

capital goods

man made goods used to produce other goods and services eg factory machines, lorries, offices, power stations

consumer goods

goods made for immediate satisfaction, to consume and use eg a t shirt

better capital goods =

better consumer goods

entrepreneurs

people who offer enterprise and take risks, organising land, labour and capital

production possibility curve

curve showing the maximum output of 2 goods made using all the resources at maximum efficiency

main choices when allocating resources

how to produce, what to produce, for whom to produce

free markets

Markets that are allowed to operate without undue interference from the government, where the buyers and sellers agree a price

market

an arrangement which allows buyers and sellers to exchange products and to agree on a price and the quantity of goods to be exchanged

competitive market

many buyers who want low prices and high quality, many sellers who want high prices for high profit, no buyer or seller dominates

money

- a medium of exchange that allows us to exchange even when there is no double coincidence of wants
- a unit of account (measures value)
- enables people to save (store value)
- generally acceptable

double coincidence of wants

the unlikely occurrence that two people each have a good the other wants

types of economy

planned economy, market economy, mixed economy

planned economy

things are planned from the centre by the government

market economy

Economic decisions and allocation of resources are made by market forces

mixed economy

elements of planned economies and market economies

advantages of free markets

firms have to be efficient to survive, profit is a great incentive to entrepreneurs, workers will be motivated by high wages

disadvantages of free markets

goods and services only produced that customers are willing to pay for, waste, unequal distribution of wealth, poor may miss out

demand

the quantity of a product which people are willing and able to buy at any given price over some period of time

demand rises as

prices fall and demand falls as prices rise

for demand, as quantity increases, price

decreases (demand curve)

supply definition

the willingness and ability to sell a product at any given price over a period of time

higher prices tend to create more or less supply

more, as suppliers have the incentive of more profit

for supply, as price rises

quantity supplied rises (supply curve)

movement along the demand curve can only be caused by

a change in price

consumer surplus is

the extra amount that consumers would have been prepared to pay for a product above what they actually pay

what happens to consumer surplus when prices fall

consumer surplus increases, and vice versa

if there is a shift in demand then

a factor other than price has changed

if demand increases, the demand curve shifts to the

right, and if demand falls, the demand curve shifts to the left

causes of change in demand

- changes in disposable income
- changes in the price of substitutes
- changes in the price of complements
- changes in taste
- successful advertising campaigns
- changes in population size and age distribution

what is an extension in supply

a rise in supply caused by a rise in price

what is a contraction in supply

a fall in supply caused by a fall in price

what is producer surplus

the extra amount that producers are paid above what they were willing to accept to supply a product

what happens to producer surplus when price increases

producer surplus increases, and when price decreases so does producer surplus

which way does the curve shift if there is an increase in supply

right if there is an increase in supply, left if there is a decrease in supply

what does an increase in supply mean

that more is supplied at every price

causes of change in supply

- changes in the costs of production
- changes in productivity
- advances in technology
- indirect taxes
- subsidies
- changes in the price of other goods

Price mechanism

operates within a market to match up demand and supply

when there is no government intervention, price and output are determined by

demand of consumers and supply of producers

what is the equilibrium price

the price at which the quantity demanded equals the quantity supplied

if we are below equilibrium price,

we have excess demand

if we are above the equilibrium price

we have excess supply

what is disequilibrium

when we have excess demand or excess supply

how do firms respond to excess supply

by reducing the price until it reaches equilibrium

how do firms respond to excess demand

by increasing the price until it reaches equilibrium

what happens to demand for inferior goods when income increases

demand decreases and the demand curve shifts to the left

what happens to demand for normal goods when income increases

demand will increase and the demand curve shifts to the right

what does elasticity measure

the proportionate responsiveness of the second variable to the change in the first variable

if responsiveness is more than proportional, the product is

elastic

if responsiveness is less than proportional, the product is

inelastic

if a change in price is matched by an exactly proportionate change in demand,

this is called unit elasticity of demand

what is price elasticity of demand

consumers' responsiveness to a change in a good's price

formula for price elasticity of demand

% change in quantity demanded / % change in price

why are PED coefficients always negative

a rise in price means a fall in demand (negative relationship)

for PED, a value between 0 and -1 means

the product is inelastic

for PED, a value below -1 means

the product is elastic

why do elasticities vary

- substitutability
- percentage of income used
- time

demand for necessities tends to be

inelastic because there are few substitutes

elastic demand on a graph

Will have a shallow negative slope for the demand curve

inelastic demand on a graph

Will have a steep negative slope for the demand curve

when demand is elastic, a firm can raise its revenue by

cutting prices, but must be careful about rising prices since revenues will fall

firms may wish to make their product more

inelastic by differentiating from the competition

income elasticity of demand definition

how demand responds to a change in income

formula for income elasticity of demand

% change in quantity demanded / % change in income

negative YED means

inferior good

positive YED means

normal good

when YED is greater than 1, a product is

income elastic

when YED is less than 1, a product is

income inelastic

superior goods

have income elasticity greater than 1

basic goods

have income elasticity of less than 1

2 types of normal good

superior good and basic good

what is zero income elasticity

where change in income has no effect on demand eg toothpaste

What is cross elasticity of demand?

the responsiveness of demand for one product to changes in the price of another good

formula for XED

% change in quantity demanded for good A / % change in price of good B

positive XED means

competing demand (substitutes) - a rise in the price of one product is likely to cause demand for its substitutes to increase

negative XED means

joint demand (complements) - a rise in the price of one product causes demand for complementary products to decrease

0 XED means

no relationship - where we have zero cross elasticity

what does a low positive XED give firms the power to do

raise their prices, but less opportunity to benefit from cutting prices