Economics: Unit 1

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  • Created by: Nicole
  • Created on: 09-02-13 22:49
What is the basic economic problem?
Scarce resources but unlimited wants faced by producers, consumer and government
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What are the factors of production?
Natural Resources: Land . Human Resources: Labour . Man-made: Capital . Organisational: Enterprise
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What are the rewards of production:
Rent .Wage/Salary. Profit .Interest
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How can goods and services output be increased?
Increase in quantity of resources. Improvement of quality of resources . Change in technology
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3 Questions asked before producing a good or service?
What to produce. How to produce. Who to produce for.
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What is an opportunity cost?
Opportunity cost measures the cost of any choice in terms of the next best alternative forgone.
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What is a renewable resources?
A never ending resources that is either unlimited or has a short life span. Non-renewable resource: Takes a long time to make or is limited.
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What meant by the term sustainable?
Preserving today’s resources for future generations.
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What is the production possibility frontier?
All the possible combinations of the output of two goods that a country can produces with all resources fully and efficiently employed (given a state of technology).
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What is Price mechanism?
The process in a free market economy to which prices to paid is determined by buyer need and is perpendicular to demand and the suppliers ability to provide a quality good or service and compete with other producers supply.
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What is specialisation?
When workers specialise in a certain task. Countries can also specialize in goods or services.
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What is Division of labour?
Splitting up the production process into a number of individual operation making each work specialised.
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Advantages of division of labour?
Efficient Training cost low Workers concentrate Time wasted
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Disdvantages of division of labour?
Difficultly finding another job Sickness or sickies Replace by machine Interdependence of production
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Advantages and disadvantages of a free market?
Efficient and motivated with wide range of goods and services due to competition. Unequal distribution of income no social services.
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Advantages and disadvantages of a centrally planned market?
Support from state with controlled society and even distribution of goods and services. Red tape and lack of incentive and competition. Skilled workers often relocate.
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Advantages and disadvantages of a mixed market?
Exploitation from private owners decrease and government owned services. Wastage of resources and relocation of businesses due to taxes.
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Actors of free market?
Household. Firms. Government. Financial
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Objectives of macro-economic policy in UK?
Controlling inflation. Growth . Balance import and export . Reduce employment
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What is a positive statement?
It is a factual based model technically based on theories and scientific equations.
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What is a normative statement
It describes what ought to be.
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What causes a Movement along Demand Curve?
Change in price
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PED
Measure responsiveness of demand to changes in price. %Qd / %P
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Explanation of PED?
> 1 means elastic demand which reacts greater than price change = 1 means unitary price change is exactly the change as demand. < 1 means inelastic demand to a change in price.
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YED
Measure responsiveness of demand to changes in income. %Qd / %Y
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Explanation of YED?
> 1 is a normal good (luxury) and +. (both price and demand increase) < 1 is an inferior good and - (When one goes down so another goes up)
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XED
Responsiveness of demand to a certain product to the price change of another product. %Qd of A / %P of B
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Explanation of XED?
Complementary if inelastic. - Substituted if elastic. +
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PES
Measure responsiveness of supply to the change in price.
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Explanation of PES?
However supply is inelastic when limiting factor.
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Price signalling?
Incentive to enter market when price is high. Incentive to exit market when price is low.
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Elasticity of the demand curve
Elastic when 1 < PED < ∞. Inelastic when 0 < PED < 1. Unitary when PED = 1.
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Determinants of Demand
Population. Income. Related (Complements and substitute). Advertisement. Tastes and fashion. Expected price Change
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Determinants of Supply
Cost of Inputs. Related (Joint supply and composite demand). Expected price change. Weather. Subsidies and Taxes
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What is consumer surplus?
The difference between the value to buyers and what they actually pay.
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What is producer surplus?
The difference between the market price which the firm receives and price which it is prepared to supply at.
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What is Indirect tax?
Imposed on producers by the government.
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What is specific tax?
Where the tax per a unit is a fixed amount.
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What is Ad volerem?
Tax is a percentage of the cost of supply and is a value added tax
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What is Living wage?
The minimum recommended wage paid by the employer to the individual earned by the hour and set according to the location of the employee.
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What is minimum wage?
The legal wage for an individual earned by the hour and set by the government nationally. (Disadvantages is firm’s reduce profit therefore reduce investment. It creates unemployment)
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Shifts in Labour demand (firms) curve?
- Increase labour productivity (Training) - Price of substitute input (machinery) - Higher demand of product
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Elasticity of Labour demand (firms) curve?
- Labour cost % of total cost - Ease and cost of factor substitution - Price elastic of demand for product then demand is elastic
