Micro 1

• Short-Termism


  the tendency for government to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives e.g. lowering income tax
• Scarcity

  a situation in which unlimited wants exceed the finite resources available to fulfill those wants
• Ceteris Paribus

  'all other things being equal
• Positive Statement


  objective statements that can be proved e.g. homelessness is currently at 5% in Cambridge
• Normative Statements


  opinions that contain value judgments
• Value Judgments

  judgments about society that cannot be quantified and tested e.g. homelessness is too high in Cambridge
• Main Purpose of Economic Activity

  to produce goods and services to satisfy consumers' wants and needs
• The Economic Problem

  involves working out how to allocate limited resources as effectively as possible to satisfy people's unlimited wants and needs
• Factors of Production - Land


  all natural resources that are used to produce goods and services e.g. materials, water
• Factors of Production - Labour


  a combination of human capital (the value of workers' labour) and the labour force (the working population)
• Factors of Production - Enterprise


  entrepreneurial actions (e.g. establishing businesses and taking risks) that individuals take to try and make a profit
• Factors of Production - Capital


  equipment used to generate goods and services within the production process e.g. machinery
• Three Main Economic Agents

  - individuals : people/firms that produce goods or supply services

  - consumers : people/firms who purchase the goods/services

  - governments : establishes rules for economies
• Opportunity Cost (Tradeoffs)


  the benefit lost by not choosing next best alternative to a decision
• Issues with Opportunity Cost (2)

  - imperfect information may prevent consumers from picking the alternative

  - barriers between switching to alternative
• Production Possibility Frontier


  illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other

  
• Why is the PPF Curved?

  as the costs of production are not constant, and therefore the tradeoffs between producing product A and product B differ at different quantities
• Efficiency


  using resources in such a way as to maximize the production of goods and services
• Static Efficiency


  when productive and allocative efficiency are both achieved at a particular point in time
• Productive Efficiency


  when it is impossible to produce more of one product without decreasing the quantity produced of another product
• Allocative Efficiency


  a state of the economy in which production is able to meet consumer demand entirely (marginal benefit = marginal cost)
• Factors which Shift the PPF Outwards (3)

  - reallocation of fixed resources

  - improvements in technology

  - increase in the supply of labour
• Command Economy

  an economic system in which the government controls a country's economy
• Marginal Product


  the amount of extra output produced by an extra unit of input
• Marginal Product of Labour

  the amount of extra output produced by one more worker
• Marginal Product of Capital

  the amount of extra output produced by an extra unit of capital
• Marginal Revenue


  the change in total revenue from selling an extra good or service
• Marginal revenue is positive / negative depending on...

  the price elasticity of demand
• Marginal Cost


  the extra cost of production that a firm incurs when producing one more good or service e.g. materials, labour

  
• Marginal Utility

  the extra benefit to an individual of consuming a good or service
• (Law of) Diminishing Marginal Returns

  the concept that the more of something you add, the lower the impact of each additional unit, ceteris paribus
• Diminishing Marginal Product


  the marginal product of an input declines as the quantity of the input increases e.g. farmers use the most fertile land to produce crops initially
• (Law of) Diminishing Marginal Utility


  decreasing satisfaction or usefulness as additional units of a product are used by consumers
• Budget Constraints

  constraints that consumers face as a result of limited incomes

  
• Total Utility

  the total amount of satisfaction obtained from consumption of a product
• Utility Maximization Formula


  P1 / P2 = MŪ / MÚ

  (these should be equal)
• Rational Agents


  agents (people, governments or producers) who use utility theory to guide their decision-making
• Producers acting rationally will...

  maximize their profit and attempt to increase their market share
• Governments acting rationally will...

  act in ways that maximise the welfare of their population e.g. reducing inflation
• Consumers acting rationally will...

  maximise their utility within the limits of their income and attempt to improve their work-life balance