Nature And Purpose Of Economic Activity Flashcards
(186 cards)
1
Q
Definition of economic activity
A
Production , Distribution , consumption or trade of a good/service
2
Q
Definition of good
A
A tangible item that satisfies human needs and wants
3
Q
Definition of services
A
Intangible item that satisfies human needs and wants
4
Q
Definition Private good
A
There a rival in consumption if one person uses it another person can not use it
It excludes people and stops them from using it
5
Q
Definition of Public goods
A
No rival in consumption if one person has it one person can have it as well
It does not exclude people everyone can have this good
6
Q
Free market economy definition
A
Goods and service are provided by suppliers straight to the customer and the government is not involved
7
Q
Definition Command economy
A
Decisions on production and allocation of resources are controlled by the government
8
Q
Definition of Command economy
A
Decisions on production and allocation of resources are controlled by the government
9
Q
Definition of Mixed economy
A
Goods + services are provided through a free market economy by the government gain benefit of free market whilst avoiding disadvantages of going through government intervention
10
Q
Definition of price mechanisms
A
The way price changes in response to changes in demand or supply so that a new equilibrium position is reached
11
Q
What does SIR stand for in the free market
A
Signal
Incentives
Rationing
12
Q
What does the S in SIP mean for consumer and producers
A
Signal - a price change that indicates to the consumer to change their demand
And
The producer how much they should be supplying
13
Q
What does the I in SIP mean for consumers and producers
A
Prices can I give a business an incentive to produce more of a product and increase potential profit
Prices can give consumers incentives to purchase a good to increase their welfare
14
Q
What does the P in SIP mean for the producer and customer
A
Changes in price can ration the amount of resources allocated to each market this ensures resources are allocated to the production of the most highly desired product
15
Q
What does decision making is decentralised
A
Decision making is spread out to include more junior managers in the hierarchy as well as individual business units or trading locations
16
Q
Definition Private ownership
A
When an individual or private organisation owns assets such as firms industries of housing
17
Q
Meaning Self interest
A
Actions that elicit personal benefit
18
Q
Definition of competition
A
The process at which various sellers try to sell the better product at a lower price to gain any advantage they can get over the competition
19
Q
What is the definition of allocative efficiency
A
The degree to which we allocate a resource to maximise the economic welfare but we cannot make someone better without making someone worse
20
Q
What/ definition of productivity efficiency
A
We measure how well the resources (inputs) are used to Produce(outputs) by achieving the lowest possible cost while still maximising efficiency when we can’t make anymore of a good without less of another
21
Q
What/definition is static efficiency
A
Where a type of efficiency can I only happen at one point in time
22
Q
Definition of Dynamic efficiency
A
By improving economic efficiency over time by creating new technology we will have more innovation and invention
23
Q
Advantages of a free market and why
A
Productive efficient firms have to compete on costs to make profit so that costs are at there lowest
Allocative efficiency competition is where firms have to produce what consumers demand which improves choices and quality of products
Wages employees and profit for firms encourage work and risks taking
24
Q
Disadvantages of a free market
A
Distribution of wealth is unequal and poverty can be a result
External cost and Benefits are ignored demerit goods produced with no restrictions
Under provision of public and merit goods
Monopolies may form
Economic cycle causes either inflation or unemployment
25
Definition of economic problems
We live in a world of unlimited wants but limited resources which leads to scarcity and choices
26
Definition of opportunity cost
The value of the next best alternative forgone when a decision is made
27
Definition of economic good
A good that has a benefit to society and have a degree of scarcity and therefore an opportunity cost this could be a private good or public good
28
Definition of free good
A product that isn’t scares which means there is no opportunity cost for their consumption and cannot be traded in the market place
29
Definition of economics
A study of how to allocate resources that maximise the welfare of society
It studies the economic behaviour of individuals and groups and economic relationships between them
30
What is production
The process that converts inputs ( or services of factors of production such as capital and labour) into Final output
31
Definition of productivity capacity
Is the maximum output level of an economy
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Definition of production possibility frontier (PPF)
Shows the maximum combination of products (good + service) that can be produced during a given period of time with the available resources + technology
When all resources are used to there maximum output and all resources with a given level of technology
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What does it mean if something is outside the PPF
If something is out of the PPF it represents a combination of product1 + product2 which is impossible to reach using the current level of resources and production techniques
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What does it mean to be inside the PPF
If something is within the PPF some of our resources are not being used at all or are used ineffectively
35
What are consumer goods
They are brought and used by consumers
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What are capital goods
Are used to produce other goods
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What effect does allocative efficiency have on the PPF diagram
When prices consumers are prepared to pay for a good or service changes
This is because the previous allocation of resources may no longer satisfy as many wants
There is one point on the PPf where allocative efficiency is maximised and it can + will change
38
What effect does allocative efficiency have on the PPF diagram
When prices consumers are prepared to pay for a good or service changes
This is because the previous allocation of resources may no longer satisfy as many wants
There is one point on the PPf where allocative efficiency is maximised and it can + will change
39
What effect does productive efficiency have on the PPF
To achieve the greatest reward the FOP will be utilised effectively to produce a combination of Goods + services
Firms will operate productively efficiently when their on the PPF
Any point on the PPF shows situations when P efficiency is maximised
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Definition Factors of production
The scares resources (inputs0 used to produce a output of finished Goods + services
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Definition of capital and its rewards
They are goods used to produce more goods including factories
Interest is a reward for creditors lending money to a firm to invest in buildings and capital equipment
