WJEC Econ - Micro

• scarcity

  a situation in which resources are finite in relation to unlimited wants
• choice

  has 2 costs:

  - the monetary cost of the chosen item

  - the opportunity cost of the unchosen item
• opportunity cost

  sacrifice of the next best alternative that has to be foregone as a result of choosing something else
• economic goods

  goods that are scarce and therefore have an opportunity cost (food, clothes)
• free goods

  goods that are unlimited in supply and therefore have no opportunity cost (water, air)
• ceteris paribus

  other things remain equal
• command economy

  - planned economy

  - total government intervention (bureaucratic)

  - no private property/self interest (equality)
• free market economy

  - no government intervention

  - allocation of resources is decided by the price mechanism (demand and supply)

  - there is private property and self interest (freedom)
• factors of production

  land, labour, capital, entrepreneurship
• production possibility frontier (PPFs)

  a curve that shows the maximum combinations of two goods that can be produced with resources which are fully and efficiently employed in a given period
• opportunity cost using ppf

  change in units of good a/change in units of good b
• straight line ppf

  - constant oc

  - perfectly transferrable resources
• concave ppf

  - increasing oc

  - resources are not transferrable
• convex ppf

  - decreasing oc
• shifts in ppf

  - shifts outwards

  ==> potential economic growth

  ==> LR, increase in Q2CELL

  - shifts inwards

  ==> actual economic growth

  ==> SR, decrease in COP
• movements in ppf

  a shift in resources out of one good into the other good

  - as less of good a is produced, more of good b is produced
• capital goods

  goods that are used in producing other goods (machineries)
• consumer goods

  goods and services that satisfy wants directly
• positive statement

  a statement that contains facts which can be tested by using evidence or data
• normative statement

  a statement that contains opinions
• specialisation

  firms concentrate on what they are best at
• division of labour

  workers specialising on specific tasks in the production process
• advantages of specialisation

  - increase productivity

  - improvement in dexterity (skills)

  ensure:

  - best use of factors of production

  - maximum output at the least cost

  - satisfaction of the most wants
• disadvantages of specialisation

  - less transferable skills

  - absent worker stops production

  - lower motivation due to boredom
• productivity

  the quantity of goods and services produced from each unit of labour input
• demand

  the quantity of a good or service that consumer are willing and able to pay at a given price in a given period
• effective demand

  demand supported by the ability to pay for a good or service
• law of demand

  - as price increases, quantity demanded decreases

  - as price decreases, quantity demanded increases

  (inverse relationship)
• utility

  ability of a good or service to give satisfaction to the consumers
• law of diminishing marginal utility

  decreasing satisfaction or usefulness as additional units of a product are consumed
• demand curve and dmu

  the more we consume, the less we're willing to pay for additional goods/services (due to dmu), so the demand curve is downwards sloping
• substitution effect

  the change in the quantity demanded of a good that results from a change in price

  - as price of good a increases, the substitutes will look cheaper relatively and so qd of good a increases

  - as price of good a decreases, the substitutes will look more expensive relatively and so qd of good a falls
• income effect

  the change in the quantity demanded that results from a change in real income

  - as income rises, qd rises

  - as income falls, qd falls
• movements along the demand curve

  a change in the quantity demanded of a good/service due to a change in its price

  - upwards - contraction in demand curve

  - downwards - extension in demand curve
• shifts in the demand curve

  a change in the conditions of demand, not including a change in its price

  - inwards - less demand

  - outwards - more demand
• conditions of demand

  - consumer incomes

  - prices of other goods

  - consumer tastes and preferences

  - seasonal factors

  - expectation of future price changes
• total expenditure from demand curve

  price x quantity demanded
• consumer surplus

  the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

  
• giffen goods

  - inferior goods

  - as price increases, the qd rises
• veblen goods

  - luxury goods

  - as price increases, the qd rises

  ==> higher price signals better quality