Principles of economics
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| • Scarcity | Refers to the condition in which human wants and needs exceed the available resources necessary to satisfy them. |
| • Opportunity costs: | Refers to the value of the next best alternative that must be given up in order to pursue a certain decision or action. In other words, it is the cost of the foregone opportunity. |
| Are opportunity costs monetary? | No, It can also refer to the time, effort, and other resources that must be given up in order to pursue a certain decision. |
| O Marginal benefits | Are the additional benefits or utility gained from consuming or producing one additional unit of a good or service, while holding other factors constant. |
| O Marginal costs: | Marginal costs refer to the additional cost incurred from producing one additional unit of a good or service, while holding other factors constant. |
| For an activity to be worth it, marginal benefits must exceed the... | Marginal costs (MB>MC) |
| MC > MB means; | It is no longer worth continuing with the activity since MC are greater than MB. |
| What is the optimal point? | The optimal point, also known as the point of equilibrium, is the point at which the marginal benefits of consuming or producing a good or service are equal to the marginal costs of producing that good or service |
| At the optimal point, any additional units of the good or service that are produced or consumed would result in a ..... in overall benefit or utility, because the additional .... would outweigh the additional .... | At the optimal point, any additional units of the good or service that are produced or consumed would result in a decrease in overall benefit or utility, because the additional costs would outweigh the additional benefits. |
| What is the equilibrium? | The optimal point is the point at which the most value or benefit can be obtained from consuming or producing a good or service, given the available resources and technology. |
| Factors of production refer to; | The resources and inputs that are used in the production process to create goods and services. These resources are combined in various ways by businesses to produce the goods and services that people want and need. |
| The four factors of production are: | O Land: o Labor: o Capital: o Entrepreneurship: |
| Land refers to | This refers to all natural resources used in the production process, such as soil, water, forests, minerals, and other resources that are found in nature. |
| O Labor: | This refers to the human effort, skills, and abilities used in the production process, including both physical and mental work. |
| O Capital | This refers to the tools, machinery, equipment, and other man-made resources used in the production process, such as buildings, vehicles, and computers. |
| O Entrepreneurship | This refers to the innovation, creativity, and risk-taking involved in the production process, including the ability to bring together the other factors of production to create a new product or service. |
| What are Positive Statements: | These are facts. It Including descriptions, theory development and theory testing. They are objective with no judgment. |
| What are Normative Statements: | These are not facts. They are what ought to be. Value judgments, should-would-could-ought to be. These are subjective statements. |
| • Equilibrium | The equilibrium point refers to the point at which the quantity demanded of a good or service equals the quantity supplied of that good or service, resulting in a market clearing price. At this point, there is no excess demand or excess supply, and the market is in a state of balance. |
| • Equilibrium | The equilibrium point refers to the point at which the quantity demanded of a good or service equals the quantity supplied of that good or service, resulting in a market clearing price. At this point, there is no excess demand or excess supply, and the market is in a state of balance. |
| • Equilibrium | The equilibrium point refers to the point at which the quantity demanded of a good or service equals the quantity supplied of that good or service, resulting in a market clearing price. At this point, there is no excess demand or excess supply, and the market is in a state of balance. |
| • Equilibrium | The equilibrium point refers to the point at which the quantity demanded of a good or service equals the quantity supplied of that good or service, resulting in a market clearing price. At this point, there is no excess demand or excess supply, and the market is in a state of balance. |
| NA | NA |
| • Demand is; | Demand refers to the willingness and ability of consumers to buy a particular good or service at a given price and time. |
| What does demand represent? | It represents the quantity of a product or service that consumers are willing and able to buy at various prices, holding all other factors constant. |
| The demand curve is | The entire relationship between the price of the product and the quantity demanded. |
| Quantity demanded (QD): is | Amount of a good or service that consumers are willing to buy at a particular price. It is not necessarily the quantity actually bought! |
| What is the law of demand? | The higher the price of a good, the smaller the quantity demanded:↑P → ↓QD The lower the price of a good, the greater the quantity demanded: ↓P → ↑QD |
| What is the result of the law of demand is being used | Movement along the curve. |
| Name 5 Determinants of Demand: | 1. change in buyers taste 2. change in the number of buyers 3. change in income 4. change in prices of related goods 5. change in consumer expectations |
