Microeconomics Theme 1 <3

all other things remaining constant

a statement with facts and is value free scientific approach.

statement with opinion and value judgement and is a nonscientific approach

how to allocate scarce resources given unlimited want

1. Households

2. Firms

3. Government

1. What to produce?

2. How to produce it?

3. Who to produce for?

nonrenewable resources are finite whereas renewable resources can replenish themselves and are infinite

wish to maximise their satisfaction or utility

wish to maximise profits by producing at the lowest cost

wish to improve the economic and social welfare

the value of the next best alternative forgone when a choice is made

the maximum potential output combination of two goods an economy can achieve when all its resources are fully and efficiently employed

increase in quality or quantity of factors of production

decrease in quality or quantity of factors of production

B

D

E

A/B/C

outward shift

inward shift

splitting the production process into different parts to increase output

the process of becoming particularly skilled in a task

a worker will be able to make 20 pins a day if he worked alone but if 10 workers who are specialised in different parts of production then they'll produce 48000 pins a day

1. Increased productivity

2. Lower cost per unit

3. Workers can concentrate on one task

4. Increased output

1. Work can become tedious

2. Workers can get bored and leave

3. All stages of production will become co reliant on each other so if one stage breaks down the others are affected as well

1. Medium of exchange

2. Store of value

3. Measure of value

4. Standard of deferred payment

an economy in which decisions on the three key economic questions and the problem of scarcity is determined by the market force (demand and supply)

a centrally planned economy in which the role of the state is to be a social planner and the decisions on the three key economic questions and the problem of scarcity is determined by the government

a mixture of free market economy and command economy

he thought when individuals follow their own self interest they indirectly promote the good of society then the free market producers would respond to changes in consumer wants in a way that reduces waste and the governments role should be limited to proving public goods

he thought when the government plans economies it leads to failure, requires force and restricts freedom

he thought capitalism was inherently unstable because workers were exploited and there would be a revolution and the economy would follow communism

1. State ownership of resources

2. Price determined by the state

3. Resources allocated by the state

4. The role of the state is to be a social planner

5. A greater equality of income and wealth

1. Private ownership of resources

2. Producers aim to maximise profits

3. Consumers aim to maximise utility

4. Resources are allocated by the price mechanism

5. The role of the state is to reduce constraints

fix market failure

the quantity of a good or service that consumers are willing and able to buy

change in price

Population Advertisement Substitutes Income Fashion/trends Interest rates Complements

Decreasing satisfaction or usefulness as additional units of a product are acquired

change/original x 100

%change in price leads to a more than proportional %change in quantity demanded (more than 1)

%change in price leads to a less than proportional %change in quantity demanded (less than 1)

how responsive quantity demanded is to a change in price

% change in Qd / % change in P

Substitutes Proportion of income Luxury/necessity Addictive Time period

how responsive quantity demanded is to a change in income

% change in Qd / % change in Y

there are other alternatives so when income rises demand falls (negative YED) more than 1 - income elastic less than 1 - income inelastic

there are no other alternatives so when income rises demand rises (positive YED) more than 1 - income elastic (normal luxury) less than 1 - income inelastic (normal necessity)

how responsive quantity demanded of good A is to a change in price of good B

%change in Qd of Good A / %change in P of Good B

two goods are complements so if price increases for one demand would decrease for the other (negative XED)

a good has substitutes so if the price of the good increases the demand for the substitute increases (positive XED)

the quantity of a good the producer is willing and able to sell

change in price

cost of production changes government subsidy entry of new things into the market

how responsive quantity supplied is to a change in price

% change in Qs / % change in P

infinity

greater than 1 but less than infinity

0

less than 1 but greater than zero

Time period Production time Factor mobility Spare capacity

Land

Labour

Capital

Entrepreneurship

signals to producers that the price is too high/too low incentive to change the price rations excess demand/supply successfully allocates scarce resources

difference between how much a consumer is willing and able to pay and the market price

difference between how much a producer willing and able to sell a good for and the market price

a tax imposed on goods

a percentage tax imposed on good

elastic demand more of the incidence of tax is paid by the producer inelastic demand more of the incidence of tax is paid by the consumer

money granted by the government

Making decisions based on what other people do.

people prefer to carry on behaving as they always have

the market misallocates resources and isn't operating at the socially optimum level

Negative externality Positive externality Public good Asymmetric information

cost to the third party and social costs exceeds private costs

cost faced by producers directly involved in a transaction

cost to the third party

private cost + external cost

the cost of producing an additional unit of output

the cost to the third party for producing an additional unit of output

The total cost to society of producing an additional unit of output MSC=MPC+MEC

social costs exceed private cost overproduction of the good misallocation of resources not operating at the socially optimum level market failure

benefit to the third party and social benefits exceed private benefits

benefits for consumers directly involved in a transaction

benefit to the third party

private benefits + external benefits

benefits to consumers for consuming an additional unit of output

Benefit to third parties from the consumption of extra unit of output.

total benefits to the consumer consuming an additional unit of output MSB=MPB+MEB

social benefits exceed private benefits under consumption of the good mis allocation of resources not operating at the socially optimum level market failure

good that are non excludable and non rivalrous

can't be confined solely to those who have paid for it and non payers can enjoy the benefits at no financial cost

each persons enjoyment of a good doesn't stop others enjoyment

difficulty of charging consumers and they will benefit from the product without paying for it

a good is non excludable and non rivalrous you can't charge people to use it (free rider problem) firms have to incentive to provide it under provision of the good misallocation of resources market failure

one party to an economic transaction has more information than the other

information gaps consumers don't have all the information to make a rational decision market failure