Theme 1

Ceteris Paribus

Assuming all other factors are equal

Why is Economics a social science?

It looks at people’s behaviour and how they interact with each other

Normative statements

Opinionated and bias statements

Positive statements

Objective and non-bias statements which can be factual

Role of Judgements with Normative and Positive statements

Positive statements can be used to back Normative statements

What is CELL

Capital, Enterprise, Labour, Land

The Economic Problem

The problem of scarcity

Scarcity

Unlimited wants, Limited resources

What are the economic agents?

Producers, Consumers, Government

What does PPF stand for

Production Possibility Frontier

Causes of inward shifts of PPF

Natural disasters, Wars, Global warming, Recession

Causes of outeard shift in PPF

Tech improvements, New resources, Improvement in education, Demographic changes

Specialisation

When an individual produces a limited range of goods (sticking to what you are good at)

Division of Labour

Specialisation at the level of an individual worker. Splitting taks between workers.

Free Market

When individuals are free to make their own choices and own the factors of production

Command Market

When resources, including labour, are allocated by the government

Demand

The amount of products consumers buy at a given price in a period time

Supply

The amount of products a producer is willing to sell at a given price at a given time

Factors that shift demand

Income, Substitutes, Complements, Trends, Population, Legislation, Advertising

Factors that shift supply

Cost of production, New technology, Taxes, Subsidies

PED

% change in quantity demanded / % change in price

YED

% change in quantity demanded / % change in income

XED

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

PES

% change in quantity supplied / % change in price

Functions of the price mechanism

Rationing, Signalling, Incentives

Habitual Behaviour

when people follow the same routines, repeating actions on a regular basis

Positive Externalities

Social benefits = Private benefits + External benefits

Negative externalities

Social costs = Private costs + External costs

Externalities

Benefits and Costs to a third party that are not included in the price of economic activity

Public goods

Non-rivalrous and Non-excludable

Problems of public goods

market failure, free rider problem, little incentive by firms

Private goods

Rival and excludable

Quasi-Public goods

private goods which have characteristics of public goods

Free rider problem

The external benefits that are received but unpaid for

Cost Benefit analysis

the process used to measure the estimated net social rate of return from an investment project

Symmetric information

When all the relevant information is known by both parties

Asymmetric information

When one or some party/ies know more than another or other party/ies

Ways government can intervene

Taxes, Subsidies, Max and Min prices, Provision of public goods, Trade pollution permits, Provision of info, Regulations

Reasons for government failure

Inadequate info, Conflicting objectives, Admin costs

Factors making demand more elastic

Many substitutes, luxury goods, long time period, high % of income

Negative XED

Complentary

Positive XED

Substitute

Positive YED

Normal good

Negative YED

Inferior good

>1 YED

Luxury good

PED < -1

Elastic

PED 0-1

Inelastic