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Detention of enterprise and its rewards
An entrepreneur risks financial capital and organised land, labour to produce outputs in the hope of profit
The reward for this risk is profit for the individuals risking funds and offering products for sale
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Definition of Land and its reward
Any of the worlds natural resources
Rent is a reward for landlords who rent out there property
44
Definition of labour and its reward
The mental and physical work of people weather by hand, brain, skilled, unskilled
The reward for labour is wages or salaries for giving up there time to help create products is wages + salaries
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Definition of renewable resources
Is a resources that can replenish itself overtime so that new addictions of the resources can match or exceed levels of use of that resources
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Definition of non renewable resources
Is the one cannot replenish itself over time so that once it is used it can no longer be available in its original form
47
Definition of social sciences
Branch of sciences that study society and the relationships of individual groups within society
48
How is economics similar to a natural science
It uses theories to create models to understand events and uses statistics to prove theories
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How is economics not similar to a natural science
Doesn’t use experiments to test theories relies on observations of real life performances
50
How is economics not similar to a natural science
Doesn’t use experiments to test theories relies on observations of real life performances
51
What is a positive statement
It can be tested against factual evidence positive economics is a scientific approach to economics
52
Definition of normative statements
States what ought to be they contain value judgment or opinions
53
Definition of value judgment
The judgment of the rightness or wrongness of something/ someone based on comparison
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Definition of moral judgment
Based on what is derived as right + good
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Detention of political statements
Is based on the need to appeal to select groups of people
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How to increase production in the short run
Increase utilisation of existing resources
Increasing existing unemployed resources
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How do you increase production in the Long run
An increase in Population size
An increase in the productivity of the FOP
Better training + education
Better technology
Increase in the scale of production more capital intensive production
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What is productivity
Measures the efficiency with which inputs are transformed in outputs
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What is labour productivity
A measure of efficiency of labour in converting inputs to outputs often measured as the value of outputs per labour hour
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What actions can firms use to increase production
Financial incentívese
More training
Increase use of capital + technology
Improving process used automation
Simplifying production
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What actions can the government do to increase production
Subside certain things
Increase minimum wage
Decrease income tax
Increase training + education
Increase incentives
Attracting FDI (foreign direct investment)
Improving access to investment funding
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Benefits of increasing labour capacity
Better living standard
Improved international competition
Allows flexible working from home
4 day working week
Greater rewards to all factors of production increase production capacity long run capacity
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Why is it good to use labour productivity as a measure
Easy to calculate + interpret
Can compare between countries
Can be used for different purposes
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Why is labour productivity bad
Ignores other factors of production
Can be difficult to compare between firms + countries
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Why is labour productivity bad
Ignores other factors of production
Can be difficult to compare between firms + countries
66
What is specialisation
When a worker or firm or country focuses on a particular task within the production process
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What is division of labour
Dividing a job into many specialised parts with a single worker or a few workers assigned to each part
68
What is Exchange
Where buyers + sellers come together in a market + negotiate a price
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What makes exchanges goods and services efficient
If a country specialises in a good/service we need/want and we trade a good/service to the country that wants something from us that is better quality
70
Being its of specialising workers
Greater bargaining power
Motivation to do better because they enjoy it
More skills developed - good for future career development
Can focus on specific tasks
Moore specialised training
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Benifit its of specialising workers
Greater bargaining power
Motivation to do better because they enjoy it
More skills developed - good for future career development
Can focus on specific tasks
Moore specialised training
72
Drawbacks of workers being specialised
Less flexible
makes it harder to move jobs
Could become boring
Harder to adopt change
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Benefits of specialising firms
Greater output as staff become more specialised/better at their job
Lower cost as staff become more efficient at their job
Fewer mistakes
Ability to become more competitive
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Drawbacks of being a specialised firm
Moral may fall leading to lower output + higher labour turnover
Workers + production are independent
Absences need to be covered
75
What is infrastructure
The basic system and services such as transport and power supplies
That A country or organisation uses in order to work efficiently
76
What is Structural unemployment
Unemployment resulting from industrial reorganisation
Typically due to technological change rather than
fluctuations in supply + demand
77
Definition of economies of scale
A proportionate saving in costs
Gained by an increase in scale of production
78
What is trade
The action of buying or selling goods + services
79
Definition of standard of living
The degree of wealth and material comfort available to a person or community
80
Definition Danger of unemployment
When being too specialised becomes a risk to your job or changing Job
81
Definition of over exploitation of resources
When resources are used too quickly for the rate of production to keep up it becomes unsustainable
82
Definition of negative externalities
This is a cost that s suffered by a third party
As a result of an economic transaction
83
Definition of social cost
The total cost to society.
