Keywords deck 1

• The basic economic problem

  The problem that humans have unlimited wants but there are limited resources available to provide the products to fulfil these wants (due to scarcity).
• rational decision making


  The process of making choices that result in the optimal level of benefit for an individual (maximum utility)
• Positive statements


  Objective and can be tested with factual evidence and consequently can be accepted or rejected.
• Normative statements


  Subjective and based on value judgements. (opinion based).
• opportunity cost


  The benefits that are lost out on when choosing one alternative over the next best option.
• Productive possibility frontier (PPF)


  Shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed

  
• Allocative efficiency


  Occurs when resources are allocated in a way which best matches peoples wants and preferences.
• Consumer goods


  products and services that satisfy human wants directly e.g. clothes
• Capital goods


  goods that are used in producing other goods, rather than being bought by consumers.
• Adam Smith


  Scottish economist who advocated private enterprise and free trade (1723-1790). He advocated for minimal government intervention.
• Ways to shift the PPF out

  ~Better machinery and technology

  ~Training of workers

  ~An increase in the quantity or quality of resources
• 4 factors of production

  land, labor, capital, enterprise
• Advantages of specialisation and division of labour

  -Larger range of goods

  -Higher quality goods and smaller margin of error

  -Economies of scale
• Disadvantages of specialisation and division of labour

  -Over reliance on one commodity can be risky

  -Changing tastes + fashions

  -Carbon footprint + other ethical considerations
• free market economy


  the market is controlled by the 'invisible hand', with no government intervention.
• command economy


  The government regulates everything in an economy
• Consumer utility


  total satisfaction received from consuming a good or service
• Why consumers don't act rationally

  -Limited time to make decisions

  -Incomplete information (might not understand)

  -Vast amounts of data to process and consider

  -habitual behaviour

  -Availability bias

  -Social norms
• bounded rationality


  A set of boundaries or constraints that tend to complicate the rational decision-making process
• demand


  the quantity of a good or service that consumers are willing and able to buy and a given time and price.

  
• What influences demand


  consumer tastes

  price and availability of similar products

  proportion of consumer's income

  reputation

  trends

  population structure (e.g. age)

  advertisement
• Extension of demand


  the increase in quantity demanded due to a fall in price

  
• Contraction of demand


  the fall in the quantity demanded due to a rise in price

  
• complementary goods


  A good where the appeal increases when sold with another good together e.g. toothbrush and toothpaste
• substitutes


  goods that are sufficiently similar to be used in place of one another.
• normal goods (superior goods)


  Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
• inferior goods


  goods that consumers demand less of when their incomes rise
• supply


  the quantity of a product suppliers are willing and able to supply at a given price and time period
• what influences supply


  -Technology

  -Subsidies

  -Taxes

  -Weather

  -Legislation

  -Competition

  -Cost of production

  -Price
• excess supply


  at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus

  
• excess demand


  at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

  
• equilibrium


  is where demand intercepts supply and the market is at rest
• Case study- Chinas economic growth

  There has been a gradual move towards allowing markets to operate more freely. This has benefits I terms of efficiency and resource allocation however, this has been criticised for causing negative externalities such as spillages causing negative impacts on the environment. China has overtaken the USA as the largest emitter of carbon dioxide.
• MPC (marginal propensity to consume)


  The extent to which a consumer changes their spending following a change in income
• MPC formula


  change in consumption/change in income (higher the number, the more they will be spending when income rises)
• Factors affecting consumption


  -Availability of credit

  -expectations

  -confidence

  -asset prices (e.g. house prices + the wealth effect)
• price elasticity of supply

  measures the responsiveness of quantity supplied to a change in price
• PES formula


  % change in quantity supplied / % change in price
• What PES means


  If PES is between 0 and 1, then supply is inelastic

  If PES is 1, then supply is unitary elastic

  If PES is over 1, supply is elastic
• Income elasticity of demand (YED)

  A measure of the responsiveness of demand to changes in income.