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37 Cards in this Set

  • Front
  • Back
Positive Economics
Based on scientific observations use reason, logic and empiricism
Normative Economics
Includes value judgements in reasoning
Economic analysis focuses on
Positive economics. Because it includes statements that can be tested.
Ceteris paribus
Assume that most values remain unchanged. Allows to test one facet of theory. 'Simplifies'
Economic agents
Consumers & producers
Deductive Analysis
Based on general observation to broad generalisations
Historical method analysis
Understands institutions by tracing evolutions from their origins in the past
Statistical Induction analysis
Analysis of numerical data, to develop quantitive knowledge.
Causation
When evidence proves a causal relationship between events
Association
Being together does not necessitate a relationship
What to Produce / Market?
Produce (Supply) products & services for which their are willing buyers.
Market price
Signals to producers what to produce
How are Goods and Services produced?
Labour and other inputs (capital) are combined in proportions that minimise cost per unit.
Where to produce?
Most countries have specific areas where production factors dictates production location.
Utility
Usefulness. Can diminish as you consume more (water) called Marginal Utility
Scarcity
How fixed resources are allocated
Free Goods
Goods with no opportunity costs. (Maybe Air?)
Opportunity cost
Cost of any activity measured in terms of the benefit from the best alternbative forgone
Economic Pie
Economy has a finite amount of production, income, resources and wealth.
Resources
land, labour and capital
Production Possibilities Frontier
Maximum output level for 2 goods when all resources used effectievly and opportunity costs involved in production
Demand (Law of Demand)
More of a good will be demanded at a lower price ceteris paribus.
Change in demand
Due to factors such as fashion, consumer income levels. Shifts demand curve to right
Substitute goods
The higher the price of substitutues the higher the demand for the original good.
Complementary goods
As price for complements rise, demand for complement and original falls
Income
As people's income rises demand for goods rise (ex inferior goods)
Why does Demand Curve slope downward?
When price increases consumer affordability decreases
People are more likely to buy substitutes as prices increase.
Supply Curve (Law of Supply)
There is a direct relationship between the price of goods & services and what producers offer for sale, certris paribus.
Why does supply curve slope upwards?
Profitiability at higher prices.

Rising costs of production but capacity fixed.

New market entrants
Movement along supply curve
Price changes shift along curve. All other shift the curve itself.
Determinants of Supply
1. Costs of production
2. Substitute goods in supply
3. Nature & random shocks
4. Goods in joint supply
5. Expectations of future prices
Price elasticity of Demand (EPD)
Measures the proporionate change in quantity consumed for a specified proportionate change in price
Demand Elastic (Responsive)
Responds to price changes.
- Availability of subsitutes
- Uses large portion of budget
Demand Inelastic
Does not respond to price changes
- Necessity goods
- Addictive goods
Elasticity and Time Effect
Time generally makes goods elastic over long run as copnsumers can change demand patterns.
Demand Curve variables
Quatity demaned at various prices.
Other variables are, Income, Tastes & preferences, prices of other goods and income distribution for aggregate demand.
Income elasticity
EID = proportionate change in quanitity /proportionate change in income