| What are substitute goods? and give an example | Are products or services that can be used in place of each other. When the price of one good increases, the demand for its substitute typically increases as well, because consumers switch to the more affordable option. tea and coffee |
| Complementary goods | Complementary goods are products or services that are often used together. When the demand for one good increases, the demand for its complement usually increases as well. sigarets and lighter |
| What is Supply? | Supply refers to the quantity of a good or service that producers are willing and able to sell at a given price and time. |
| What does supply represent? | It represents the amount of a product or service that producers are able and willing to sell at various prices, holding all other factors constant. |
| The supply curve: | The entire relationship between the quantity supplied and the price |
| Quantity supplied (QS) refers to | A point on the supply curve. The quantity supplied at a particular price. It is not necessarily the quantity actually sold! |
| What is the Law of supply? | The higher the price of a good, the greater the quantity supplied: ↑P → ↑QS The lower the price of a good, the smaller the quantity supplied: ↓P → ↓QS |
| The lower the price of a good, the ..... the quantity supplied: | The lower the price of a good, the smaller the quantity supplied: ↓P → ↓QS |
| The higher the price of a good, the ...... the quantity supplied: | The higher the price of a good, the greater the quantity supplied: |
| Explain Higher Price, Greater Quantity Supplied: | When the price (P) of a good increases, suppliers are willing to produce and sell more of that good because higher prices usually mean higher potential profits. This is depicted by the upward arrow (↑) for both price and quantity supplied (QS). |
| Explain Lower Price, Smaller Quantity Supplied: | Conversely, when the price (P) of a good decreases, suppliers are less inclined to produce and sell as much of that good because lower prices mean lower potential profits. This is shown by the downward arrow (↓) for both price and quantity supplied (QS). |
| Name 6 determinants for supply | 1. change in resource price 2. change in technology 3. changes in taxes and subsidies 4. changes in prices of other goods 5. change in producer expectations 6. change in number of suppliers |
| • Equilibrium | The equilibrium point refers to the point at which the quantity demanded of a good or service equals the quantity supplied of that good or service, resulting in a market clearing price. At this point, there is no excess demand or excess supply, and the market is in a state of balance. |
| At the Equilibrium Point we have: | The equilibrium price (PE). The equilibrium quantity (QE). |
| Scarce resources are; | Often referred to as limited resources, are resources that are finite and not abundant enough to satisfy all the wants and needs of people. |
| Scare resources might be allocated by; | O Market price. o Command. o Majority rule. o Contest. o First-come, first-served. o Lottery. o Personal characteristics. o Force. |
| What is Consumer surplus? | Is an economic concept that refers to the difference between the maximum amount that a consumer is willing to pay for a good or service and the actual price that they pay. |
| What does consumer surplus represent? | It represents the value that consumers receive from a transaction over and above what they paid for it. |
| What is the producer surplus? | Producer surplus is an economic concept that refers to the difference between the price that producers receive for a good or service and the minimum price they are willing to accept for it. |
| What does the producer surplus represent? | It represents the benefit that producers receive from a transaction over and above the cost of producing the good or service. |
| How to calculate the producer surplus? | Producer surplus is the (actual) price of a good minus the minimum-supply price (marginal cost), summed over the quantity sold. |
| How to measure producer surplus? | By the area below the market price and above the supply curve, summed over the quantity sold |
| It is the extra benefit from receiving a higher price. | Producer surplus |
| What is deadweight loss? | Occurs when there is an inefficiency in the market, leading to a loss of economic welfare. This inefficiency means that total surplus (the sum of consumer and producer surplus) is not maximized. |
| Common causes of deadweight loss include: | Taxes and subsidies Monopolies Price floor Price ceiling |
| What does deadweight loss represent? | The lost opportunities for trade and the inefficient allocation of resources. |
| What sort of loss is a deadweight loss | Social loss |
| The Government can set restrictions on prices of goods and services, these restrictions can be: | O Maximum price/ Price ceiling: Housing market: maximum rent Illegal to trade at a price higher than a specified level! o Minimum price/ Price floor: Labour market: minimum wages Illegal to trade at a price lower than a specified level |
| Occam's razor | The logical principle that states you should make no more assumptions than the minimum amount needed to perform analysis; in economics, we use the concept of Occam's razor when we invoke the ceteris paribus assumption. |
| Ceteris paribus or Law of demand: | The higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded. |
| Law of supply: | Suppliers will offer more for sale at higher prices and less at lower prices. As the price of a good rises, quantity supplied rises. |
| Law of diminishing marginal utility: | The more we consume a product, the less benefit or utility we get. |
| 6 factors that cause demand to shift: | Income; preferences; price of related goods; population; future prices; expected future income or credit |