theme 1- Micro - Introduction into markets and market failure

the basic economic problem

problem of scarcity,limited rescources and infinite wants

positive statements

objective statements which can be proven or disproven

normative statemnents

subjective statements which express opinions or judgements

needs

minimum necessary to survive, limited

types of needs

• water

• food

• shelter

• clothes

• warmth

wants

desires for consumption of goods and services, not necessary to survive, unlimited

rescources

inputs we use to produce goods and services

social science

economics is a social science which focus on theories and problems relating to the production of goods, distribution of goods and the consumption of wealth

natural science

studies the natural world

ceterus paribus

the effect of one economic variable has on another while all other variables remain the same

renewable resource

resource of economic value that can be replenished on a level equal to its consumption

non-renewable resource

a resource of economic value that cannot be readilly replaced by natural means on a level equal to consumption

opportunity cost

the value of the next best alternative foregone

factors of production

resources are split up into 4 factors of production

• land

• labour

• capital

• entrepreneurship

land

all natural resources used in production i.e raw materials

owners receive rent from land or money from the sale of land

labour

the mental and physcial human effort

labourers receive wages

capital

man-made resources which are used to produce goods and services e.g equipment

owners of capital receive interest on their land

enterpreneurship

the willingness and ability to take the risks of combining the other factors of production in order to make a product

enterpreneurs receive profit

circular flow of income

a model of the economy which describes how money flows

injection

variables that add to the circular flow of income

governments spending + investment+exports

withdrawal

variables leaking out of the circular flow of income and reducing the size of the national income

taxation+saving+import

measures of economic performances

• output

• income

• employment/unemployment

• economic growth

• inflation

• CPI/RPI

PPF

product possibility frontiers -

shows the maximum possible combinations of 2 products or capital and consumer goods that the economy can achieve with its current resources and technology

why is PPF normally a curve

because the opportunity cost of producing the combinations of the 2 products changes when a certain amount of each product is produced

what does it mean when the point is on the curve of a ppf

maximum potential of an economy, its economically efficient

opportunity cost on a ppf

how many of one good is lost in order to produce more of the other good

what happens to the PPF when the economy grows

it shifts outwards

done by increasing the quantity/quality of resources

what happens to the PPF when the economy declines

it shifts inwards

caused by natural disasters,natural resources running out,decrease in quantity or quality of labour

specialisation

concentration of workers,firms,areas or countries on a paticular task or narrow range of products

pros of specialisation

• quality

• quantity

• allows countries to concentrate output which increases standard of living

cons of specialisation

• what if demand falls

• competitors

• wages+raw materials

division of labour

product is broken down into many seperate tasks

pros of division of labour

• workers highly productive

• lower costs of production

• improved skills

• saves time

• quality

cons of division of labour

• demoralisation

• reduced flexibility

• finding alternative work