Theme 1 Economics flashcards from Up learn

Social science

The scientific study of societies and social interaction. 

Positive statement

A statement that can be tested using evidence to see if it’s true or false. It is objective.

Normative statement

A statement that involves a value judgement. It is subjective and opinion based.

The economic problem (or problem of scarcity)

Humans have infinite wants but scarce resources 

Economy

Any system that tries to solve the economic problem

PPF

Shows all possible combinations of two goods that can be produced, using all resources efficiently

Division of labour

When a firm splits up its production process into smaller separate tasks, and assigns different workers to each of these tasks.

Specialisation

When a worker, firm or economy concentrates on producing a limited range of goods and services. 

Functions of money (DUMS, Donald Uses Money Shopping)

Deferred Payment - You can borrow money to buy goods now, and then pay the money back in the future

Unit of account - Money helps us compare prices of different products

Medium of exchange - We can use money to trade goods and services.

Store of value - You can store your money and save it for later.

Pros and cons of division of labour

Pros	Cons
Can increase productivity and output by specialising and using specialist equipment	Demotivation can decrease productivity and output
Can increase quality because workers master their craft	Demotivation can decrease quality because workers will take less pride in their work
Can decrease unit costs because workers are more efficient	Can increase absenteeism, staff turnover and recruitment costs
Can help firms save on training costs because each worker needs to be trained in fewer skills	Specialised workers will have only one skill so may end up unemployed if they lose their jobs

Pros and cons of specialisation and trade

Pros	Cons
Wider variety of goods and services from trade	If a region over-specialises and their specialist industry shuts down, workers will have no other work, leading to unemployment e.g. miners in the 1980s after the mines were shut down
Can increase overall output	Countries can over-specialise and deplete their natural resources e.g. Saudi Arabia is slowly running out of its oil reserves
Can increase trade	We become vulnerable because if people specialised in producing a certain good or service go on strike or stop trading, we’re left without the goods and services we need E.g. when train drivers strike the rest of us can’t get to work or school

Rational decision making for consumers and firms

Economists assume that consumers want to maximise their utility.

Economists assume that firms want to maximise their profit

3 Reasons consumers behave irrationally

Herd behaviour - Consumers are influenced by the behaviour of others.

Habitual behaviour - When consumers are in the habit of making certain decisions.

Weakness at computation - Consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.

Factors which affect PED

Necessity or luxury

Addictive or habit-forming

Substitutes

Brand loyalty

Proportion of Income

Time

NASBIT

Factors affecting demand

PASIFIC

Population

Advertising

Substitute’s price

Income

Fashion/tastes

Interest rates

Compliment’s price

Factors affecting supply

PINTSWC

Productivity

Interest rates

Number of firms

Technology

Subsidy

Weather

Costs of production (e.g. transport, raw materials)

Income elasticity of demand (YED)

YED measures how much quantity demanded will change in response to a change in income.

YED = %△Qd/%△Y

Normal good

For normal goods, demand increases when income increases, which means the YED for normal goods is positive.

Inferior good

For inferior goods, demand increases when income decreases, which means the YED for inferior goods is negative

Income elastic goods (or luxury goods)

When YED is between 1 and ∞. Income elastic goods are very responsive to changes in income and are likely to be luxury goods

Income inelastic goods (or necessity goods)

When YED is between 0 and 1. Income inelastic goods are unresponsive to changes in income, and are likely to be necessity goods

Complements (or complementary goods)

Complements are goods which are used and bought together (e.g. iPhones and iPhone apps)

For complements, if the price of good B (iPhone apps) increases then demand for good A (iPhones) decreases.

XED will be negative.

Substitutes (or substitute goods)

Substitutes are goods which can replace one another (e.g. iPhones and Samsungs)

For substitutes, if the price of good B (Samsungs) increases then demand for good A (iPhones) increases.

XED will be positive.

Unrelated goods

Unrelated goods are goods which have nothing to do with each other

XED = 0 for unrelated goods

Cross elasticity of demand (XED)

XED measures how much quantity demanded of good A changes in response to a change in price of good B

XED formula = % change in quantity demanded (Qd) of A / the % in price (P) of B 

Factors which affect PES

TEASS

Time

State of the Economy

Availability of factors of production

Spare capacity

Stockpiles and perishability

Functions of the price mechanism

SIR

Signalling: higher prices signal to producers that consumers want more of their goods, so producers supply more of them. Lower prices signal to producers that consumers want fewer of their goods, so producers supply fewer of them. 

Incentivising: higher prices increase the incentive to supply, because producers can make more profit. Lower prices decrease the incentive to supply, because producers make less profit.

Rationing: higher prices ration (or limit) goods to the consumers who will pay the most.

Indirect tax

A tax on goods and services

Specific tax

A fixed amount of tax paid on each unit sold e.g. excise duties

Ad valorem tax

A tax charged as a % of the price of a good e.g. VAT

4 types of market failure

Negative externalities

Positive externalities

Public goods

Information gaps

Market failure

When the price mechanism leads to a misallocation of resources.