value judgements
statements or opinions expressed that cannot be tested against real world data and depend a lot on the individuals views
normative statement
statement/opinion that requires a value judgment to be made
positive statement
can be tested against real world data
basic economic problem
needs and wants are endless but resources are finite- economics looks at how best to employ the resources to maximize economic welfare
4 factors of prodiction
land, labor , capital, entrepreneurship
rewards for the factors of procuction
land-rent, labor-wages, capital-interest, entrepreneurship-profit
3 functions of price
rationing(consumers) incentive(producers) signaling(entrepreneurs)
ppf/ppb
production possibility frontier/boundary- shows maximum output achievable given a fixed set of resources and tech in a given time frame
factors that shift ppf to the right
investment in new tech, increased supply of labor, more resources, improvements in human capital (training/education), increased productivity, encouraging entrepreneurship
human capital
the skills abilities, motivation and knowledge of labour
productivity
a measure of efficiency measuring the ratio of inputs to outputs
factors that shift ppf to the left
war, emigration, disease, disaster,decline in investment in capital
productive efficiency
when a firm operates at maximum average total cost producing the maximum possible output possible from its inputs, For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another or you cant make one person bettor off without another becoming worse off
allocative efficiency
occurs when available resources are used to produce the combination of goods that best matches peoples tastes and preferences
demand
the amount that consumers are willing and able to buy at each given price level
supply
the amount that producers are willing and able to supply at each given price level
contraction in demand
when demand shrinks along the demand curve
extension in demand
when demand rises (along the demand curve)
determinants of demand
changes in population, seasonality, low interest rates, income changes, prices of substitutes, advertising, consumer confidence, changes in quality, law, fashion, consumer tastes and preferences, uncertainty over future prices
inferior good
goods or services that will see demand fall as incomes rise
normal good
good or service for which demand rises when incomes rise
substitute
A good that can be used as a replacement for another good
complementary product
a good that is consumed together with another good
composite demand
a good that is demanded for more than one purpose so that when demand for one purpose increases supply for the other decreases
derived demand
when the demand for one good or service comes from the demand for another good or service
price elasticity of demand
the responsiveness of demand to a change in price
formula for PeD
%change in Qd/ %change in price
interpretation of PeD
if the number is above 1=price elastic if below 1= inelastic perfectly elastic=infinity (1= unitary)
Income Elasticity of Demand
responsiveness of demand to a change in income
YeD formula
%change in Qd/%change in income
interpretation of YeD
-ive= inferior +ive=normal
opportunity cost
the next best alternative forgone when an economic decision is made
cross price elasticity of demand
the responsiveness of demand of one good to a change in price of another good
XpeD formula
%change in Qd of good a/ %change in price of good b
interpretation of XpeD
-ive=complementary +ive=substitutes between 1 and -1 inelastic
determinants of supply
change in production costs, change in wages, change in indirect taxes, change in technology, subsidies, change in productivity, expectation of future prices, number of sellers in the market, firms objectives, joint supply, regulation +bureaucracy
joint supply
when one good is produced another good is also produced from the same raw materials
price elasticity of supply
responsiveness of supply to a change in price
PeS formula
%change in Qs/ %change in price
factors affecting PeS
time, extraction+processing raw materials, availability of stocks/stockpiling, ease of switching between methods of production, availability of spare capacity, number of firms in the market, ease with which firms can enter the market, ability to alter production methods
equilibrium
the price at which demand equals supply and there is no tendency for change
disequilibrium
the price at which supply doesn’t equal demand and there is likely to be a further change or reaction by buyers or sellers
excess supply
when qs at a particular price is greater than qd
excess demand
when qd at a particular price is greater than qs
minimum price
a price floor beneath which price is no allowed to fall
commodity
unbranded, homogeneous good (usually a raw materials or semi manufactured) bought and traded in bulk
factor markets
commodity needed to make a good
production
process that converts input into outputs of goods and services
labor productivity
measures output per worker or hour worked
fixed cost
doesn’t vary with output (in short term)
variable cost
varies with output
labour productivity
total output per time period/ units of labour
economies of scale
