Untitled Flashcards Set

Introduction to Economics

Define Economics - economics is a study of rationing systems. It is the study that looks at how limited resources are allocated to fulfil our unlimited wants.

Explain basic economic problem - consumers have unlimited wants, while there are only a scarce amount of resources to fulfil it.

Explain the concept of Scarcity / choice / opportunity cost:

Scarcity : demand for a good or service exceeds the supply of it

Choice: because resources are scarce and there are unlimited needs and wants, a choice must be made between the options and alternatives available.

Opportunity cost: the real cost of the next best alternative foregone

Construct and use PPF to explain the basic economic problem

• PPF demonstrates how opportunity costs arise when individuals or the community makes choices

• Shows the various combinations of two alternative products that can be produced, given technology fixed quantity of resources and when all resources are used to their full capacity.

(assumptions - can only produce two goods or services, technology is fixed, quantity of resources available are unchanged, all resources are fully employed)

Purpose of the 4 economic questions

• What to produce -

• How to produce -

• How much to produce -

• For whom to produce -

Define each Factors of production with examples

• Land - natural resources that are available for production (rent)

• Labour - mental and physical effort of people that is used in production (wages)

• Capital - all manufacture resources that  are used in the creation and production of the other products (interest)

• Enterprise - management, organization and planning of the other three factors of production (profit)

Explain purpose of economic systems - an economic system is the way an economy organises itself to address the basic economic problem

Differentiate between different economic systems -

Market - system in which the laws of supply and demand direct the production of goods and service

SIX CHARACTERISTICS:

• Private property : most goods and services are privately-owned, giving them the right to profit through legally binding contracts

• Freedom of choice - free to produce, sell and purchase goods and services in a competitive market

• Motive of self-interest - sells their wares to the highest bidder, while negotiating the lowest price for their purchases

• Competition - force of competitive pressure keeps prices low, ensuring that society provide gds and services most efficiently

• System of markets and prices - relies on an efficient market in which to sell goods and services, meaning that buyers and sellers have equal access to the same information

• Limited government - ensures that the markets are open and working, making sure that no one is manipulating the markets and that everyone has equal access to information.

Planned economy - where central government makes all economic decisions, and does NOT rely of the laws of supply and demand that operate in a market economy. (government or a collective owns the land and means of production)

• Creates a central economic plan to set economic and societal goals, allocating all resources according to the plan, trying to use all resources in the most efficient way possible

• Owns monopoly business, meaning that there is no domestic competition in the sectors e.g. finance, utilities and automotive

Mixed economy - system combining both planned and market economies

1. Protects private property

2. Allows free market and the laws of supply and demand to determine prices

3. Driven by motivation of self-interest

• Allow central government to safeguard people and it' market, large role in military, national transportation and international trade

Compare the strengths and weaknesses of each economic system

• Market - A market economy promotes competition and innovation, leading to efficient resource allocation and consumer choice; however, it can also result in income inequality and may fail to provide public goods.

• Mixed -

  A mixed economy combines elements of both market and planned economies, allowing for a balance of private enterprise and government intervention.

  Strengths:

  • Flexibility to adapt to changing economic conditions.

  • Government can intervene to correct market failures and provide public goods.

  • Encourages innovation through competition while ensuring social welfare.

  Weaknesses:

  • Potential for government overreach, leading to inefficiencies.

  • Conflicts may arise between private and public interests.

  • Can lead to unequal distribution of wealth if not regulated properly.

• Planned- economy could exacerbate these issues, as it may prioritize state control over individual freedoms, stifling innovation and competition.

• Demand and Supply

  Define demand - quantity of a good or service that consumers are willing and able to buy at each price in a particular point in time

  Describe law of demand - the inverse relationship between the price of a product and the quantity of the product demanded

  Describe the effect of changes in price on quantity demanded i.e. expansion or contraction of demand - changes in price will cause for there to be a movement along the demand curve (expansion = decrease in price, contraction = increase in price)

  Describe the effect of changes in non-price factors on quantity demanded i.e. increase or decrease in demand - change in non-price factors will cause for there to be a shift in the quantity of the demanded of the goods at every price (rightward = increase in demand, leftward = decrease in demand)

   

  Define supply - quantity of a good or service that suppliers are willing and able to sell at each price and particular point in time.

  Describe law of supply - the appositive relationship between the price of a good and the quantity supplied of that good

  Describe the effect of changes in price on quantity supplied i.e. expansion or contraction of supply - changes in prices will cause for there to be an expansion along the supply curve

  Describe the effect of changes in non-price factors on quantity supplied i.e. increase or decrease in supply - change in non-price factors will cause for there to be a shift in the quantity of the supplied goods at every price (rightward - increase, leftward - decrease)

   

  Define market equilibrium - the state in which there is no tendency for either demand or supply to change, quantity demanded being equal to quantity supplied

  Explain and demonstrate concept of market clearing: shortages and surpluses - the price mechanisms, which is the force of demand and supply interacting to determine the price of a good and service, thus clearing the market

  Explain and demonstrate effects of changes in demand or supply on market equilibrium - when there is an increase in demand, the demand curve shifts to the right, leading to a higher equilibrium price and quantity, whereas a decrease in demand shifts the curve to the left, causing a lower equilibrium price and quantity. Similarly, an increase in supply shifts the supply curve to the right, resulting in a lower equilibrium price and a higher quantity, while a decrease in supply shifts the curve to the left, leading to a higher equilibrium price and lower quantity.