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What is the basic economic problem?
Resources are scarce and cannot meet out infinite needs
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Opportunity cost
The loss of alternatives when one alternative is chosen
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Production possibility
The maximum output that can be produced from the available scarce resources
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The law of diminishing returns
The more you produce, benefits are reduced
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Measure of output produced per time period per unit of a factor of production
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Capital productivity
Output produced per £ of capital equipment per hour
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Labour productivity
Output per worker per period of time
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The quantity of a good or service that consumers want and are willing to pay for in a given period of time
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Unusual demand goods
Giffen, Veblen, Quality, Speculative
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Speculative goods
Buyers associate high prices with large speculative gains in the future.
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Quality goods
Consumers assume a higher priced good must be of higher quality.
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Veblen goods
A good of ostentatiousness. Demand increases as price increases because of its exclusive mature and appeal as a status symbol.
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Griffin goods
As the price increases, the demand of a product will increase if the income effect is greater than the substitution effect.
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The quantity of a product that firms are willing to offer for sale at any given price in any given time period.
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Supply schedule
The quantity supplied for certain prices
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Equilibrium price
When there is no incentive to change. Supply = Demand. I.e. Market clearing price.
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Normal goods
As income rises so will demand
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Inferior goods
As income rises demand will fall
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Derived demand
If the demand for the final product increases, so will demand for the raw material
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Joint supply
If a product can be put to more than one use simultaneously. E.g. Cows = leather and meat.
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Composite demand
If a product has more than one use. E.g. Land for a building or a park.
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Price elasticity of demand
The effect an increase or decrease in price has on demand. (% change in the quantity demanded) / (% change in price)
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Elasticity= - infinity
Perfectly elastic
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Elasticity= -1
Unitary. Total revenue doesn't change.
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Elasticity= 0
Perfectly inelastic
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Price elasticity of supply
The effect an increase or decrease in price has on supply. (% change in quantity supplied) / (% change in price)
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Cross elasticity of demand
The responsiveness of the demand for one product in reaction to a change in the price of another product. (% change in quantity demanded of good A) / (% change in the price of good B)
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Income elasticity of demand
The responsiveness of the demand for a product to changes in the general level of income. (% change in quantity demanded) / (% change in income)
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The price mechanisms 3 functions
Signalling, Rationing, Incentive.
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Marginal cost
The extra cost created by an extra unit of output
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Marginal benefit
The extra benefit created by an extra unit of output
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Six main reasons of market failure
Monopoly, imperfect knowledge, externalities, inequality, factor immobility, missing markets
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When a firm has a 25% or more share of the market.
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When there are large inequalities in the distribution of income/wealth.
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Factor immobility
When the factors of production are not easily or quickly movable from one use to another use.
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Imperfect knowledge
When either firms or consumers don't have all the relevant information to help them make decisions. Can lead to a misallocation of scarce resources.
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Spill over effects arising from production and consumption.
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Missing markets
When a market under or over provides a product.
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Marginal social benefit
Marginal private benefit + marginal external benefit
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Marginal social cost
Marginal private cost + marginal external cost
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Public goods
Non rival and non excludable.
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Non rival
One persons consumption does not rival another persons consumption
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Non excludable
You cannot force consumers to pay for the goods they consume as consumption cannot be easily measured. Leads to "free riders".
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Private goods
Rival and excludable
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One persons consumption rivals another persons consumption
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Consumption can be easily monitored and measured so you can force consumers to pay for the good.
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Card 2


Opportunity cost


The loss of alternatives when one alternative is chosen

Card 3


Production possibility


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Card 4


The law of diminishing returns


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