It includes private costs(costs to individuals)
Any external costs (cost to third parties)
84
Benefits of being specialised at a regional level
Efficient use of resources:
A region could specialises in a particular industry due to the availability of resources in a region
Creates jobs to residents:
When a industry develops in a particular region
It helps the residents of the area since they can find work near to their homes
Infrastructure development:
When a region is specialised in a particular industry
Infrastructure will be built to support that industry
Therefore helping development of the region
85
Drawbacks of being specialised at a regional level
Risk of low demand for what the region has specialised in leads to structural unemployment
Rising costs
86
Benefits of being specialised at a national level
Economies of scale and efficiency
Job creation
More tax revenue for government
Improves standard of living
87
Drawbacks of being specialised at a national level
Danger of unemployment
Over exploitation of resources
Negative externalities/social costs
88
What is a market
A place whereby buyers + sellers come together in order to trade goods + services
89
What is a product market
These are markets where the consumer derives utility for the purchases of goods + services
90
What is a factor market
These are markets where the goods sold are the resources or inputs used in production sectors
91
What is a commodity market
A market that trades in primary rather than manufacturing products
92
What is a Financial markets
Any marketplace whereby buyers + sellers participate in the trade of assets such as pounds + currencies
93
What is demand
The quantity of a product that consumers are able to+ willing to purchase at a given price at a point in time
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What is national demand
The desire for a product
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What is Effective demand
The willingness + ability to buy a product
96
What is the Law of demand
It states that as price increases demand for a product will fall
Inverse relationships between prices of goods + the quantity demanded
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What is ceteris paribus
With other conditions remaining the same (all things being equal)
98
Willingness to pay curve
The benefits we are going to get from them next additional unit of a good
The next additional unit is known as the marginal unit + it is the benefit to the individual
Demand curve reflects marginal private benefits
99
What are normal goods
Are goods that experience an increase in quantity demand as incomes increase (certais paribis)
Normal goods will decrease when income goes down
100
What are inferior goods
Are goods that experience a decrease in quantity demand as incomes increase Normal increases
101
What is the income effect
If the price falls then real incomes ( as the consumer has more income left over ) rises so demand should rise for most goods (normal goods)
102
What is the substitution effect
If the price of a good falls the consumer will look to substitute a good as it becomes a relatively cheaper alternative to a i other good
103
What is Condition of demand
Is a determinant of demand other than a goods own price
That fixes the position of the demand curve
104
What is CAPTAIN
Consumer confidence
Advertising
Price of other goods(substitutes + complements)
Taste + fashion
Availability + cos of credit(interest rate)
Income
Number of customers in the market
105
What effect does Consumer confidence have on the consumer and why
Confidence that the economic agent has in their future income + employment
This will alter the willingness to spend money
Especially on larger items that take up significant proportions of their incomes
If they have confidence in future employment + income they will buy more because they will have a higher willingness to spend money especially on more expensive products (that take up more income)
106
What effect does advertising have and why
Persuasive - feel you need the product
Informative - benefits
People will gain information and be persuaded to buy it because they have more knowledge
107
What are complements
Are products that are in joint demand
When one is bought the other is as well
108
What are complements
Are products that are in joint demand
When one is bought the other is as well
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What’s Is joint demand
Occurs when the demand for two Or more products (or service) are interdependent but normally because they are used together
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What is substitution
When you use a similar or alternative product
These give competing demand
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What is competing demand
Occurs when the buyer can chose between substitute goods
112
What is liquidity
The assets we have
113
What effect does taste and fashion have on buying a product
These can change the utility gained from consuming a product and therefore the willingness to buy it
114
What is availability and cost of credit
Large items may play an important part in determining demand it effects the ability to buy the product
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What are the types of credit
Tight credit conditions - credit is harder and more expensive to access
Loose(easy) credit conditions - credit is easier and cheaper to access
116
What are the types of income
Disposable income - after tax is paid and benefit received
Discretionary income - after regular outgoings for essentials
