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70 Cards in this Set
- Front
- Back
- 3rd side (hint)
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The basic economic problem |
Resources are scarce so we need to allocate it because demand is infinite |
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Opportunity cost |
The cost of the next best alternative forgone when a choice is made |
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Positive statement |
A fact that can be proved or disproved |
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Normative statement |
They contain value judgements which are subjective |
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Ceteris paribus |
All other things being equal |
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Economic agents |
Consumer, producer and the government |
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Factors of production |
Capital, enterprise, land and Labour (CELL) |
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Free goods |
Goods that have no opportunity cost associated with their use because they are not scarce |
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Sustainable resources |
A product that meets todays society without compromising the needs of future generations |
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PPF |
The different combinations of economic goods which an economy can produce if all resources are fully and efficiently employed |
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A shift in the PPF curve |
Change in quality or quantity of CELL: capital, enterprise, Labour, land |
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Specialisation |
A system where economic units concentrate on producing select goods and trade their surplus |
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Division of labour |
The specialisation of workers into performing a narrow range of tasks |
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Division of labour(Adam Smith) |
Advantages: production line is much more efficient, no confusion towards the job, higher output of production, less wastage of materials, lower cost of production.
Disadvantages: need more workers therefore more expensive, if manufacturing process changes then employees need to be trained or find new employees, it's repetitive therefore boring, it de-skills workers in other areas as they are only practising one skill |
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Free market economy (Adam Smith) |
Resources are allocated through market forces of demand and supply working through the price mechanism |
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Free market economy (features) |
Advantages: lower taxation, wealthy individuals, increase entrepeneurship which leads to higher competition and innovation, more choice, variety and consumer control, responds to changes in demand very quickly, efficiency Disadvantages: no welfare/health care, uneven distribution of income, more expensive education, monopolies form more easily, unemployment, more effects on the environment |
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Demerit good |
A good which has costs that people do not realise or choose to ignore |
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Merit goods |
A good that people do not realise the true value of |
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Public goods |
Those goods that have non-rivalry and non-excludability in their consumption |
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Command economy (Karl Marx) |
Where there is public ownership of resources that are allocated by the government |
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Mixed economy (John Keynes) |
An economy where both the free market mechanism and the government planning process allocates a significant proportion of resources |
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Command economy (features) |
Advantages: much less inequality, government intervention to stop external costs, government subsidising, less unemployment.
Disadvantages: the price mechanism can't operate so markets may suffer from shortages and surpluses leading to an inefficient allocation of resources, no competition leads to inefficiency so productivity is low, less choice, lower living standards |
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The invisible hand (Adam Smith) |
In the free market, resources would be allocated by an 'invisible hand' |
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Demand |
The quantity of a good or service that a consumer is willing and able to buy at a given price in a given time period |
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Movement in demand |
The only thing that causes a movement is a change in price of the product |
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Factors that shift the demand curve |
Population Advertising Substitute's price Income Fashion/trends Interest rates Complement's price |
(PASIFIC) |
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Supply |
The quantity of goods or services that produces are willing and able to sell at any given price over a given time period |
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Factors that shift the supply curve |
Productivity Indirect tax No. Of firms Technology Subsidy Weather Costs of production |
(PINTSWC) |
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Market |
Where consumers and producers come into contact with each other to exchange goods and services |
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Revenue |
Price * quantity |
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Inter relationships in markets |
Joint demand= complements Competitive demand= substitutes Derived demand= one good produces another Joint supply= supplying one results in supply of another |
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Marginal utility |
The extra utility gained from consuming one or more unit of a product |
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Incentive |
Increase movement along the supply curve |
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Rationing |
Decrease movement along the demand curve |
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Price elasticity of demand (PED) |
Measures the responsiveness of quantity demanded of a product to a change in its own price |
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(PED) EQUATION |
%Change in quantity demanded/%change in price |
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PED has an inverse relationship |
As price falls, demand increases |
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PED perfectly inelastic |
(PED is 0) a change in price will lead to no change in quantity demanded |
Vertical line |
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PED Relatively inelastic |
(PED is between 0 and -1) will only fall in demand slightly |
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PED unitary elasticity |
(PED is -1) it's an asymptote curve |
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PED relatively elastic |
(PED is between -1 and -infinity) elastic demand curve |
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PED perfectly price elastic |
(When PED is infinity) it's a horizontal line |
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The invisible hand (Adam Smith) |
Allocating efficiently Rationing Signaling Incentives |
ARSI |
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Income elasticity of demand (YED) |
Measures the responsiveness of the quantity demanded of a good to a change in real income |
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Normal good |
A good with a positive income elasticity of demand. As income rises, so too does demand for the good |
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YED information |
If the sign is negative= inferior good because as the income increases then demand falls If the sign is positive= normal good because as the income increases then demand also increases |
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Specific tax |
A tax levied on volume. |
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Consumer surplus |
The difference between the price a consumer is willing to pay for and the market price |
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Producer surplus |
The difference between the price a producer is willing to sell a product for and the market price |
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Indirect tax |
A tax imposed by a government on producers in the sense it is only paid when the product is purchased |
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Ad valoreum |
A tax levied as a percentage on the value of a good or service |
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Subsidy |
A grant given which lowers the costs for an individual firm, usually designed to encourage production or consumption of a good |
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Subsidies information |
Advantage: increase output, prices fall Disadvantage: opportunity cost, not all is passed on to consumer, inefficient firms |
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Market failure |
When resources are not allocated efficiently and as such are not allocated in a manner optimal for society |
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Private costs |
Costs which are directly incurred by individual consumers and producers within the transaction when they consume or produce a good |
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External costs |
Costs experienced by third party outside of the transaction who are not involved in the consumption or production of a good |
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Externalities |
They are outside of the market mechanism, they are external to the normal costs/ benefits of producers/ consumers |
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Causes of market failure |
Externalities Under provision of public goods Information gaps |
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How the government reduces consumption of de-merit goods |
Tradeable permits Regulation Indirect tax Property rights Subsidy alternatives |
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Permit |
Given by the government to producers as a licence to pollute up to a specified limit |
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Information on tradeable permits |
Positive: incentive to reduce pollution, reduces level of pollution to social optimum level therefore increase welfare, market based solution, efficient and equitable for firms
Disadvantage: deciding level of pollution, high admin costs and difficult to enforce, fines may not be strict enough, geographical distribution, need for international cooperation |
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External benefits |
Benefits experienced by third party outside of the transaction who are not involved in the consumption or production of a good |
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How the government increases consumption from QFM to QSOL |
Subsidise Direct provision |
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Minimum price |
A price below which it is illegal to trade |
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Maximum price |
A price above which it is illegal to trade |
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Asymmetric information |
Where one party in an economic transaction has more knowledge about the product than the other |
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Government failure |
Occurs when government intervene to correct market failure causing an inefficient use of resources resulting in a net welfare loss |
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Assumptions |
Consumers = maximising utility Firms = maximising profits Governments = maximising welfare |
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Goods |
Normal goods= luxury goods Inferior goods= staple goods |
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Normal good |
A good that will be more acwu |
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