Unit 1 - Microeconomics

• What is scarcity?

  Resources are finite or limited in supply as more and more resources will be used up, there will come a time when we will run out of resources.
• What are human needs and wants?

  Human Needs:

  Needs are the essential goods and services required for human survival. These include food, clean water, shelter, protection, clothing and access to health care and education.

  Human Wants:

  Wants are goods and services that are not necessary for survival. An individual’s wants, or desires, tend to be unlimited as most people are rarely satisfied with what they have and are always striving for more.
• What are consumer and capital goods?

  •A consumer good is an economic good that satisfies a consumers needs and wants they can be durable consumer goods and non durable consumer goods.

  •These are human made resources used in the production of other goods and services
• What is durable and nondurable consumer goods?

  Durable: goods that last for a little while

  Nondurable: can be consumed only once
• What are the factors of production?

  •Land: natural resources (such as oil, coal, water, wood, metal ores and agricultural products).

  •Labour: human skills and effort (such as skilled and unskilled labour).

  •Capital refers to the manufactured resources required in the production process (such as machinery, tools and equipment).

  •Enterprise: the skills a business person requires to combine and manage successfully the other three factors of production and the ability to undertake risk.
• What are the rewards for the FOP?

  Land: rent

  Labor: wages

  Capital: Interest

  Enterprise: profit
• What are the three fundamental economic questions?

  What to produce

  How to produce

  For whom to produce for
• What are the two types of factor mobility?

  Factor mobility is the ease in which FOP can move from one activity to another without significant losses of output.

  Occupational mobility: the ability to move factors of production between productive tasks.

  Geographical mobility: the ability to move factors of production to different locations.
• What is opportunity cost?


  The benefits of the next best alternative foregone. Every choice made has an opportunity cost because in most cases there is an alternative.
• What is the PPC?

  Production Possibility curve is a diagram that represents the maximum combined output of two products a firm or an entire economy can produce with its available resources & technology.

  • Resources are being used efficiently if they are producing their maximum output
  • But, because resources are limited, producing more of one product means producing less of another
  • PPCs are a useful way of showing the opportunity cost of producing more of one product in terms of how much of another must be given up
• What is the movement along the PPC?

  •the reallocation of resources from one productive use to another

  •At any point on the PPC between the two points the firm will be using its resources to produce different combination of the two product
• What are inefficient and unattainable allocation of resources?

  Inefficient: any point below the PPC, the firm is not using all the resources as efficiently as possible.

  Unattainable with resources and technology available: any point above the PPC.
• What causes an inward shift in the PPC?

  •Depletion of factors of production

  •Lower supply of labour due to outward migration

  •Capital equipment wearing out and is not replaced

  •Workforce skills are outdated and no new training

  •Lack of required infrastructure and no new investments
• What causes an outward shift in PPC?

  •Increase in the factor of production

  •New technology

  •Increased education and training

  •Better health care

  •Better infrastructure
• How to increase the quantity and quality of land?

  Quantity:

  increase in rent

  new discoveries of natural resources

  using previously unused natural resources

  Recycling and reusing

  Planting and growing more plants

  
  

  Quality:

  fertiliser and better land management

  reducing use of chemicals

  new technology

  organic and humane farming
• What is the basic economic problem?

  In every country, resources are limited in supply and decisions have to be made by governments, firms and individuals about how to allocate scarce resources to satisfy unlimited needs and Wants. This is the basic economic problem that exists in every economy. How to allocate scarce resources to satisfy unlimited needs and wants.

  Simple: scarcity of resources relative human wants
• What are economic and free goods?

  •Economic goods are those which are limited in supply.

  •Free goods are goods which are unlimited in supply, such as air or sea water.
• What are goods and services?

  •Goods are physical items such as tables, cars, toothpaste and pencils.

  •Services are non-physical items such as haircuts, telephone calls, and internet
• How can labors' quality and quantity be increased?

  Quantity:

  Increase wages.

  Healthcare (reduce absents)

  Increase in population

  Quality:

  Training and education
• How can capital's quality and quantity be increased?

  Quantity:

  decision to produce more.

  Increase interest payment.

  quality:

  Advances in technology
• How can enterprise quantity and quality be increased?

  Quantity:

  Increasing prices so more profit

  Unemployment.

  Quality:

  Training course and education

  More and better business advice and support
• What is a chain of production?

  •how businesses from the primary, secondary and tertiary sectors work interdependently to make a product and sell it to the final customer.
• What does an inward and outward shift in PPC represent?

  inward shift: negative economic growth

  outward shift: economic growth
• What is the resource allocation problem?