Real income - income after taking account of price changes
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What effect does number of consumers have on demand
If the number of people in a country increases then it is likely demand will also increase
If the age of the population changes this can impact demand
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What is composition demand
Occurs when a good has one or more uses
An increase in demand for one use will see a decrease in the availability for another use
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What is derived demand
Where for one good is determined by demand for another good
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What is a Veblen good
Types of luxury goods form which the quantity demand increases as price increases
Because we think more expensive goods are better
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What is a giffin good
Goods that people consume more of as a price rise
The concepts of Giffen good is limited to very poor communities with a very little choice of goods
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What is speculative demand
Causes demand to increase as price increases and demand to fall as price falls
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What is supply
The quantity of goods and/or services an individual or firm is willing or able to offer for sale at a given price
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What is a fixed cost
Cost that does not change with output
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What is a variable cost
A cost that changes with output
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What is total cost
Fixed cost + variable cost
Sum of all costs
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What is law of supply
Is that as price of products rises business should expand there supply to the market
128
What is a supply curve
Shows a relationship between market price and how much a firm is willing and able to sell
129
What are the 3 reasons the supply curve slopes up
The profit motive
Production and cost
New entrants coming into the market
130
What is a profit motive
When the market price raises following an increase in demand
It becomes more profitable for business to increase production
131
What is production and cost
When output expands
A firms production costs tend to rise
Therefore a higher price is needed to cover these extra costs
132
What are new entrants coming into the market in terms of of supply
Higher prices may create an incentive for other business to enter the market leading to an increase in total supply
133
What is the marginal cost curve
As supply increases there are extra costs associated with producing the extra output
These are known as marginal costs and are calculated as marginal cost per unit of output
Different firms will drop out of markets as the price falls below this threshold it is not profitable to supply
Marginal cost of supplying extra units below this point its not helping meet the objective of profit maximisation
Therefore the supply curve represents the marginal private cost of supplying extra units
134
What are the conditions of supply
Condition of supply are influenced by costs expected costs and profit
Supply is predominately determined by unit costs
If unit cost increase then supply will move left
If unit cost decreases then supply will move right
135
What is a subsidie
A payment to encourage supply to a market
It is an incentive to supply and so increase a firm to willingness and ability to supply
136
What effect does more of a good being subsidies
It makes production cheaper
Therefore the supply increase as more profit can be made
Causing an outwards shift in supply
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What is height of barrier to entry
Ease of entry and exit to the market is important
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What effect does a decrease in height of barrier to entry have
If firms can enter and exit easily there will be more competition
Not only will this increase supply at every every price
The easier it is for firms to enter a market
The more supply there will be in market
139
What is indirect tax
A tax on consumption
Not directly given to the government
A levy paid by a supplier based on the units the sell it is a levy per unit
140
What effect does indirect tax have
These add a firm cost so an increase in indirect tax
If VAT increases the firms cost and supply will fall and supply curve will shift left
141
What is specific tax
A set levy per unit
142
What is ad valorem tax
A percentage levy per unit
143
What is productivity and what are wages measured in
Wages per unit
The efficiency with which inputs to production are processed into outputs
144
Definition of material cost
Inputs cost affect the ability of firms to supply the market at a given price
(Energy)
145
What is availability of production (production)
Firms need to have access to the Fop as there resources are
what enable the firm to produce the supply and therefore determine how much can be supplied to the market in total
146
What effect does availability of the factors of production
The more Fop available more can be supplied causing an outwards shift
147
What effect does technology have on supply
The introduction of new technology can reduce the costs of production and therefore increase the amount that can be produced
148
What effect does expectation of profits/sales have on supply
Expectations of future sales and profit play a role. This has a dynamic effect on the market
149
What is joint supply
