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| Science that studies HOW resources are used in order to satisfy human wants or needs. |
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Limited, scarce
Human wants are Unlimited |
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| Resources used in capitalist production |
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People not only have a want but also purchasing power.
Eg. Starvation in Africa is demand but they do not have purchasing power |
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Production consists of firms
(1) |
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Definition
| Employs factors of production in order to produce commodities that it sells to other firms to households, or to government. |
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Consumers consists of households
(1) |
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Definition
| Consists of all people living under one roof, make joint financial decisions |
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Circular flow of expenditures and income
(1) |
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Definition
Commodities and factors of production are bought and sold in MARKET
Firms supply commodities which are demanded by households who supply factors of production to firms |
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| Household sells labour/land/capital in factor markets which are demanded by firms |
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| Goods and services brought here to be sold to households who demand for them. |
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Focuses on household and firms
eg. determination of price of apples in market for apples, ONLY focuses on apples |
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Studies economy as a whole.
eg. determination of price level for economy as whole. |
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| allow for simplification of the real world |
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| on model depends on assumptions, outcomes of a model |
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Production Possibility Curve
It can shift and change according to how of certain goods are being produced |
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Definition
Value of variable relative to its value in base period.
(Absolute value in given period)/ (Absolute value in base period)*100
could be prices increasing over the years or differences in prices between different locations |
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Definition
| Relationship between quantity demanded of commodity and its own price |
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Definition
Other things being equal, the higher the price of commodity, the lower it is demanded
This is not an absolute law, it is only most likely outcome
It is the negative slope |
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Definition
Substitute can replaces another commodity (Pepsi vs. Coke)
Complement can be consumed in conjunction with another commodity (Drinks and bottles) |
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Types of goods (3 types)
(2) |
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Definition
Normal Good - the demand for normal good increases when income increases
Inferior goods - Demand for inferior good decreases when income increases
Income-Independent Good - changes in income won't effect demand |
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Causes for demand to shift
(2) |
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Definition
If price is same but demand changed then demand shifts.
This can happen when population increases, tastes/preferences change, expectations about future will cause increase in demand for most commodities |
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Definition
| Price of good changes, that is only movement along curve, it does not shift. |
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The amount that producers plan to sell in a given period of time at particular price
Depends on prices of input used to produce, State of technology (how much it costs), number of firms in the industry |
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| Relationship between quantity supplied and its price, holding all other variables constant |
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Definition
| States that other things being equal, the higher the price of commodity, the larger the quantity supplied |
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How Supply Curve Shifts
(2) |
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Definition
| Shifts when change in price of input (factor of production), change in technology, change in number of firms |
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Movement along Supply Curve
(2) |
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Definition
| Price of good changes while value of other variables are unchanged |
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Term
4 Laws of Demand and Supply
(2) |
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Definition
Rise in demand causes rise in equilibrium price and quantity
Fall in demand causes fall in both equilibrium price and quantity
Rise in Supply causes fall in equilibrium price and increase in equilibrium quantity
Fall in supply causes increase in equilibrium price and decrease in equilibrium quantity |
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Definition
| Value a consumer places on good is equal to maximum price that she is willing to pay for it, difference between the value the consumer assigns to good and its market price |
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Definition
| Additional cost of producing each unit of good is the minimum price that producer is willing to accept for each additional unit |
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Government sets minimum price that can be charged for commodity
Price floor must be above market price |
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Definition
Government sets maximum price that can be charged for commodity
Price ceiling must be below market price |
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Indirect Tax
Direct Tax
(2) |
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Definition
Indirect - on production or consumption
Direct - on income |
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Term
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Definition
reduces unit-cost of production allowing firms to demand lower price for unit, shifts supply curve down-right, price will fall and quantity transacted of commodity will increase
Can be given to producers OR consumers, results are same |
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Definition
Increases cost per unit of production, causing firm to demand higher minimum price, shifts supply curve up to left
Can be put on consumers or producers, results are the same |
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Definition
| Responsiveness of quantity demanded to change price of a commodity We need to know price elasticity of demand to determine size of required shift in supply curve. |
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Arc Elasticity of Demand
(3) |
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Definition
| Arc elasticity of demand measures average responsiveness of quantity demanded to change in price over interval of demand curve |
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Term
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Definition
| Measure of elasticity at only one point of demand curve. |
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Values of Elasticity (What does zero and infinity mean?)
(3) |
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Definition
Only absolute values. zero - infinity
elasticity zero means curve is vertical demand and Q is unchanged curve is infinity
elasticity infinity means horizontal demand curve and slope is 0 |
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What happens to elasticity when price goes up? what do the values of elasticity mean?
(3) |
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Definition
Price goes up (let n=elasticity, C=change)
if 1=n then equilibrium
n>1 p/q is larger ratio, %CQ>%CP
n<1 p/q is smaller ratio, %CP>%CQ |
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Total revenue, what happens to price when TR changed?
(3) |
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Definition
TR=P x Q
n>1 p/q is smaller ratio, %CP<%CQ therefore decrease in price increases TR
n<1 p/q is smaller ratio, %CP>%CQ
therefore decreases in price decreases TR |
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Term
What determines elasticity of demand?
(3) |
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Definition
3 main factors:
-How easily good can be replaced (coke vs pepsi vs sprite)
-Proportion of income spend on good
- amount of time elapsed since price change, more time means substitute can be found easier |
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Income Elasticity of Demand
(3) |
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Definition
Measures responsiveness of quantity demanded to change in income.
Results:
ny>0 in case of normal good
ny<0 in case of inferior good
ny=0 in case of income-independent good |
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Cross-Elasticity of Demand
(3) |
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Definition
| Nxy - measures responsiveness of quantity demanded of good to change in price of ANOTHER good |
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Term
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Definition
Ns - measures the responsiveness of quantity supplied to change in price of commodity
Short-run supply curve is relatively steep, hard to increase output by increasing price
Long-run supply curve is relatively flat, production capacity can be increased easily |
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Incidence of Sales Tax
(3) |
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Definition
| Burden of sales tax is distributed between consumers and producers in manner that depends upon elasticities of supply and demand |
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