Micro Flashcards
How do we try to solve the economic problem?
Economics tries to solve this problem by allocating resources to their most efficient use.
What is the economic problem?
The economic problem is based upon scarcity. We live in a world of unlimited wants and needs but also limited resources.
What is the PPF/PPC?
The production possibility frontier/production possibility curve is an economic model used to show how the economic problem of scarcity applies to firms setting production quantities.
What is opportunity cost?
The next best forgone option.
What are the 4 factors of production?
The 4 factors of production/factor inputs are resources needed by any firm to run a business and thus produce what customers may need or want before they start. They are:
Land-Natural resources or that which we derive from the land.
Labour-The human input
Capital-Anything man-made which aids production (not money!)
Enterprise-The ideas, creativity, drive and successful mixture of the other factors of production
What is demand?
The amount of people willing and able to purchase a good or service at a given price.
What is a market?
An arrangement that brings buyers into contact with sellers for the purpose of trading or exchanging goods. Price is determined.
What are the determinants of supply?
Change in costs Technological progress Environmental effects Competition Future expectations Government position
What is price elasticity of demand?
The responsiveness of the quantity demanded to ac change in the price of goods.
What is income elasticity of demand?
The responsiveness of the quantity demanded to a change income.
What is a normal good?
A good where an increase in income results in an increase in the quantity demanded.
What is an inferior good?
A good where an increase in income results in a fall in the quantity demanded.
What is producer surplus?
The difference between what the producers is willing to sell at and the market price.
What is consumer surplus?
The difference between how much the consumer is willing to pay and the market price.
What are the determinants of demand?
Population Interest rates Prices of other goods- substitutes and compliments Real income Tastes and preferences Marketing and advertising
What is price elasticity of demand?
The responsiveness of the quantity demanded to a change in the price of a product.
What is the formula of price elasticity of demand and the relationship between the values?
%Δ Qd/%Δ p
Always a negative number because the values are inversely proportional.
Whats is income elasticity of demand?
The responsiveness of quantity demanded to a change in income.
What is the formula of income elasticity of demand and the significance of the final value?
%Δ Qd/%Δ Y
An inferior good has a YED of less than 0
A normal good has a YED of more than 0.
What is price elasticity of supply?
The responsiveness of the quantity supplied to a change in the price of a product.
What is the formula of price elasticity of supply and the significance of the final value?
%Δ Qs/%Δ p
Elasticity of more than 1 means it is elastic
Elasticity of less than 1 means it is inelastic.
What is cross price elasticity of demand?
The responsiveness of demand of one good (good a) to a change in the price of a different good (good b).
What is the formula for cross price elasticity of demand and what is the significance of the final value?
%Δ QdofX/%Δ pofY
If XED is negative then the goods are compliments
If XED is positive then the goods are substitutes.
If XED is less than 1 the good is inelastic
If XED is more than 1 the good is elastic
If XED is 0 or very close then the two goods are unrelated or very weakly related.
What is market failure?
Where the free market mechanism fails to achieve economic efficiency.
