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69 Cards in this Set
- Front
- Back
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What is the 'Economic Problem' |
To satisfy mans unlimited wants with limited resources. Scarcity |
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What is 'Scarcity' |
Mans wants are unlimited, resources are limited. Not enough for everyone therefore scarcity. |
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What is a 'Basic need' |
The essentials to living. Food, water, shelter, clothing. |
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What is a 'Free resource' |
A resource that is provided by nature. Example: Sunlight, wind, the ocean. Unlimited in supply |
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What is a 'Renewable resource' |
A resource that can be increased through man's effort. Example: Wood |
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What is a 'Non-renewable resource' |
A resource that cannot be increased through man's effort. Example: Fossil fuel |
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What is 'opportunity cost' |
The next best alternative forgone. The cost of picking one option over another. |
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What is the opportunity cost of consumers? |
Missing out on what they choose not to buy. |
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What is the opportunity cost of producers? |
There are 3 costs for producers. What to produce? How to produce? For whom to produce? |
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What is the opportunity cost of the government? |
Choosing what to spend their tax on. Example: Health care, Social welfare, Education. |
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What is 'division of labour' and 'specialisation'? |
The sharing of work. Having a worker become an expert at one specific task. |
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Advantages of 'Division of labour'? |
Cost efficient, Time efficient (less time to train workers, Makes complex products easier to manufacture |
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Disadvantages of 'Division of labour'? |
Boredom, Thorough Quality Control required, Potential unemployment as workers may not be able to transfer their skills to other jobs. |
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Limitations of 'Division of labour'? |
A task can only be broken down into so many steps. People may not want something that is mass-produced. |
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What is an 'Allocative mechanism' and what types are there? |
A system of how resources are allocated in an economy to battle scarcity. Market, Planned/Command, Mixed. |
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What is a 'Market Economy' and name two features. |
An economy where resources are allocated by the spending decisions of consumers. - Government has very restricted role - People are motivated for self-gain - Private ownership - Free enterprise - Rivalry between businesses - Decentralised Decision making |
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What is a 'Planned/Command Economy' and name two features. |
An economy where resources are allocated through a thorough planning process. - Main participants : Planners, Consumer, Workers - No motivation for self-gain, only work for your country - Public ownership, all factors of production besides labour are owned by Govt. |
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What is a 'Mixed Economy' and name two features. |
An economy where around 75% of decisions are made by consumers and the other 25% are made by the Govt. - Motivated for self gain - Govt. provides public goods and maintains law and order - Free enterprise - Rivalry between businesses - Consumer welfare. |
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How do you write a PPC essay? |
1. State economic problem 2. Therefore countries need to decide what to produce and how much of it to produce and in what combos. 3. Shown using PPC 4. Assumptions of PPC. Only 2 goods, 1 country, resources are fixed. 5. PPC graph. Show max amount of Good A and max of good B. If want max A then no B, vice versa. 6. Most efficient combination shown by two points, X and Y. To increase X you must decrease Y, and to increase Y you must decrease X. 7. Point W (outside of graph) shows what cannot be produced as not enough resources. 8. Point Z shows where most countries operate as they want Sustainable Developement. 9. Shifts in PPC. If new resource/tech for A is found then graph shift more A. Vice versa for B. 10. If new resource/tech for both then entire PPC will outward shift. If resource are depleted or tech is outdated, PPC go inwards. 11. Talk about if PPC is realistic in real world. |
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What is a 'Private good' |
A good consumed by people and not available to others. - Excludability. Others excluded from using good due to price - Rivalry. Consumption by one reduces availability for others. |
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What is a 'Public good' |
Good provided by state that private sectors will not produce because: - High Start up cost - Little to no profit - Non-excludable. Everyone can use you cannot stop them. - Non-rival. Consumption by one does not dimish the good for others. - Free riding. People can use without any contribution. |
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What is a 'Merit good' |
A good that is better for a person than the person may realise. Example: Education |
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What is a 'Demerit good' |
A good that is worse for a person that the person may realise. Example: Fast Food |
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What is a 'Market' |
A place/situation where sellers and buyers enter an exchange. |
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What is 'Demand' |
Quantities of a product that is person is willing to and able to afford at different price points. |
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What is 'Ceteris Paribus' |
In market demand, an assumption that other variables remain constant and only price changes. |
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What is the 'Law of demand' |
If price of a product increases, demand decreases. Vice versa. |
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What is the relationship between Demand and Price? |
A negative relationship. |
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What other factors affect Demand? |
- Change in income. For NORMAL GOODs increased income will lead to an increase in demand. Rightward shift. For INFERIOUR GOODs demand will decrease. Leftward shift. - Change in Taste/preferences - Change in expectation on future price - Change in population size - Price of related goods: - Substitutes - Compliments |
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What is 'Supply'? |
The quantity of a good that a firm is willing to supply in relation to its price. The aim of every firm is to maximise proft. |
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What is the 'Law of Supply'? |
Higher price = Larger quantity supplied. Lower price = lower quantity supplied |
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What is the relationship between Supply and Price? |
A positive relationship. |
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What are factors that affect 'Supply'? |
- Cost of production. Raw material, tax, subsidies, Joint supply. - Change in physical condition. Drought |
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What is 'Equilibrium price'? |
When the quantity demanded is equal to quantity supplied. A balance between demand and supply. |
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When does shortage occur? |
When demand is higher than supply. |
