intro to ecnomics Flashcards
(64 cards)
what is economics?
“Economics is the study of how we the people engage ourselves in production, distribution and
consumption of goods and services in a society.”
“The science which studies human behavior as a relationship between ends and
scarce means which have alternative uses.”
BRANCHES OF ECONOMICS
Normative economics:
Normative economics is the branch of economics that incorporates value judgments about what the
economy should be like or what particular policy actions should be recommended to achieve a desirable
goal.known as statements of
opinion which cannot be proved or disproved, and suggests what should be done
Positive economics:
Positive economics, by contrast, is the analysis of facts and behavior in an economy or “the way things
are.” Positive statements can be proved or disproved, and which concern how an economy works,
factors of production
- Land includes the land used for agriculture or industrial purposes as well as natural resources
taken from above or below the soil. - Capital consists of durable producer goods (machines, plants etc.) that are in turn used for
production of other goods. - Labor consists of the manpower used in the process of production.
- Entrepreneurship includes the managerial abilities that a person brings to the organization.
Entrepreneurs can be owners or managers of firms.
Scarcity
does not mean that a good is rare; scarcity exists because economic resources are unable to
supply all the goods demanded
rationing
a process by which we limit the supply or amount of some economic factor which is
scarcely available. It is the distribution or allocation of a limited commodity
ECONOMIC SYSTEMS
Dictatorship:
Dictatorship is a system in which economic decisions are taken by the dictator which may be an individual or a group of selected people.
Command or planned economy:
A command or planned economy is a mode of economic organization in which the key economic functions – for whom, what, how to produce are principally determined by government directive.
Free market/capitalist economy:
A free market/capitalist economy is a system in which the questions about what to produce, how to produce and for whom to produce are decided primarily by the demand and supply interactions in the
market.
Islamic economic system:
This system is based on Islamic values and Islamic rules i-e zakat, ushr, etc.
of wealth and this strikes at the root of capitalism.
Pakistan case: A mixed economy
In Pakistan, there is mixed economic system. Resources are governed by both government and individuals. Some resources are in the hand of government and some are in the hand of public. Optimal mix of resources is decided by the price mechanism.
CIRCULAR FLOW OF GOODS & INCOME
There are two sectors in the circular flow of goods & services. One is household sector and the other is the business sector which includes firms. Households demands goods & services, Firms supply goods & services. An exchange takes place in an economy.
In monetary economy, firms exchange goods & services for money. Firms’ demands factors of production and households supply factors of production.
Firms pay the payment in terms of wages, rent, etc. This is circular flow of goods. On the other hand, household gives money to firms to purchase the goods & services from firms, and firms’ gives money to households in return for factors of production.
DISTINCTION BETWEEN MICRO & MACRO ECONOMICS
Micro Economics:
The branch of economics that studies the parts of the economy, especially such topics as markets, prices, industries, demand, and supply. It can be thought of as the study of the economic trees. studies how individuals, households, and firms make decisions to allocate limited resources typically in markets where goods or services are being bought and sold.
Macro Economics:
The branch of economics that studies the entire economy, especially such topics as aggregate production, unemployment, inflation, and business cycles. It can be thought of as the study of the economic forest. involves the “sum total of economic activity, dealing with the issues of growth,
inflation, and unemployment and with national economic policies relating to these issues” and the effects of government actions (e.g., changing taxation levels) on them.
HOW PRODUCERS DECIDE ABOUT OPTIMAL CHOICE
Costs:
will be additional labor employed, additional raw material and additional parts & components that have to be bought.
Benefits:
will be additional revenue that the firm will get by selling the additional number of cars.
It will be profitable to invest if revenue is greater than the cost.
MARGINAL COST AND MARGINAL BENEFIT
Marginal cost:
is the additional costs of producing an additional unit of some good or service.
Marginal benefit:
is the additional benefit derived from consuming an additional unit of good or service.
PRODUCTION POSSIBILITY FRONTIER (PPF)
Production possibility frontier (PPF):
is the curve which joins all the points showing the maximum amount of goods and services which the country can produce in a given time with limited resources.
GOODS MARKET AND FACTORS MARKET
Goods/product/commodity markets:
Markets used to exchange final good or service. Product markets exchange consumer goods purchased by the household sector, capital investment goods purchased by the business sector, and goods purchased by government and foreign sectors.
Factors markets:
Markets used to exchange the services of a factor of production: labor, capital, land, and entrepreneurship. Factor markets, also termed resource markets, exchange the services of factors, NOT
the factors themselves
types of goods
Normal goods:
are goods whose quantity demanded goes up as consumer income increases.
Inferior goods:
are goods whose quantity demanded goes down as consumer income increases.
Giffen goods:
are the sub category of inferior good.a change in price causes quantity demanded to change in the same direction.
demand analysis effects
substitution effect:
occurs because a change in the price of a good makes it higher or lower than the prices of other goods that might act as substitutes.
The income effect:
results because a change in price gives buyers more real income, or the purchasing
power of the income, even though money or nominal income remains the same.
Price effect = Income effect + Substitution effect
law of demand
The law of demand states that holding all other factors constant, if the price of a certain commodity rises, its quantity demanded will go down, and vice-versa. Other factors are income, population, tastes, prices of all other goods etc.
demand function
A demand function is an equational representation of demand as a function of its many determinants. Equation of demand function is Qd= a – b P
a= slope pf demand curve
b=unit price
p= intercept
Shifts in the demand curve
normal goods: (increase in income): rightwards
normal goods: decrease: leftwards
inferior goods: increase: leftwards
inferior goods: decrease: rightwards
substitute: increase in price: rightwards
substitute: decrease: leftwards
law of supply
The law of supply states that the quantity supplied will go up as the price goes up and vice versa.
supply function
A supply equation is QS = c + d P
Determinants of supply
- Costs of production
- Profitability of alternative products (substitutes in supply) ( favour more profitable good)
- Profitability of goods in joint supply
- Nature and other random shocks
- Aims of producers(maximise short run profit)
- Expectations of producer(increase or decrease predictability maybe wrong)
ALGEBRAIC REPRESENTATION OF EQUILIBRIUM
Qd = Qs
price ceiling
A price ceiling is the maximum price limit that the government sets to ensure that prices don’t rise above that limit (medicines for e.g.).
price floor
A price floor is the minimum price that a Government sets to support a desired commodity or service in a society (wages for e.g.)
RATIONING & SUPPLY SHOCKS (ALTERATION OF EQUILIBRIUM PRICE BY THE
GOVT)
- Through Tax :
Tax (to be paid by the producer) will increase the Supply Price, Supply Curve shifts left ward, Price
increases & quantity decreases. - Through Subsidy :
Subsidy (given to the producer) will decrease the Supply Price, Supply Curve shifts rightward, Price
decreases & quantity increases.
