economics theme 1

The study of the allocation of scarce resources.

Resources that are scarce.

A time period where at least one factor of production is fixed.

A time period where all factors of production are variable.

The output per unit of input.

Resources are scarce but wants are infinite.

The world's resources are limited, there are only limited amounts of land, water, oil, food, etc..

Goods that are unlimited in supply and therefore have no opportunity cost.

Consumer, Business and Governments.

The maximum potential output of a combination of goods an economy can achieve when all its resources are fully and efficiently employed, given the level of technology.

The next best alternative foregone.

Increase an economy's productive potential.

Goods intended for use in production, rather than by consumers.

Goods designed for use by final consumers.

A resource whose stock level can be replenished naturally over a period of time.

A resource whose stock level decreases over time as it is consumed.

'All other things (factors) remaining the same'

A statement based on facts which can be tested as true or false and are value-free.

A statement based on value judgements which cannot be tested as true or false.

The Father of Economics;

The Father of Economics;
- The Invisible Hand (workings of the Price Mechanism)
- Specialisation
- Division of Labour

The process of breaking down the production process into steps and then each worker is assigned a step. This would then increase labour productivity (Output per Worker).

Specialisation of workers on specific tasks in the production process.

Specialisation of workers on specific tasks in the production process.

The process of breaking down the production process into steps and then each worker is assigned a step. This would then increase labour productivity (Output per Worker).

An exchange of goods/services for other goods/services.

• does not involve money

• double coincidence of wants

Anything which is acceptable to a wide number of people and organisations as payment for goods and services.

Where all resources are privately owned and allocated via the price mechanism. There is minimal government intervention.

Where there is public ownership of resources and these are allocated by the government.

Where some resources are owned and allocated by the private sector and some by the public sector.

A channel where goods and services are exchanged.

The capacity of a good or service to satisfy some human want.

Where consumers allocate their expenditure on goods and services to maximize utility, and producers allocate their resources to maximize profits.

The quantity of goods or services that will be bought at any given price over a period of time.

Shows the quantity of a good or service that would be bought over a range of different price levels in a given period of time.

Slopes downward - Price and Quantity have an inverse (negative) relationship.

The additional satisfaction that a consumer gains for consuming one additional unit of a product.

As successive units of a good are consumed, the utility gained from each extra unit will fall.

y2 - y1 / y1 × 100

The responsiveness of demand to changes in price.

The value is always negative.

% ∆QD / % ∆P × 100

Ped = 1

Ped = 0

Ped is < 1

Ped = ∞

Ped is > 1

Price × Quantity

The responsiveness of demand to changes in income.

%∆QD / %∆Y × 100

Negative - Inferior Good (Y increases, QD decreases)

Positive - Normal Good (Y increases, QD increases).

Inferior Good (As income increases, QD decreases)

Normal Good (As income increases, QD increases)

The responsiveness of demand for one good to changes in the price of a related good. (Either substitutes or complements).

% ∆ inQD of Good A/ % ∆ in Price of Good B × 100

Negative Value - Complements (The 2 goods are in Joint Demand; as the Price of Good A increases the Demand of Good B decreases).

Positive Value - Substitutes (The 2 goods are in Competitive Demand; as the Price of Good A increases, the Demand of Good B increases.)

Complements (As the Price of one good increases, the Demand for the second good decreases)

The 2 goods are in Joint Demand.

Substitutes (As the Price of one good increases, the Demand for the second good increases)

The 2 goods are in Competitive Demand.

The quantity of a good or service that firms are willing to sell at a given price over a given period of time.

Shows the quantity of a good or service that firms are willing to sell to a market over a range of different price levels in a given period of time.

An upward sloping curve - Price and Supply have a direct relationship.

The responsiveness of supply to changes in price.

Pes = %∆QS / %∆P

The price at which the Quantity Demanded and Quantity Supplied are equal, ceteris paribis. "Market Clearing Price"

Where the QS exceeds the QD for a good at the current market price.

QS > QD

When the QD exceeds the QS for a good at the current market price.

QD > QS

A hidden hand of the market operating in a competitive market through the pursuit of self-interest allocated resources in society's best interest.

The use of market forces to allocate resources in order to solve the economic problem of what, how, and for whom to produce.

The interaction of demand and supply to determine the market clearing price.

The difference between how much buyers are prepared to pay for a good and what they actually pay.

It is represented by the area under the demand curve above the ruling market price.

The difference between the market price which firms receive and the price at which they are prepared to supply.

It is represented by the area below the ruling market price and above the supply curve.

Consumer Tax Burden > Producer's Tax Burden

Consumer Tax Burden < Producer's Tax Burden

Consumer Tax Burden < Producer's Tax Burden

Consumer Tax Burden > Producer's Tax Burden

Tax paid on incomes or profits.

Example: income Tax and Corporation Tax.

A tax levied on the purchase of goods and services. It includes both specific and Ad Valorem taxes.

Its shown by an inward shift of the supply curve.

The amount of tax levied does not change with the value of the goods but with the amount or volume of goods purchased (Excise Duties)

• Parallel to the 1st Supply Curve

Tax levied increases in proportion to the value of the tax base. (VAT)

• Steeper Gradient relative to the original Supply Curve.

The distribution of the tax paid between consumers and producers.

Below the new EQ and above the original EQ.

A government grant to firms, which reduces production costs and encourages an increase in output.

Its shown as an outward shift of the Supply Curve.

A misallocation of resources caused by the Market Mechanism.

• Missing Markets ( Merit Goods and Public Goods)

• Lack of Competition in the market.

• Externalities

• Imperfect Market Information

• Factor Immobility

• Inequality

A good which is over provided by the Market Mechanism and tends to yield more costs to individuals than they realize.

Examples: Tobacco, Drugs, Alcohol.

The costs or benefits that are external to an exchange. They are 3rd party effects ignored by the Market Mechanism.

An external cost or benefit arising from a consumption activity.

An external effect of production, which neither harms nor benefits the person or firm controlling the production.

Negative 3rd Party effects that are excluded from the Market Mechanism.

Cost internal to a market transaction, which are therefore taken into account by the Market Mechanism.

External Costs + Private Costs.

Positive 3rd Party effects that are excluded from the Market Mechanism.

Benefits internal to a market transaction, which are therefore taken into account by the Market Mechanism.

External Benefits + Private Benefits.

Marginal Private Costs (MPC) = Marginal Private Benefits (MPB)

Marginal Social Costs (MSC) = Marginal Social Benefits (MSB)

This is where society should be.

The excess of social costs over social benefits for a given output.

A situation where MSB is ≠ to MSC and society does not achieve maximum utility.

The excess of social benefits over social costs.

Eliminating the externality by bringing it back into the framework of the Market Mechanism.

= Creating a market for the Externality.

Examples: Tradable Pollution Permits, Extending Property Rights, Taxes, Regulation.

Those goods that have non-rivalry and non-excludability by their consumption.

Non Rivalry: Consumption of goods by one person does not reduce the amount available for consumption by another.

Non-Excludable: Once provided, no person can be excluded from benefiting.

Examples: Police Service, Street Lighting.

Those goods that have rivalry and excludability in their consumption.

If left to the free market, public goods would not be adequately provided for.

The market fails because firms cannot withhold the goods and services from people who refuse to pay.

Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.

Where consumers and producers have access to the same information about a good or service in a market.

Where consumers and producers have unequal access to information about a good or service in the market.

A ceiling price set by the government on a good or service, above which it cannot rise. It may be enforced through government legislation.