Theme 1: Introduction to markets and market failure

• ceteris paribus is everything else remains the same
• A positive statement is a statemnt that is objective; free from jugement. It can be tested or proven.
• A normative statement is a statement subjective to value judgement. It cannot be tested or proven.
• Value judgement is a judgement based off of opinion.
• PPF is the maximum possible combinations of capital and consumer goods that an economy can produce with its current resources.
• The economic problem is that there are infinite wants but only finite resources.
• What are the three economic questions?

  "What goods to produce?

  How to produce these goods?

  Who to produce these goods for?"
• What is opportunity cost?

  The next best alternative foregone.
• What is efficiency?

  A lack of waste
• What is derived demand?

  The demand for a good that is dependent on the demand of another good.
• What is renewable resource?

  A resource that can be replenished or replaced on a level equal to consumption.
• What is a non-renewable resource?

  A resource that cannot be readily replenished by natural means on a level equal to consumption.
• What is productive efficiency?

  It means that is impossible to produce more of one good without decreasing the quantitiy of another good being produced.
• What is allocative efficiency?

  It occurs when a specific combination of goods is efficient for society.
• What is division of labour?

  Division of labour involves dividing the workforce and allocating specific individuals to specific tasks.
• How does the free market allocate scarce resources?

  The free market alloactes scarce resources based on the price mechanism
• How does a command economy allocate scarce resources?

  In a command economy, the government allocates the scarce resources.
• How are scarce resources allocated in a mixed economy?

  In a mixed economy, the government forms the public sector and firms form the private sector.
• What are reasons why the PPF would shift outward?

  • Increased innovation
  • Higher productivity
  • Economic growth
  • Inward migration
• What are reasons why the PPF would shift inwards?

  • War
  • Natural disaster
  • Outward migration
  • Economic decline
• Every point on the PPF is productively efficient, but not all are allocatively efficient.
• What does the slope on the PPF represent?

  Opportunity cost
• What does the curve on the PPF represnt?

  The law of diminishing returns
• What are the two axes on the PPF?

  Capital goods and consumer goods
• What are the three economic agents?

  • Consumers
  • Producers
  • Government
• What do Consumers want to maximise?

  Utility
• What do Producers want to maximise?

  Profit
• What does the Government want to maximise?

  Welfare
• What are the four functions of money?

  It is a store of value

  It is a standard of deferred payment

  It is a unit of account

  It is a medium of exchange between buyer and seller
• Which market did Adam Smith believe in and why?

  He believed in the free markets and said that the interaction of firms and consumers is beneficial as both are driven by self-interest.
• What market did Karl Marx believe in and why?


  Karl Marx believed in the Command economy because he argued that the inequalities and situation of exploitation would lead to a revolution.
• What market did Friedrich Hayek believe in and why?

  Friedrich believed in the free market as he argued that asymmetry of information, in a command economy, stopped them from making good decisions on resource allocation. He believed that the price mechanism was communication between consumers and producers meaning firms and consumers would use it efficiently.
• What are the advantages of a free market?

  • It is efficient
  • It rewards entrepeneurship
  • Incresed innovation allows consumers a greater choice of products
• What are the diadvantages of the free market?

  • It is inequitable - what is fair in a free market may not be fair in reality
  • Monopolies may arise
  • Missing markets - Goods we may need may not be produced if they don't create profit
• What are the advantages of specialisation?

  • It can lead to economies of scale(lowers the long run average cost for the firm)
  • It reduces the cost of training workers because they only have to be trained for one particular job
  • Can increase labour productivity
• What are the disadvantages of specialisation?

  • Countries can become less-sufficient and struggle when trade suffers
  • Workers may become bored which would reduce productivity
  • Specialised firms are often not flexible - workers may struggle to adapt if the environment changes
• Willingness to pay is the desire to pay based on tastes and preferences
• Ability to pay factors in someone's income
• The income effect is when price falls so consumers can afford more