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When does surplus occur? |
When supply is higher than demand. |
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How does a market respond to surplus or shortage? |
It will drift towards equilibrium. |
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What do sellers do when there is a surplus? |
Get rid of their supply by lowering price or destroying it. |
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What do sellers do when there is a shortage? |
Have scope to raise price to increase profit. |
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What is 'Price elasticity of Demand'? |
A measure of how responsive a change in demand is to a change in price. |
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How is elasticity demand of a product calculated? |
Percentage change in demand / Percentage change in price |
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What does it mean if the PED of a good is within 1 to infinity? |
The demand is elastic. |
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What does it mean if the PED of a good is within 0 to 1? |
The demand is inelastic.Shops have scope to raise price. |
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What does it mean if the PED of a good is 1? |
The demand is unitary elastic. |
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What does it mean if the PED of a good is 0? |
The demand is perfectly inelastic. Consumers will buy the product regardless of its price. Example: Medicine |
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What does it mean if the PED of a good is infinite? |
The demand is perfectly elastic. People will only buy it at a certain price point. |
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What is 'Price elasticity of Supply' (PES)? |
A measure of how responsive supply is to a change in price. It is the relationship between percentage change in quantity supplied and the percentage change in price of a product. |
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How do you calculate Price elasticity of Supply (PES)? |
Percentage change in supply / Percentage change in price |
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What value of Price elasticity of Supply (PES) suggests the good is elastic? |
When PES is > 1 |
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What value of Price elasticity of Supply (PES) suggests the good is inelastic? |
When PES is < 1 |
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What factors affect Price elasticity of Supply (PES)? |
- Time to increase supply - Ease of storage - Cost of increasing supply. Less costly = more elastic. - External factors. Factors beyond the suppliers control. |
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What factors affect Price elasticity of Demand (PED)? |
- Range and attractiveness of substitutes. Number of subs, quality and accessibility of subs, how addicted they are to original product, strength of brand image. - Relative expense of a product. Rise in price of product means consumers real income decreases. - Time. In a short period, demand will not change while price is increasing (consumers unaware), PED Inelastic. In a long period, demand will change greatly in response to price change, PED elastic. |
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What is 'Cross Elasticity of Demand' (XED)? |
The responsiveness of a change in price in one product to a change in price of a related product. A measure of how price of one product changes in response to a change in price of a related product |
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How do you calculate 'Cross Elasticity of Demand' (XED)? |
Percentage change in price of Good A / Percentage change in price of Good B |
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Will a XED of a substitute be positive or negative? |
Positive. |
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Will a XED of a compliment be positive or negative? |
Negative. |
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What is Income elasticity of Demand (YED)? |
A measure of the responsiveness of the percentage change in Demand to a Percentage change in Income. |
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How do you calculate Income elasticity of Demand (YED)? |
Percentage change in Demand / Percentage change in Income |
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What does it mean if a products YED is between 0 and 1? |
The product is a normal good and is inelastic. |
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What does it mean if a products YED is greater than 1? |
The product is a luxury good and is elastic. |
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What does it mean if a products YED is less than 0? |
The product is an inferior good and is inelastic. |
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Why is Elasticity of Demand relevant? |
Helps understand: - How prices can be varied in the market. Example: Airline tickets more cheaper when bought early. Gym memberships cheaper for offpeak hours. - How consumers expenditure and the firms total revenue is affected. - How consumer expenditure responds to changes in price. - How firms revenue changes. |
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How to calculate the total expenditure of consumers and revenue of firms? |
Price x Quantity traded |
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How does PED affect tax decisions? |
The Govt. charges taxes on goods that are inelastic. If the price of a necessity good is increasing, the Govt. will tax less to ensure its price does not make it unaffordable. |
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How does PED affect revenue when exchange rates change? |
If an exporter is selling NZ goods in America while the NZ dollar rises against the US dollar, therefore making the NZ good more expensive to other countries, a good with an elastic PED will have a greatly falling revenue while a good with an inelastic PED will have little falling revenue. This is because higher price = lower quantity demand. Lower quantity of demand = less revenue as revenue = P x Q. |
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Why is Income elasticity of Demand relevant (YED)? |
It is important for planners within businesses and governments because: If YED of a good is > 1 than demand for the good will grow more rapidly than consumer income during periods of economic growth. However during recessions, firms may experience rapidly falling demand as consumer incomes are falling. If YED is negative, firms producing inferior goods will see demand for their product fall during economic growth, however they will see their demand increase during recession. |
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Why is Cross elasticity of Demand (XED) relevant? |
Firms are concerned with the impact that other rival pricing strategies will have on their own product. Substitutes have a positive XED. The higher the value, the more easy it is to get a substitute of the good. Firms are aware that rivals will cut prices to increase their own market share. Firms want people to not only buy one product, but a range of their compliments. XED will help identify a good that is most complementary and introduce a pricing strategy to increase revenue. |
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Why is Price elasticity of Supply (PES) relevant? |
If incomes rise then demand for normal goods rise. Price and quantity traded will also rise in response. If supply is elastic, then prices will not rise as much. If supply is inelastic, the price will rise greatly as it is hard to produce more of the product in response to the increasing demand. Firms have greater scope to raise prices if supply is inelastic. |
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Invisible hand? |
The market forces of demand and supply that push towards equilibrium. |
