Micro

opportunity cost

The value of the next best alternative that must be given up in order to obtain the alternative chosen

economic growth

an increase in the amount of goods and services produced per head of the population over a period of time

factors of production

land, labor, capital, entrepreneurship

PPC

production possibilities curve

inside line of circular flow of income model

output flow (counterclockwise)

outside line of circular flow of income model

monetary flow (clockwise)

open economy sectors not shown on circular flow of income model

- government sector
- financial sector
- foreign sector

injections

additions to an economy's circular flow which include investments, government spending, and exports

leakages

withdrawals from an economy's circular flow which include savings, taxes, and imports

positive economics

the branch of economic analysis that describes the way the economy actually works
- study of economics that is provable
- relies on logic, reasoning and empirical evidence

empirical evidence

firsthand data and information acquired by observation and experimentation of certain behaviours or patterns

logic

rationality and reasoning rather than beliefs or emotions

ceteris paribus

a Latin phrase that means "all other things held constant"
- allows economists to simplify and explain possible causes and effects

hypothesis

an assumption, prediction or notion made before research is conducted

null hypothesis

affirmative; assumed to be true

alternative hypothesis

contradicts null hypothesis; will not happen

models

Provide an approximation (physical/conceptual representation) to help explain the real world

theories

broad generalizations about economic ideas and build on existing models

hypothesis becomes...

hypothesis becomes model becomes theory

Refutation

rejection of an economic statement by referring to facts, data and/or empirical evidence

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented

value judgements

beliefs of individuals and societies about what is right or wrong

economic wellbeing

is related to finance and having an adequate standard of living while satisfying your needs and wants

economic interdependence

a condition in which countries have strong economic ties and depend on each other for resources, technology, trade, and investment. the decisions of one country affects other countries along with it.

scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

production possibilities curve

a graph that shows all possible combinations of producing two products using all available resources

outward shift of PPC

economic growth - the quantity and quality of factors of production increases, new technology appears

inward shift of PPC

economic contraction - the quantity and quality of factors of production decreases, technology regresses

e.g. war, natural disasters, aging population.. etc.

shift of curve (PPC)

potential economic growth

shift of point within PPC

actual economic growth >> closer point is to the PPC, the more efficient an economy is

what are the markets on the circular flow of income model?

the factor market (above)
the product market (below)

what are the actors/participants on the circular flow of income model?

businesses/firms (left)
households (right)

government: leakages and injections

leakages: taxes
injections: government spending

financial: leakages and injections

leakages: savings
injections: investments

foreign: leakages and injections

leakages: imports
injections: exports

economic systems: free market capitalism

who has money can buy goods

economic systems: comand economy

based on first come; first serve basis
who you know
by chance >> randomly

Adam Smith

- invisible hand / Laissez-Faire (government should not be involved in the market)
- free trade >. no government interference
- labour of theory value
- wealth measured by production
- concept of specialization/division of labour

David Ricardo

comparative advantage theory

Jean Baptiste Say

concept that supply creates its own demand

Marx and Engels

Communist Manifesto >> governments should regulate the economy

neo-classical (late 1800s)

- prices determined by consumer demand
- marginal revolution
- law of diminishing marginal utility

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Alfred Marshall

supply/demand graphs
rational choice theory

John Maynard Keynes

- advisor to Roosevelt during Great Depression
- 1930s

Milton Friedman

promoted the idea of free trade and condemned government regulation
- money supply should increase at the same percentage as economic growth >> prevent inflation

Efficiency

using resources in such a way as to maximize the production of goods and services, avoiding waste

intervention

government intervention in the workings of markets in making allocation and distribution decisions

sustainability

ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs. using resources in ways that do not reduce their quantity or quality over time

equity

concept of fairness, in connection with the distribution of income and output to ensure that people with little or no income in a market economy can survive

demand

the quantity of a good or service that consumers are willing and able to purchase at any given price

quantity demand

The quantity of a good or service consumers are willing and able to purchase at a specific market price

law of demand

as the price of a good increases, the quantity demanded decreases, and vice versa
(movement along demand curve)

Non-price determinants of demand

Related goods prices' (in the cases of substitutes and complements)
Income
Preferences and tastes
Expectations of future prices
Number of consumers

RIPEN

supply

the quantities of a good or service that a firm is willing and able to produce for sale at different market prices, during a particular time period

law of supply

as the price of a good increases, the quantity supplied increases and vice versa
- direct/positive relationship
- movement along supply curve

market supply

the sum of all the individual firms' supply schedules in a market

non-price determinants of supply

Cost of production (FOP)
Indirect taxes
Subsidies
Technological change
Expectations of future prices
Related product prices'
Number of firms

