Micro Theme 1 Definition

• Scarcity


  fixed amount of materials that yield human being happiness e.g time
• the economic problem


  - Which products should be made

  - How are they made

  - Who gets them?
• economic model


  a simplified version of reality used to analyze real-world economic situations. excludes night and day, wether etc. demand and price main thing considered
• opportunity cost


  the next best alternative choice forgone
• renewable resources


  one which is replenished by nature e,g, water, forests
• non-renewable resources


  once used cannot be replaced e.g. gas oil gold. not sustainable
• Capital goods


  needed to make other things
• consumption goods


  used as a means for happiness. aims to satisfy consumer
• free good


  a good whose production uses no scarce resources
• free market economy


  type of economic system that is controlled by the market forces of supply and demand and the price market (incentives, rations, signalling), as opposed to one regulated by government controls.
• command economy


  key aspect of a political system in which a central governmental authority dictates the levels of production that are permissible and the prices that may be charged for goods and services. Most industries are publicly owned.
• mixed economy


  - some resources are provided by price-mechanism/market (private companies) e.g. Tesco, amazon, primark etc, while others are provided by the government eg public transport, state schools
• medium of exchange


  means by which people can exchange goods/services
• unit of account


  enables you to assign a value to different types of things
• standard of deferred payment


  setting terms upon which can be payed in the future
• store of val


  a means of holding purchasing power over time
• Production Possibilities Frontier (PPF)

  a curve showing the maximum combinations of two products that may be produced with available resources and current technology

  
• What did Adam Smith believe

  - founder of economics

  - specialisation and division of labour-

  - free market economies - Govs should leave markets alone unless market failure

  - price mechanism
• What did Karl Marx believe

  - hated capitalism as they make money but pay workers as little as possible to maximise profits - free market

  - resources should be shared - gov control - command economy
• What did Friedrich Hayek believe?


  - supported free market, critical of command economies

  - gov needs info from consumers to know what to produce, eg technology, materials etc - impossible as changes every day

  - price mechanism worked as communication network
• division of labour


  The breaking down of the production process into small parts with each worker allocated to a specific task.
• division of labour dis

  - Boredom could lead to inefficiency

  - decline in motivation leading to mistakes

  - less flexible workforce

  - increases labour turnover
• division of labour advantages

  + Increases efficiency - workers become experts so can do the job fast

  + Improves quality - fewer mistakes because of specialisation.

  + Reduces cost as workers are more productive.
• occupational labour division


  one person specialises in faring another teaching
• technical labour division


  further subdivision e.g. teaching in maths, others in history etc
• firm specialisation labour division


  firms specialising in making tyres or hoodies
• regional labour division


  countries and regions specialise in a certain type of product - Canada wheat, China mass production, California computer tech etc
• 2 assumptions of rational behaviour

  - firms want to maximise profit

  - consumers want to. maximise utility
• ceteris paribus


  The assumption that nothing changes except the factor or factors being studied. "all things being equal"
• positive statement


  Objective statements that can be tested for, and proven to be true or false
• normative statement


  Subjective statements based on value judgements and opinions; cannot be proven or disproven
• equilibrium price


  the price at which the amount people want to buy = the amount people want to sell
• price elasticity of demand (PED)


  a measure of how much the quantity demanded of a good responds to a change in the price of that good

  
• cross elasticity of demand (XED)


  A measure of the responsiveness of demand of one good/service due to a change in price of another good/service

  
• income elasticity of demand (YED)


  A measure of the responsiveness of quantity demanded of a good to change in the consumers' income

  
• compliments


  goods that go together e.g. milk and tea
• normal good


  where people can buy more or less of a good according to income
• inferior good


  goods for which there are superior substitutes available
• consumer surplus


  refers to the difference between what a person is WILLING to pay for a good and what they ACTUALLY have to pay

  - amount consumer prepared for product - amount they actually have to pay

  
• producer surplus


  The difference between the market price producers receive for supplying a good and the price at which they are prepared to supply that quantity

  · If the market price EXCEEDS cost of production, firm receives additional net benefit from supplying product - PRODUCER SURPLUS