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37 Cards in this Set
- Front
- Back
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Positive Economics
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Based on scientific observations use reason, logic and empiricism
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Normative Economics
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Includes value judgements in reasoning
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Economic analysis focuses on
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Positive economics. Because it includes statements that can be tested.
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Ceteris paribus
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Assume that most values remain unchanged. Allows to test one facet of theory. 'Simplifies'
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Economic agents
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Consumers & producers
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Deductive Analysis
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Based on general observation to broad generalisations
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Historical method analysis
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Understands institutions by tracing evolutions from their origins in the past
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Statistical Induction analysis
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Analysis of numerical data, to develop quantitive knowledge.
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Causation
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When evidence proves a causal relationship between events
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Association
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Being together does not necessitate a relationship
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What to Produce / Market?
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Produce (Supply) products & services for which their are willing buyers.
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Market price
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Signals to producers what to produce
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How are Goods and Services produced?
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Labour and other inputs (capital) are combined in proportions that minimise cost per unit.
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Where to produce?
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Most countries have specific areas where production factors dictates production location.
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Utility
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Usefulness. Can diminish as you consume more (water) called Marginal Utility
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Scarcity
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How fixed resources are allocated
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Free Goods
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Goods with no opportunity costs. (Maybe Air?)
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Opportunity cost
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Cost of any activity measured in terms of the benefit from the best alternbative forgone
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Economic Pie
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Economy has a finite amount of production, income, resources and wealth.
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Resources
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land, labour and capital
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Production Possibilities Frontier
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Maximum output level for 2 goods when all resources used effectievly and opportunity costs involved in production
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Demand (Law of Demand)
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More of a good will be demanded at a lower price ceteris paribus.
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Change in demand
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Due to factors such as fashion, consumer income levels. Shifts demand curve to right
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Substitute goods
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The higher the price of substitutues the higher the demand for the original good.
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Complementary goods
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As price for complements rise, demand for complement and original falls
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Income
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As people's income rises demand for goods rise (ex inferior goods)
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Why does Demand Curve slope downward?
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When price increases consumer affordability decreases
People are more likely to buy substitutes as prices increase. |
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Supply Curve (Law of Supply)
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There is a direct relationship between the price of goods & services and what producers offer for sale, certris paribus.
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Why does supply curve slope upwards?
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Profitiability at higher prices.
Rising costs of production but capacity fixed. New market entrants |
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Movement along supply curve
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Price changes shift along curve. All other shift the curve itself.
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Determinants of Supply
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1. Costs of production
2. Substitute goods in supply 3. Nature & random shocks 4. Goods in joint supply 5. Expectations of future prices |
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Price elasticity of Demand (EPD)
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Measures the proporionate change in quantity consumed for a specified proportionate change in price
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Demand Elastic (Responsive)
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Responds to price changes.
- Availability of subsitutes - Uses large portion of budget |
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Demand Inelastic
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Does not respond to price changes
- Necessity goods - Addictive goods |
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Elasticity and Time Effect
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Time generally makes goods elastic over long run as copnsumers can change demand patterns.
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Demand Curve variables
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Quatity demaned at various prices.
Other variables are, Income, Tastes & preferences, prices of other goods and income distribution for aggregate demand. |
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Income elasticity
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EID = proportionate change in quanitity /proportionate change in income
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