CISTERN

Vertical supply curve

no time to produce more (e.g. theatre tickets)
no possibility of producing more (e.g. Picasso Painting)

surplus

if quantity demanded of a good is smaller than the quantity supplied >> excess supply (above equilibrium)

shortage

if quantity demanded of a good is larger than the quantity supplied >> excess demand (below equilibrium)

equilibrium price

the price at which the quantity demanded of a product equals the quantity supplied
>> market clearing price

Equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

Price mechanism functions

-Incentives
-Signals
-Rationing

resource allocation

The process through which the available factors of production are assigned to produce different goods and services

allocative efficiency

producing the combination of goods people and society most desire
>> answers "what to produce" question

productive efficiency

producing goods at lowest cost possible, with the the fewest resources used or wasted
>> typical in highly competitive markets
>> answers "how to produce" question

consumer surplus

the amount a buyer is willing and able to pay above the equilibrium price
>> top triangle

producer surplus

the amount a seller is willing and able to sell below the equilibrium price

social surplus

the sum of consumer surplus and producer surplus

signalling

the price in a market sends important information to producers and consumers

incentives

an motivation and opportunity to create action

Price mechanism

moves market into equilibrium

reasons for government intervention

- earn government revenue
- support firms
- support low income households
- influence levels of production
- influence levels of consumption
- change resource allocation (correct market failure)
- promote equity

price controls

setting of maximum or minimum prices by the government, which prevents the equilibrium price and quantity to prevail

- price ceilings and price floors

price ceiling: definition

a legal maximum price set by the government which may not be exceeded by suppliers/sellers

(usually placed on non-luxury/necessity goods)

price ceiling: results

- shortages
- non-price rationing
- arising underground markets
- underproduction of good
- misallocation of resources

price ceiling: affect on stakeholders

- consumers: some benefit (buying good at lower price) some are worse off (do not get the good > shortage)
- producers: worse off (sell less of good at lower prices, decreasing total revenue)
- workers: worse off (reallocation of resources, many may lose their jobs)
- government: budget unaffected (may gain/lose support, popularity, votes etc.)

price floor: definition

a legal minimum price set by the government, which may not be undercut by suppliers/sellers

price floor: why are they introduced?

1) provide income support for farmers
2) to support low-skilled, low-wage workers

agricultural price floors: results

- surplus (excess supply) : government buys excess supply and export it, store it, or give it away
- inefficient farmers
- overallocation of good
- negative welfare impacts (society is worse off)

minimum wage: price floors results

- demand: businesses will hire less people (due to higher wages)
- supply: more people are willing and able to work
- surplus: unemployment

elastic vs. inelastic supply and demand for minimum wage

elastic: result in a larger surplus (more unemployment)
inelastic: result in a smaller surplus (less unemployment)

indirect taxes: definition

a tax levied on goods and services rather than on income or profits

- targets goods that are harmful to society

indirect taxes: specific tax

fixed value tax on a good or service (parallel shift in supply)

indirect taxes: ad valorem tax

specific percentage tax on a good or service

indirect taxes: results

- prices rise as goods are taxed (decreases demand)
- supply decreases due to an increase in costs of production
- fewer resources are allocated to taxed good

indirect tax on elastic demand

burden of the tax/incidence of tax will mainly fall on producer

indirect tax on inelastic demand

burden of the tax/incidence of tax will mainly fall on consumer

subsidies: defintion

financial assistance by the government to individuals or firms to encourage production or consumption of good

subsidies: why are they introduced?

- to increase producer revenue
- make certain goods affordable to low-income consumers
- encourage production/consumption of merit goods
- encourage exports
- support growth of particular industries
- improve allocation of resources

subsidies: affect on stakeholders

- consumers: pay less; buy more
- producers: increase supply, increase total revenue (money from subsidy)
- governments: spend money for subsidies (decrease in budget) may gain support/votes
- workers: better off (have more stable and protected jobs)
- society as a whole: better off if misallocation of resources is corrected; worse off if misallocation of resources results

subsidies: results

- equilibrium quantity of goods demanded and goods supplied increases
- equilibrium prices decrease > consumers pay less
- money received by producers increases (TR increases)
- change in allocation of resources occurs

PED

price elasticity of demand
- a measure of responsiveness of the quantity of a good demanded, to a change in its price

Determinants of PED

- Substitutes
- Percentage of budget
- Luxury
- Addiction
- Time

PED = 0

perfectly inelastic PED

PED < 1

inelastic PED

PED = 1

unit elastic PED

PED > 1

elastic PED

PED = ∞

perfectly elastic PED