AICE Economics AS Level

the economic problem

scarcity

scarcity

wants are greater than our limited resources. forces us to make choices.

positive statements

based on facts (ex. will, is)

normative statements

based on value judgement (ex. should, might)

marginal analysis

making decisions based on additional benefit vs. cost

trade offs

all of the alternatives we give up when we make a choice

opportunity cost

most desirable alternative given up in a decision (what you would have done, had you not made the decision that you did)

utility

satisfation

marginal

additional

allocate

distribute

price

amount paid

cost

amount used to produce a good

investment

money spent by businesses to improve production

scarcity vs. shortages

there is always scarcity for all items. there is not always a shortage.

shortage

producers are unable and unwilling to off goods/services at current prices

goods

physical objects that satisfy needs or wants

consumer goods

created for direct consumption

capital goods

created for indirect consumption

services

actions or activities that one person performs for another

land

all the natural resources used to produce goods and services

labour

any effort a person devotes to a task which is paid

entrepreneurship/enterprise

ambitions leaders combining fop to create goods and services

physical capital

human made resource used to make other goods and services

human capital

any skills or knowledge gained by a worker (education/experience)

3 economic questions

1. what should be produced
2. how should it be produced
3. who will consume it

planned economy

government answers the three economic questions

advantages to a planned economy

1. low unemployment
2. job security
3. equal incomes
4. free healthcare

disadvantages to a planned economy

1. no incentive
2. no competition
3. corrupt leaders
4. few individual freedoms

free market economy

individuals and businesses answer the three economic questions

advantages to a free market economy

1. incentive due to opportunity to make a profit
2. wide variety of goods
3. competition regulates economy (price goes down, quality goes up)

the invisible hand

competition and self-interest act as an invisible hand that regulates the free market

production possibility curve

shows alternative ways an economy can use its scarce resources

4 assumptions of a PPC

1. only two goods can be produced (ex. guns and butter)
2. full employment of resources
3. fixed resources
4. fixed technology

ceteris paribus

with other conditions remaining the same

constant opportunity cost

happens when resources are easily adaptable for producing either good (straight PPC)

law of increasing opportunity cost

as you produce more of any good, the opportunity cost will increase (bowed out PPC)

productive efficiency

products are produced in the least costly way (any point on the PPC)

allocative efficiency

products being produced are the ones most desired by society

shifters of the PPC

1. change in resources (quality or quantity)
2. change in technology
3. change in trade

money

anything generally accepted as a mean of payments

near money

non-cash assets that can quickly be turned into cash (ex. savings accounts, bonds)

liquidity

the extent to which there is an adequate supply of assets that can be turned into cash

liabilities

debt obligations

bartering

direct exchange of one good/service for another

4 functions of money

1. medium of exchange
2. unit of account
3. standard of deferred payment
4. store of wealth

private goods

goods consumed by someone and not available to anyone else

excludability

some people may not be able to use the good (price is too high, etc)

rivalry

consumption by one person reduces availability for others

public goods

non-excludable and non-rival, hard to charge a direct price

quasi-public goods

goods with some, but not all, of the characteristics of public goods

free riders

may try to benefit from a good another consumer purchase

merit good

good that is better for the consumer than they may realize (underproduced and underconsumed)

demerit good

good that is worse for the consumer than they may realize (overproduced and overconsumed)

paternalism

society knows best and has the right to make a value judgement

demand

different quantities of goods that consumers are willing and able to buy

law of demand

there is an inverse relationship between price and quantity demanded

law of diminishing marginal utility

as you consume more of any good, the additional satisfaction from each additional use will decrease

rule of 3

1. is it a price change
2. is it a current price change
3. is it for an item on the curve

shifters of demand

1. number of consumers
2. tastes and preferences
3. price of related goods
4. income
5. future expectations

supply

quantity sellers are able and willing to produce at a certain price

law of supply

there is a direct relationship between price and quantity supplied

shifters of supply

1. price/availability of inputs
2. number of sellers
3. technology
4. government action
5. opportunity cost of alternative production
6. expectations of future profit

double shifts

any time there is a double shift, either quantity or price will be ambiguous and the other will consistently increase or decrease

consumer surplus

difference between what you are willing to pay and what you actually pay

producer surplus

difference between what sellers are willing to sell it for and how much they receive

elasticity

shows how sensitive a quantity is to a change in price

elasticity of demand

measurement of consumer responsiveness to a change in price

elasticity of supply

how sensitive producers are to a change in price

inelastic

quantity is insensitive to a change in price

elastic

quantity is sensitive to a change in price

total revenue test

uses elasticity to show how changes in price will affect total revenue

cross-price elasticity of demand (XED)

how sensitive a product is to a change in price of another good

income elasticity of demand (YED)

how sensitive a product is to a change in income

inferior good

when income decreases, quantity demanded increases

normal good

when incomes decreases, quantity demanded decreases

price ceiling

maximum legal price a seller can charge for a product (must be below equilibrium to be binding)

price floor

minimum legal price a seller can charge for a product (must be above equilibrium to be binding)

dead weight loss

caused by price controls. it is inefficient and usually hurts the market.

quota

limit on number of inputs

purpose of quotas

1. protect domestic producers from a cheaper world price
2. prevent domestic inemployment

excise taxes

per unit tax on consumers

aggregate demand

all the goods and services buyers are willing and able to purchase at different price levels

shifters of AD

1. consumer spending
2. investment
3. government spending
4. net exports

aggregate supply

amount of goods and services that firms are willing and able to produce at a certain price level

short run AS

wages and resource prices will not increase as price level increases

long run AS

wages and resource prices will increase as price level increses

shifters of AS

1. inflationary expectation
2. (change in) resource prices
3. (change in) actions of the government
4. (changes in productivity

3 major economic goals

1. promote economic growth
2. limit unemployment
3. keep prices stable

real GDP

expressed in constant dollars

frictional unempolyment

workers between jobs

structural unemployment

changes in structure of labour force make some skills obsolete

cyclical unemployment

results from economic downturn

inflation

rising general level of prices

3 causes of inflation

1. government prints too much money
2. demand-pull
3. cost-push

stagflation

price increases but quantity supplied decreases

quantity theory of money

money x velocity = price level x quantity of output

fiscal policy

actions by congress to stabilize the economy

contractionary fiscal policy

used to decrease inflation (increase taxes, less gov. spending)

expansionary fiscal policy

used to reduce unemployment (decrease taxes, more gov. spending)

problems with fiscal policy

1. can cause defecit spending
2. problems of timing
3. politically motivated policies
4. crowding-out effect

monetary policy

federal reserve can change amount of money in the country

shifters of demand for money

1. change in price
2. changes in income
3. changes in taxation (affecting investment)

shifters of supply for money

1. change in the reserve requirement
2. change in the discount rate
3. buying and selling bonds

absolute advantage

can produce the most or requires the least input

comparative adavantage

producer with the lowest opportunity cost

trade surplus

exporting more than is imported

trade defecit

exporting less than is imported

current account

includes:
1. trades in goods/services
2. investment income
3. net transfers

financial account

measures the purchase and sale of financial assets abroad (deals with purchases of things that stay in the original, foreign country)