Theme 1 Microeconomics - FULL THEME

What is scarcity?
When something is limited in supply and demand
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Value is a function of scarcity, what does this mean?
The scarcer the good; the higher the price
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What is an example of a scarce good?
Gold
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What is the economic problem?
What should be produced, how should the goods be produced and for who should the goods be produced.
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Name the factors of production
Land, labour, capital, enterprise
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Define a positive statement
An objective statement that can be backed up by facts
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What is a normative statement?
An opinion
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Define and give an example of opportunity cost
The next best alternative foregone; for example, work and leisure time.
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What is the opportunity cost of a free good?
Zero
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Define economic welfare
The benefit gained by individuals, firms or society in the production of goods and services
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What is a trade off?
The thing that's been given up in opportunity cost
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What is shown on a PPF?
Different combinations of output
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If a point is above the line on the PPF, what is this considered?
Unobtainable
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What can cause an inward shift on the PPF?
Natural disasters or civil war
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Define specialisation
Occurs when economic units such as individuals, firms or countries concentrate on producing specific goods or services.
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What is the division of labour?
Specialised use of workers within an organisation.
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What are the advantages of specialisation?
Efficient use of time, Technical economies of scale, means to exchange goods between the economic units, increased output
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What are the disadvantages of specialisation?
Work can become monotonous, limited by the size of the market, reduced flexibility and structural unemployment
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What does specialisation do to the PPF?
Shifts it outwards
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What does specialisation allow economic agents to do?
Reduce unit cost, improve quality, creates a USP, use technology
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What does money act as?
A medium of exchange, a store of value, a unit of account, a standard of defered payment
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What is the market mechanism?
Businesses supply what is demanded at a price they can profit, consumers demand at a price that they can afford
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What do free market stakeholders aim to maximise?
Consumers - welfare, producers - profit, owners of inputs - gain, government - benefits to society
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What are the free market characteristics?
Private sector ownership, free enterprise, limited government intervention.
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When does maximisation occur?
When an economic agent tries to obtain the most that they can from the economic activity.
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What are the objectives of firms?
Profit maximisation, profit satisficing, sales maximisation and growth,
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What does the demand curve show?
The relationship between price and quantity demanded
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Define a normal good
When price rises, demand falls
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What are the determinants of demand?
Price of the good, consumer income, prices of other goods and services, consumer tastes and fashions
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What is a substitute product?
An alternative to the original product
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What is a complementary product?
A product brought alongside a good or service
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What is marginal utility?
The extra satisfaction gained from consuming an additional unit of a good or service
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What happens to utility as consumption increases?
It declines
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What is the percentage change formula?
[ ( new-original ) / original ] x 100
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P.E.D shows what?
The responsiveness of demand to a change in price
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What is the P.E.D formula?
% change in QD / % change in P
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What are the price inelastic coefficients?
0
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What are the price elastic coefficients?
Above 1
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What are the factors that determine P.E.D?
Number of close substitutes, price of product in relation to total income, cost of substituting, brand loyalty, degree of necessity
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P.E.D can estimate what?
Price volatility, effects of a change in indirect tax, effects of a change in price on total revenue, price discrimination
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Normal goods have a ...... Y.E.D
Positive
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Inferior goods have a ...... Y.E.D
Negative
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What is the formula for Y.E.D?
% change in QD / % change in Y
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What are the determinants of Y.E.D?
Whether the good is a necessity or a luxury, the level of consumer income
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What happens to the Y.E.D of necessities as income goes up?
It moves closer to 0
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A luxury is income ....
Elastic
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What is the relevance of Y.E.D to firms?
Standards of living, economic cycle
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What happens to disposable incomes in a slump?
They decline
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What is X.E.D?
The responsiveness of demand for one good to a change in price for another.
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State the X.E.D formula
% change in QD of X / % change in P of Y
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What do the coefficients of X.E.D mean?
-1< 1 = price inelastic and below -1 and >1 = price elastic
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What are the determinants of X.E.D?
Whether the two products are: substitutes, complements or have no relation
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A substitute has a ...... X.E.D
Positive
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A complement has a ...... X.E.D
Negative
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Other cards in this set

Card 2

Front

Value is a function of scarcity, what does this mean?

Back

The scarcer the good; the higher the price

Card 3

Front

What is an example of a scarce good?

Back

Preview of the front of card 3

Card 4

Front

What is the economic problem?

Back

Preview of the front of card 4

Card 5

Front

Name the factors of production

Back

Preview of the front of card 5
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