economics 1.1- theme 1

ceteris paribus

all other things remaining equal

positive statement

statement that is objective and can be tested

normative statement

based on opinion can’t be proven

problem of scarcity

people have finite needs but infinite wants, relative concept as scarce due to demands

renewable resource

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

non renewable resource

of economic value that can’t be readily replaced

opportunity cost

cost of one thing in terms of next best alternative that has been given up

choices best for

consumers

producers

gov

income/ satisfaction

resources/profit

tax.revenue/social welfare

factors of production

land-raw materials, land and produce of sea

labour

capital-man made resources to produce goods

entrepreneurship-willingness and ability to take risks

PPF

maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology

specialisation

process of focusing on specific task/product/area to increase efficiency and productivity

division of labour

labour is broken down and specialises in particular part of production process

pros of specialisation/division of labour

labour productivity increases

quality increases as more skilled

more cost effective to develop specialist tools

no time waste

trained to do one task, saves time and money

comparative advantage in trade

cons of specialisation/division of labour

tedious, repetitive so poor quality of work

craftsmanship decreases as more standardised product

not wide training so structural unemployment

overdependent on one export in trade

could run out

high interdependence

free market economy

pros

cons

decisions made by private individuals and firms

pros

efficiency-competition incentivises firms to produce well and innovate

consumer choice- wide range

economic growth-rapid and higher living standards

cons

inequality-income and wealth disparity

lack of public good-essential services under provided without gov.intervention

booms/busts

command economy

pros

cons

made by gov/central authority

pros

equality-reduce income inequality through central planning

stability-central control provides during crisis

prioritizing social goals-resources goes towards public services and social welfare

cons

lack of incentives-central planning discourages innovation

resource misallocation-inefficient leads to shortages

bureaucracy complex

roles of state in mixed economy

regulation-consumer protection, environmental standards=prevent abuse of monopolies

public goods-provides things not adequately supplied by private sector, infrastructure,education,healthcare

welfare and redistribution-gov implements safety nets and income redistribution policies to address poverty and inequality, welfare programs, progressive taxation

stabilisation and economic planning-gov uses fiscal and monetary policies to manage economic cycles, central banks adjust interest rates to control inflation

three way of rational decision making

consumers aim to maximise utility- satisfaction

firms aim to maximise profit

gov aim to maximise social welfare-satisfaction

demand

willingness and ability to buy a good at a given price at a given time

factors that cause shift in demand curve

population- people increase more demand

income- income increase less demand

related goods, complements- price decrease demand increases, substitutes- price increase demand increases

advertising- firm successful demand increases, competitor successful demand decreases

taste- more fashionable more demand

expectations in future- if price increases more demand

seasons- dependent on weather

diminishing marginal utility

demand curve slopes downwards

inverse relationship between price and quantity

we assume people behave rationally and it gives them greatest level of satisfaction

if prices increase, marginal utility per penny for income decrease

total utility

satisfaction gained as result of overall consumption

marginal utility

change in satisfaction by the consumption of the next unit of a good

law of diminishing marginal utility

satisfaction derived from consumption of additional unit of good will decrease as consumption of good increases

price elasticity demand

responsiveness of demand to a change in price of good

factors that affect ped

substitutes- more substitutes more elastic

time- longer time easier for alternation more elastic

necessity- inelastic because even if price increases still need to buy

% of expenditure- if small, increase in price has small impact so inelastic

addicitve- inelastic because even if price increase people will still buy to fulfil addiction

tax elasticity

ineffective at reducing output but higher tax revenue for gov

inelastic consumer burden high but unresponsive to change in price so quantity will not fall

subsidy elasticity

ineffective at increasing output but cheaper for gov to impose

elastic as small change in price and producer revenue high

income elasticity of demand and effect

responsiveness of demand to change in income

impact on type of good firm produces

cross elasticity of demand and effect

responsiveness of demand for one product to the change in price of another product

beware of competition

supply

willingness and ability to provide a good at a price in a given amount of time

factors that affect supply

cost of production- if high but same selling price, loss, less supply shift to left

price of other goods- joint supply production of one good causes extra production of another supply increase, competitive supply production of one good prevents supply of another

weather- particular agricultural goods if good more supply

technology- production falls as more productive efficiency so low price

goals of supplier- wants to help society increase supply but no profit

gov legislation- if rules made supply increase but high levels of regulation means cost increases and supply decreases

tax and subsidies- tax means supply decrease subsidy means supply increase

producer cartels- firms come together so supply decrease so price and profit increase

if supply curve upward sloping

if price increases production increases to take advantage of high profit

if low firms will cut back on unprofitable production so low supply

price elasticity of supply

responsiveness of supply to a change in price of good

factors affecting pes

time- short term so factor of production fixed so inelastic long term factors of production variable can increase production so elastic

stocks- stockpile of goods when price increases so elastic

working below full capacity- if working below when price increases can respond quickly so elastic

availability of factors of production- labour needs skill and training so inelastic

ease of entry into market- expensive startup equipment so supply decrease so inelastic

availability of substitutes- elastic so can alter pattern of production