ECONOMICS

  • Created by: mrmendes
  • Created on: 17-11-18 14:45
Ceteris paribus
This assumption is that other things are being held equal or constant, so nothing else changes.
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Positive statements
Positive statements are objective. They can be tested with factual evidence, and can consequently be rejected or accepted.
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Normative statements
Normative statements are based on value judgements. These are subjective and based on opinion rather than factual evidence.
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Economic activity
Producing goods and services which satisfy consumer needs and wants.
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Economic questions
What is to be produced? How should it be produced? Who will benefit from the goods and services produced?
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Economic problem
The basic economic problem is scarcity. Wants are unlimited and resources are finite, so choices have to be made. Resources have to be used and distributed optimally.
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Factors of production
These are capital, enterprise, land and labour. (cell)
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Opportunity cost
The opportunity cost of a choice is the value of the next best alternative forgone. In the above example, the opportunity cost of choosing the crisps is the chocolate bar.
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Economic agents
Consumers, producers and governments
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Production possibility diagrams
PPFs depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed. PPF curves can show the opportunity cost of using the scarce resources
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Trade-off
A balance achieved between two desirable but incompatible features; a compromise.
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The law of diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
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Capital goods
Goods which can be used to produce other goods, such as machinery.
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Consumer goods
Goods which cannot be used to produce other goods, such as clothing.
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Productively efficient
Resources are being used to their productive potential so it is efficient.
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Allocative efficiency
When no one can be made better off without making someone else worse off. Another name for this is Pareto efficiency.
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Demand
The quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time.
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Expansion
Moving downwards on the graph
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Contraction
Moving upwards on the graph
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Diminishing marginal utility
The first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts.
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Price elasticity of demand
The price elasticity of demand is the responsiveness of a change in demand to a change in price.
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Price inelastic
Demand that is relatively unresponsive to a change in price. <1.
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Price elastic
Very responsive to a change in price. In other words, the change in price leads to an even bigger change in demand. >1.
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Unitary elastic
Demand which is equal to the change in price. = 1.
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Perfectly inelastic
Demand which does not change when price changes. = 0
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Perfectly elastic
Demand which falls to zero when price changes. = infinity.
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Subsidy
A payment from the government to firms to encourage the production of a good and to lower their average costs. It has the opposite effect of a tax because it increases supply.
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Total revenue
Equal to average price times quantity sold. TR= P x Q
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Income elasticity of demand
Income elasticity of demand is the responsiveness of a change in demand to a change in income.
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Inferior goods
Inferior goods are those which see a fall in demand as income increases. YED < 0.
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Normal goods
Demand increases as income increases. YED >0.
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Luxury goods
An increase in income causes an even bigger increase in demand. YED > 1.
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Cross elasticity of demand
Cross elasticity of demand is the responsiveness of a change in demand of one good, X, to a change in price of another good, Y.
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Complements
Complementary goods have a negative XED. If one good becomes more expensive, the quantity demanded for both goods will fall.
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Substitues
Substitutes can replace another good, so the XED is positive
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Unrelated goods
Unrelated goods have a XED equal to zero.
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Supply
Supply is the quantity of a good or service that a producer is able and willing to supply at a given price during a given period of time.
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Price elasticity of supply
The price elasticity of supply is the responsiveness of a change in supply to a change in price.
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Equilibrium
This is when supply meets demand. On the diagram, this is shown by P1 and Q1. At market equilibrium, price has no tendency to change, and it is known as the market clearing price.
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Excess demand and supply
When demand or supply is greater than each other
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Derived demand
This is when the demand for one good is linked to the demand for a related good.
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Composite demand
This is when the good demanded has more than one use. An example could be milk. Assuming there is a fixed supply of milk, an increase in the demand for cheese will mean that more cheese is supplied, and therefore less butter can be supplied.
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Joint demand
This is when goods are bought together
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Joint supply
This is when increasing the supply of one good causes an increase or decrease in the supply of another good.
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The price mechanism
The manner in which the prices of goods or services affect the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyers and sellers who negotiate prices.
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Adam Smith
The invisible hand of the market
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Rationing
When there are scarce resources, price increases due to the excess of demand. The increase in price discourages demand and consequently rations resources.
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Incentive
This encourages a change in behaviour of a consumer or producer.
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Signalling
The price changes show where resources are needed in the market. A high price signals firms to enter the market because it is profitable. However, this encourages consumers to reduce demand and therefore leave the market. This shifts demand & supply
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Market failure
Whenever a market leads to a misallocation of resources.
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Misallocation of resources
When resources are not allocated to the best interests of society. There could be more output in the form of goods and services if the resources were used in a different way.
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Externalities
The cost or benefit a third party receives from an economic transaction outside of the market mechanism. Negative externalities are caused by the consumption of demerit goods, and positive externalities are caused by the consumption of merit goods
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Under-provision of public goods
Public goods are non-excludable and non-rival, and they are underprovided in a free market because of the free-rider problem.
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Information gaps
It is assumed that consumers and producers have perfect information when making economic decisions. However, this is rarely the case, and this imperfect information
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Monopolies
Since the consumer has very little choice where to buy the goods and services offered by a monopoly, they are often overcharged. This leads to the underconsumption of the good or service since consumer needs and wants are not fully met.
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Inequalities in the distribution of income and wealth
There is an un-equitable distribution in income and wealth. Income refers to a flow of money, whilst wealth refers to a stock of assets
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Complete market failure
When there is a missing market. The market does not supply the products at all.
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Partial market failure
When the market produces a good, but it is the wrong quantity or the wrong price.
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Other cards in this set

Card 2

Front

Positive statements are objective. They can be tested with factual evidence, and can consequently be rejected or accepted.

Back

Positive statements

Card 3

Front

Normative statements are based on value judgements. These are subjective and based on opinion rather than factual evidence.

Back

Preview of the back of card 3

Card 4

Front

Producing goods and services which satisfy consumer needs and wants.

Back

Preview of the back of card 4

Card 5

Front

What is to be produced? How should it be produced? Who will benefit from the goods and services produced?

Back

Preview of the back of card 5
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