Econ Test 1

Since resources are finite, goods and supplies are also finite. Human needs and wants are infinite. Thus, there is a conflict between infinite wants and needs and finite resources. There must be a system for rationing the scarce resources. Economics is the study of how scarce resources are allocated to fulfill the infinite wants of consumers.

relatively scarce

• what you give up in order to have sth else.
• If there is a choice, there is an opportunity cost. If a good or service has an opportunity cost, it is relatively scarce. If a product is relatively scarce, it is an economic good.

What should be produced and it what quantities?

How should things be produced?

Who should things be produced for? (for people who can afford them or “fairly”)

Land

Labor

Capital (physical capital, factories etc., and human capital, value of the work can be improved through investments in education, health care)

Entrepreneurship (management and risk taking factor of production)

Shows the maximum combination of goods and services that can be produced by an economy at any given time period if all the resources are being used efficiently and everything else is fixed.

not all factors of production are equally good at producing both products.( Opportunity cost increases as we move closer to the axis.)

there is an improvement in the quantity and or quality of the factors of production. If the shift happens it means there was a change in potential output but not actual output.

war or natural disasters.

A self-righting system in which prices are used to ration goods and services. All production is in private hands and demand and supply are left free to set wages and prices in the economy.

Demerit good will be overprovided

Merit goods will be underprovided

Harmful for the environment

Some members of the society will not be able to kook after themselves

Large firms may dominate

The basic economic problem is addressed by the government. Government bodies arrange all production, set wages and set prices.

Planning is too difficult

Resources will not be used efficiently

Incentives tend to be distorted

There is a loss of personal choice and freedom

Governments might make decisions that are not popular or even corrupt

National income is the value of all goods and services produced in a set amount of time

If the national income per capita has increased, we can say that there has been economic growth.

We can’t really say much about the life quality based on economic growth.

We just look at GDP or GNI

Is a measure of welfare.

• Is calculated using HDI
• which takes real GNI per capita
• expected years of schooling and mean years of schooling
• life expectancy at birth 
• into account

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

It is becoming increasingly vital to appreciate the negative consequences of economic growth.

A mechanism that determines which goods and services will be produced in an economy and how scarce resources will be allocated.

Product markets (goods and services)

Labor markets (factors of production)

Financial exchange markets (foreign exchange, stock)

Informal markets (black markets)

Emerging markets (in developing countries)

The quantity of a good and service that consumers are willing and able to purchase at a given period.

When the price of a product falls, consumers have more income left to spend.

• Law of Demand
• When the price of a product falls, it becomes more attractive.

Have snob value

Looks like a C on the graph.

The demand is normal until snob value status and the quantity demanded increases as the price increases afterwards.

As income increases, the demand curve shifts out.

As income rises, the demand curve shifts in.

If the price for one of the goods increases, the demand curve for the other shifts out.

If the price for one of the goods increases, the demand curve shifts in.

: is the willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period.

States that the quantity supplied will increase as the price rises.

If the cost of the factors of production increase, the supply curve will shift in.

If they increase for one product, the supply curve will shift in for another product.

The state of the technology

Expectations

Government intervention (indirect taxes, subsidies)

Weather

quantity demanded = quantity supplied

excess supply occurs

excess demand occurs

Is the extra satisfaction gained by consumers from paying a price lower than what they were prepared to pay.

The left, upper part of the supply demand X

Is defined as the excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be willing to accept for that output

The left, down part of the supply demand X

When a market is at equilibrium without any external influences and external effects, it is said to be socially efficient or in a state of allocative efficiency. Perhaps producers would like higher prices and consumers would like to pay lower prices but through this, community surplus is maximized.

producer surplus + consumer surplus

Free markets supply the goods to the consumers who want them the must

Free markets allocate the demand for goods to the sellers who can produce them at the lowest price

Free markets produce the quantities of goods that maximize the sum of consumer and producer surplus

Free markets lead to allocative efficiency

Is the extra cost incurred by society from the production of an extra unit of good

When we assume that the costs of the industry are equal to the costs to society, the supply curve represents MSC

Is the extra benefit enjoyed by the society from the consumption of an extra unit of good

When the benefits in the market are equal to the benefits to society, the demand curve represents MSB

more horizontal

more vertical

Would shift to the left. The quantity supplied of the brown bread would increase. Movement along brown bread, shift of white bread.

• upwards
• downwards

Complements

Substitutes

Percentage change in quantity demanded of product X/ percentage change in price of product Y

PED: Percentage change of demand/ percentage change of price

How much the quantity demanded of a product changes when there is a change in its price

Cross elasticity of demand

Measures how much a quantity demanded of a product changes when there is a change in the price of another product

• PED is infinite 
• perfectly elastic

• perfectly inelastic demand
• PED= 0

• should raise the price
• should not raise the price
• no difference

• positive 
• positive
• negative

less elastic

less elastic