  • Every economy must choose which goods and services to produce to satisfy wants and needs, and how with their limited resources.
  •  Deciding how to best allocate resources to different productive uses is the resource allocationproblem.
• What is an economic system?

  how a national economy answer the 3 fundamental questions. There are 3 different types of economic systems that differ according to the government involvement in the decisions made for what, how and for whom to produce for.
• What are the features of a free market economic system?

  •All resources are owned and allocated by private individuals. No govt. control exists.

  
  

  •profit is the main-motive.

  
  

  •The demand and supply fixes the price of product. price mechanism.
• Write the three market systems in order of least to most govt involvement?

  Free market economy --> mixed economy --> planned economy
• What are the features of a planned economy?

  1. All resources are owned and allocated by the govt. They also fix the prices.

  2. Profit is not the main motive- social welfare is.

  3. They produce goods that will be most beneficial to the social welfare of the economy.

  4. Efficiency may not be the highest priority as they are not motivated by profit. Thus, they could use inefficient production methods to produce the goods.

  5. Goods will be produced for all people- mainly those with low incomes. Rich people may demand for luxury goods, which the govt. might not be interested in producing.
• What are the features of a mixed economy?

  government can intervene in different markets in an attempt to correct the worst market failures:

  -provide useful and essential goods and services

  -provide goods and services for people in the greatest need

  -employ people in public sector organizations and provide financial support to private sector firms to boost output and employment

  -outlaw the production of harmful goods and dangerous activities

  -outlaw business practices that restrict competition or mislead consumers
• What are the advantages of a free market economy

  A wide variety of goods and services will be produced to satisfy consumer wants

  Firms respond quickly to changes in consumer wants and spending patterns

  The profit motive of firms encourages them to develop new products and use the most efficient methods of production

  There are no taxes
• What are the disadvantages of a mixed economy?

  By correcting market failure, government may distort the allocation of resources and cause problems in others:

  X High taxes on people and firms can distort market price signals and reduce work incentives

  X Land regulations can increase production costs and therefore reduce the profitability and supply of some goods and services

  X Public sector organizations may be inefficient and produce poor-quality goods and services because they do not have to make a profit

  X Some government spending may be for political or even personal gain
• What are the advantages of a planned economy?

  1. As it’s a welfare-motive economy, it will produce necessities (food/water/clothes), public goods and merit goods.

  2. Prices are kept low, so it’s affordable for everyone.

  3. Low unemployment can exist as the govt. aims at full employment.

  4. Since there is no competition, duplication of products is eliminated
• What is a market?

  • - Any set of arrangements that brings together all the producers and consumers of a good or service so they may engage in trade or exchange.

  
  

  • - The market of a good or service is made up of all the producers willing and able to sell that product and all the consumers willing and able to buy it.
• What are market outcomes?

  
  

  • Firms will allocate their resources to the production of those goods and services that will earn them the most profit.

  
  

  • - Firms will supply a certain quantity of their goods or services to consumers in return for an agreed price that will earn them a profit.

  
  

  • - The outcomes of exchange between producers and consumers in a market are therefore a quantity traded and a market price.
• What is market equilibrium and disequilibrium?

  Equilibrium:

  1. The quantity producers are willing and able to supply using their factors of production is exactly equal to the quantity consumers are willing and able to buy. There is no surplus or shortage
  2. demand = supply

  disequilibrium: demand does not equal supply
• How the free market solves the three questions

  1. What to produce: the most-demanded goods to generate a high profit

  2. How to produce: using the cheapest yet efficient combination of resources– capital or labour- in order to maximise profits

  3. For whom to produce: producing to people who are willing and able to pay for goods at a high price
• Consumer sovereignty

  The consumer has controlling power over goods that are produced, and the idea that the consumer is the best judge of their own welfare. In a market economic system, consumer sovereignty is the highest
• What are the disadvantages of a planned economy?

  1. Consumer sovereignty is low as the govt. decides what to produce.

  2. Lack of profit motive may lead to firms being inefficient.
• What are the three economic systems?

  1. Mixed: ownership of scarce resources and decisions about how to use them are split between the private sector and a public sector. It combines the market system with government planning and control over some resources.

  
  

  2. Planned: All decisions are made by the government. They decide what, how and for whom to produce. E.g. North Korea.

  
  

  3. Market: All decisions are made by private individuals, there is no government intervention or involvement in resource allocation. (no economies in the world who follow this-there is a government control everywhere)
• What is price mechanism

  The way prices of goods and services affect the forces of supply and demand to establish equilibrium prices.

  Higher prices due to higher demand --> more supply

  Lower prices due to lower demand --> less supply, reallocate resources elsewhere.

  Price signals help private firms identify products that will be profitable to make and sell.

  Changes in market prices provides how decisions taken by private firms and consumers interact to determine how scarce resources are allocated.

  determines the 3 questions