Define PPF
The various combinations of two products that can be produced when all available resources are being fully and efficiently employed.
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What does being inside the curve mean?
Productive inefficiency.
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Define allocative efficiency
When all available resources are used to produce the combination of goods and services that match peoples tastes and preferences.
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Why does allocative efficiency not always optimise social welfare?
Depends on the distribution of income and value judgements.
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What is the difference between a positive and normative statement?
Positive statement can be tested whereas a normative involves opinions.
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Describe each FOP.
Land, Labour, Enterprise, Capital
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Define economic growth
The increase in the POTENTIAL level of real output the economy produces over a period of time.
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What is the entrepreneurs role in FOP?
Decides what to produce, how to produce and target market.
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What is the 'law' of demand?
An inverse relationship between price and quantity demanded.
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What are the factors that effect demand? Give 3.
Price of subsitutes, price of complements, income, fashion, population size, advertising.
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What determines if a good is an 'inferior good'?
As income increases demand decreases (neg number on IED)
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What is elasticity of demand?
The proportionate responsiveness of demand to a change in price.
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What is an elastic good? Give examples.
A small change in price leads to a large change in demand
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What determines elasticity of demand?
How many subsititutes, the percentage of income, necessities or luxuries, time
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What could you tell about a product with an IED of +2.5
It is a normal good, but it is elastic.
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What are the 5 possible conclusions to draw from and XPED calculation?
Strong complements; Weak complements, strong subsititutes, weak substitutes, no relationship
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What are the main conditions of supply?
Wage costs, raw material costs, interest rates, technical progress, taxes/subsidies.
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Explain the effect of a rise in wage costs of bakers on the supply curve for bread.
Shifts left. Less produced as it is more expensive, less profit to be made in that market so suppliers switch.
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What factors effect the PES?
Length of production period, spare capacity, stock levels, switching beween alternative methods of production, time, size of market.
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What is equilibrium?
Demand and supply agree at a price and output, no excess demand or surplus.
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What is composite demand?
Demand for a good that has multiple uses.
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What is joint demand?
The demand between two interdependent goods. Eg printers and ink.
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Define derived demand.
Demand for a product that originates from demand from another product.
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What is the meaning of labour productivity?
The amount of goods/services that a worker produces in a given amount of time.
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What is the difference between specialisation and division of labour
Specialisation is when a firm or economy focuses on producing one type of good/services, whereas division of labour is when businesses split up the task of producing a good/service between workers who become experts at their task.
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Why is it necessary to have money as a medium of exchange?
To exchange goods and services in order to survive and trade by setting the value of goods.
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What is the difference between the short and long run?
In the short run at least one factor of production is fixed whereas in the long run all factors of production are variable.
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What shape is the ATC curve?
It is likely to be U-shaped.
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What are increasing marginal returns?
Each extra factor of production that is added, the marginal output increases as
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What are diminishing marginal returns and why do they occur?
The marginal output decreases as more VARIABLE factors of production overcrowd the FIXED fop and there is less efficiency.
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What is the difference between ATC and TC?
ATC is the cost per item, TC is the entire cost to produce all items.
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What is the relationship between EOS, DOS and the shape of the LRATC curve?
The downward slope is from EOS as the firm receives more benefits. The upward slope is when the firm begins to become too large and DOS set in.
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Other cards in this set

Card 2


What does being inside the curve mean?


Productive inefficiency.

Card 3


Define allocative efficiency


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Card 4


Why does allocative efficiency not always optimise social welfare?


Preview of the front of card 4

Card 5


What is the difference between a positive and normative statement?


Preview of the front of card 5
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