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Elasticity of Labour supply (individuals) curve?
- Real wage rate on offer in industry - Overtime opportunity -Substitute occupations -Barriers to entry -Improvements in occupation mobility -Non-monetary characteristics of jobs -Net migration of labour
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Other factors of labour supply?
Trade unions and government affects wages.
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What is wage determination?
 In a free market wages of employees are determined by the supply and demand of labour in a certain industry.  The wage rate adjusts to bring about a equilibrium, It is price mechanism in the labour market.
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What is the labour force?
Represents everyone who is in work or who is seeking work at any given wage rate.
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What is the supply of labour dependent on?
Depends on the number of people willing and able to work and the number of hours they are willing to work.
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Demand for labour equation?
Demand for labour= Marginal product * Marginal revenue
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When market failure occur?
 Lack of economic efficiency – Productive efficiency (minimum on AC curve) – Allocative efficiency (producing goods that consumers want)  Market if not equitable – Uneven distribution of factors of production
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Positive externality?
Positive externalities- health care, education. Under produced and under consumed. Subsidies used in order to reduce cost for society
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Negative externality?
(Negative externalities- alcohol. Overproduced and over consumed. Tax introduced to increase cost.
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Imperfect information?
- Asymmetric information when one party knows more than the other. - Isometric information is where neither party knows the information
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Increasing information supply?
- Government forcing firms to produce accurate information. - Public broadcasts - Law passed to force public companies to be transparent - Regulate advertisement
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Increasing information demand?
- Provide information at low cost - Promote pressure groups - Promoting education may increase demand for information
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What is a public good?
- Non excludable: Provided for one it is provided for all - Non rival: consumption of one does not prevent anyone else use it
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What is a quasi good?
- Possess some of the qualities of public goods but one all e.g. beaches & public park.
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What is a merit good?
- Positive externalities - Underproduced and Under consumed
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What is a monopoly?
A monopoly is when 40% of market owned by one company/. - Good as re-invest into research and have innovative products. - Bad as lack of production and higher prices
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Geographical immobility?
Geographical immobility refers to the barrier people moving from one area to another to find work: - due to family and social ties - Financial cost moving home - Regional difference in house prices and regional costs differ greatly - Reform housing
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Occupational immobility?
Occupation immobility is barrier to the mobility of factors of production between different sectors. - Not specialised or do not have training - No experience - Invest in training schemes for unemployed - Subsidise the provision of vocational traini
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Distribution of income?
Unequal distribution of income - Homelessness
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What is price volatility?
Price Volatility: how quickly the price fluctuates due to supply and demand.
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Factors of price volatility?
- Hedging - Climate change - Civil unrest - Population - Land grabs - Floods, fires and drought - Intensive farming - Technology - Cost of factors of production - Price
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What is an index?
Index: measure of monthly change in international prices of a basket of food commodities: - Cereal - Dairy - Oil/fat - Meat - Sugar
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Demand factors of price volatility?
Demand is cyclical (cobweb) Peak demand and seasonal changes Speculative demand Low PED .
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Supply Factors of price volatility?
Unstable conditions of supply Artificial limits (export quotas) Change in actual vs planned supply Low PES
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Consequences in price volatility?
Risk - Income profits unpredictable - Little investment capital wise Poverty and resources allocation - Fall in price causes deep poverty - Unemployment and wasting of resources - Incentives to switch crop - Steep rise may lead to malnutrition
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Attempts to stabilize?
Price control - Price floor to protect farmer - Price ceiling to protect consumer Trade Controls - Changes in import tariffs - Export quotas . Commodity price stabilisation schemes - Buffer stocks
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Why intervene?
Prices fluctuate - Farm incomes fluctuate - Consumer has to pay high prices - Predictions are often difficult to make - This may discourage farmers Farm incomes rise less quickly Lack of economic power Traditional rural ways may be destroye
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Why farmers need help?
Farm incomes decrease as SUPPLY goes up as the price decreases despite the small income in quantity sold. Small shift in demand causes large shift in price. Small decrease in supply causes bigger shift in price. Short run price instability mark pri
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Problem with intervention?
- Storage cost - Goods maybe perishable - Inadequate supply if couple of bad years - Taxes must be raised to finance this
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What is Guaranteed Price Scheme?
The government guarantees a price and therefore farmers will still produce and the government will pay a subsidy between market price and agreed price.
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What is Income support schemes?
A scheme which keeps the price that farmers receive stable.
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What is a Set aside policy?
EU farmers are paid to produce nothing on their land.
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What is European common agriculture policy?
Ensure supplies of food to the consumer within Europe and ensure adequate return to farmer by system taxes on imported foodstuffs.
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Current Account
Balance of trade in goods of services, net income and net transfers.
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What is government failure?
When government intervention leads to a misallocation of resources.
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Card 4

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Card 5

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