as the scale of production of a firm increases long run average costs fall
internal economies of scale
cost saving resulting in the growth of the firm itself
external economies of scale
cost saving resulting in the growth of the industry
examples of internal economies of scale
R+D, financial, managerial, marketing ,bulk buying, technical
examples external economies of scale
technology, R+D , education , infrastructure
diseconomies of scale
as the scale of production of a firm increases long run average cost rises
examples of diseconomies of scale
int- failure of - communication, control, coordination, cooperation
external- pollution
point at which LRAC is lowest is all known as
proactive efficiency
for what kind of firm will LRAC never rise
monopolies/ natural monopolies e.g. national grid
short run
at least one factor of production is fixed usually land
long run
all factors of production are variable
total revenue
price x units sold
average revenue
total revenue / no. sold = price
a firms demand curve also shows
its average revenue
market structures from most to least competitive and least to most concentrated
perfect competition, monopolistic competition, oligopoly, monopoly
features of a perfectly competitive market
perfect information, firm is a price taker, homogenous good, many small firms, low barriers to entry, consumer sovereignty, ability to buy and sell as much as you want at the ruling market price, factors of production are perfectly mobile
features of a monopoly
imperfect/asymmetric info, firm has full control over price, one large firm, high barriers to entry , producer sovereignty
factors used to determine market structure
numer of firms, product differentiation, barriers to entry, extent to which knowledge is perfect, influence of firms on price
CSR
corporate social responsibilities
objectives of firms
profit maximisation short/long run , sales maximisation, market share maximisation, survival, quality CSR
we assume that firms are
short run profit maximisers
division of labour
breaking down the production process down in to a sequence of tasks with workers assigned to particular tasks
benefits of specialisation of labour
workers become specialised, increases productivity, wage costs fall, greater output, allows for specialist machinery
specialisation
a worker preforming one task or a series of narrow tasks, also different firms specialising in producing particular goods or services
consumer sovereignty
through exercising their spending power consumers collectively determine what is produced in a market
producer sovereignty
producers or firms in a market decided what is produced and what is charged
pure monopoly
one firms, price setter ,complete barriers to entry
monopoly power
ability to dictate prices, high barriers to entry, big firm
factors which influence monopoly power
number of competitors, market share of the incumbent (the largest firm) concentration ratio, branding/advertising, barriers to entry, degree of product differentiation
barriers to entry natural vs artificial
nat- start up costs, economies of scale artificial- patents, predatory pricing
concentration ratio
a ratio which indicates the total market share of a number of leading firms in a market or the total output of these firms as a percentage of total market output
problems with monopolies
restrict supply -> proactively and allocative inefficient higher prices, reducer consumer welfare, lack of chow, exploit customer
benefits of monopolies
R+D economies of scale internationally competitive
Why competition is desirable
Lower prices More choices Greater efficiency Better quality Invention and innovation Consumer surplus
Market failure
Occurs when the free market fails to deliver an efficient allocation of resources
Leads to over/under production/consumption
Missing market
A situation in which there is no market because the functions of price have broken down. This is a complete market failure
Causes of market failure
Externalities Merit and demerit good Public gooods Monopoly Inequality in distribution of income and wealth Factor immobility Imperfect information
Public good
Good that is non excludable, non rejectable and non rival
State provision
Gets around the problem of free riders in public goods
Externality
Cost or benefit that spill over to third parties outside the market transaction
Indirect tax
A tax on spending
Incidence of tax
The proportion of tax that is passed into the consumer
Merit good
Good with positive externalities. Will generally be under consumed in the free market
Demerit good
Good with negative externalities. Will generally be over consumed in a free market
Occupational immobility
As patterns of demand and employment change workers find it hard to get new jobs as they lack the necessary skills
Geographical immobility
Workers find ur difficult to move to areas with employment opportunities due to familial ties and housing costs
Policies to deal with income / wealth inequality
Income tax, free school meals, mandatory schooling, inheritance tax, benefits, subsidised childcare, bursaries, free healthcare
Consumer surplus
Difference between equilibrium price and price the consumer is willing to pay. Larger the surplus the greater the welfare