Occurs when the supply of one good automatically leads to the production of another good
150
What is competing supply
Occurs when a good has more then one use
151
What does demand concern and reflect
Demand concerns consumers
And reflects the benefit we get from a product
This is the term marginal private benefit (MPB)
152
What does supply concern and reflect
Supply concerns producers/firms
Supply reflects the cost as firms supply at a price to cover there costs
This is termed as marginal private benefit
153
What effects does price have
Signals
Incentives
Rations
154
What is a price mechanism
The place where supply + demand satisfied through the price which incentivises producers to+ signals to consumers what actions they should take if therefore rations resources through changes in the price
155
What is market equilibrium
When quantity supplied = quantity demand
The market will clear
156
What is Market equilibrium price
The price at which the market velars + there is no tendency to change
This will be where demand equals supply
157
What is clearing price
The price which quals demand with supply
158
What is market equilibrium quantity
The quantity at which the market clears + there is no tendency to change
This is where demand equals supply
159
What is market disequilibrium
Where the market does not clear this is at a price where the quantity supplied does not equal demanded there will be excess supply(surplus) or excess demand(shortage)
160
What is a surplus(excess in supply)
Where the quantity supplied exceeds the quantity demanded the price will be above equilibrium
161
What happens if there is a surplus
If the price is above P1 this will be too high to equate demand with supply centuries paribus
At P3 there is no demand at P4 there is Q2 demand and Q3 supply
An excess supply Q3-Q2
If firms are rational price will fall to P1 to clear the market demand will expand supply will contract to Q1
162
What is shortage (excess demand)
Where the quantity supplied is less than the quantity demanded
The price will be below the eq point
163
What happens if there is a shortage
If the price is below P1 this will be too low to equate demand with supply cetruis paribus
At P2 there is no supply at P4 there is Q3 demand but Q2 supply
An excess of Q3-Q2
If consumers are rational the price will work to P1 to clear the market demand will contract supply will expand to Q1
164
What causes a shift in the demand curve and is it to do with willingness or ability
C- willingness
A- willingness
P-willingness
T-willingness
A-ability/willingess
I-ability
N-willingness/ability
165
What causes a shift in the supply curve and weather it is willingness/ability
S-ability/willingness
H-ability
I-ability
P-ability
M-ability
A-ability
T-ability
E-ability/willingness
166
What happens if there is an increase demand
An increase in demand curve shifts right from D1 to D2
This will cause price to rise from P1 to P2
Quantity demanded will move from Q1 to Q2
At this point we have a new market equilibrium (E2)
Causes an expansion in supply
167
What happens if there is a decrease in demand
There is a decrease in demand curve shifts left from D1 to D2
This will cause price to decrease from P1 to P2
Quantity demanded from Q1 to Q2
At this point we have anew market equilibrium(E2)
This causes a contraction in supply
168
What happens if there is an increase in supply
There is an increase in supply curve shifts right from S1 to S2
This will cause the price to decrease from P1 to P2
Quantity supply from Q1 to Q2
At this point the markets has found a new equilibrium(E2)
Causes an expansion in demand
169
What happens if there is a decrease in supply
There is a decrease in supply curve shifts left from S1 to S2
This will cause price to increases from P1 to P2
Quantity supplied from Q1 to Q2
At this point from Q1 to Q2
At this point the markets has found a new equilibrium point (E2)
Causes a contraction in demand
170
What letters on the diagram give tax per unit
BC
DP2
FE2
171
What letters on a diagram show area of tax revenue
DFE2P2
172
What letters on a diagram show area of production tax
DFGP1
173
What letters on a diagram show consumer tax
P1P2E2G
174
What letters on a diagram represent unit per subsidy
BC
P2D
E2F
175
What letters on a diagram show area of subsidy
DFP2E2
176
What letters on a diagram shows subsidy on producers
DFP1G
177
What letters on a diagram show subsidy on producers
P1DFG
178
What are signals
The price is the signal to producers and consumer weather to supply or demand a good
179
What are incentives
This gives producers + consumers the motivation to demand or supply
180
What is rationing
This is how many resources are allocated to each market
181
What is the signalling function
The price signal indicates to consumers if the price is greater than the marginal benefit
To the firms if it can make a profit
182
What is the incentive function
The price will indicate potential profits to a firm this will affect the profit motivate the potential profits are an incentive to supply
No profit is a disincentive to supply
183
What is the rationing function
Lower demand leads to lower prices
Lower profit less is supplied and supply meets demand
The correct quantity of goods are rationed to that market
The opposite occurs with a price increase
184
What is consumer sovereignty
This is where through their demand the consumers decide what is produced with the scares resources an economy has
185
What is static efficiency
Measures how efficiently markets work at one point in time both productively + allocatively
186
What is dynamic efficiency
How efficiency changes overtime
