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Micro Economics > 1 > Flashcards

1 Flashcards

1
Q

Factors of production

A

Land
Labour
Capital
Enterprise

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2
Q

Command economy

A

How to produce
What to produce
For whom to produce

(Gov decides)

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3
Q

Free market economy

A

Firms compete with each other without government intervention

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4
Q

Positive statement

A

Statements that can be tested using evidence

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5
Q

Normative statement

A

Subjective statements (ought)

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6
Q

What is assumed in economics

A
  • Rational consumers
  • Producers/firms want to maximise profits
  • Government wishes to improve economic/social welfare of citizens
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7
Q

What happens in a command economy

A
  • most resources are state owned
  • planning allocates resources
  • little role for market prices
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8
Q

What happens in a mixed economy

A
  • mix of state/private ownership
  • gov. Intervention in markets
  • mix will vary from country to country
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9
Q

What happens in a free market economy

A
  • markets allocate resources
  • driven by the profit motive
  • limited role for the state
  • private sector dominates
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10
Q

Utility = ?

A

Measurement of satisfaction

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11
Q

What’s a free good?

A

Resources that aren’t scarce

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12
Q

What’s allocative efficiency?

A

You can’t make anyone better off without making someone else worse off (like on PPF curve)

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13
Q

What’s productive efficiency?

A

Producing maximum output (points along PPF curve)

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14
Q

What are the 4 non price determinants of demand?

A

Price of substitutes
Price of complements
Income
Fashion/taste

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15
Q

Definition of demand:

A

The quantity that purchasers are willing and able to buy at a given price in a given period of time

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16
Q

How does demand relate to price?

A

Inverse relationship

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17
Q

5 non price determinants of supply

A 
Costs 
Firms expectations 
Technology
Legislation 
Indirect tax
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18
Q

Reasons why supply slopes upwards

A
  • the profit motive
  • production and costs
  • new entrants coming into the market
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19
Q

What’s the profit motive?

A

Market price rises following an increase in demand (more profitable)

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20
Q

How does production and costs make the demand curve slope upwards?

A

When output expands, a firms production costs tend to rise therefore resulting in higher prices

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21
Q

How does new entrants coming into the market result in an upward sloping supply curve

A

Higher prices may create an incentive for other businesses to enter a market leading to an increase in total supply

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22
Q

What is price elasticity of demand?

A

The responsiveness of demand to a change in price (always negative but ignore the sign)

23
Q

PED equation

A

% change in QD
/
% change in P

24
Q

What do price inelastic curves look like

A

Steep

Small decrease in price results in a less than proportionate increase in quantity demand

25
Q

What do price elastic curves look like?

A

Shallow

26
Q

PED of price inelastic

A

PED < 1

27
Q

PED of price elastic

A

PED > 1

28
Q

Extreme inelastic

A

PED = 0

Vertical line

29
Q

Extreme elastic

A

PED = infinity

Horizontal line

30
Q

Factors determining PED

A
  • number of substitutes available
  • price of good compared to total income
  • cost of substituting between different goods
  • brand loyalty
  • degree of necessity/ luxury
31
Q

Increase price of inelastic good means….

A

Increase in revenue

32
Q

Higher up the demand curve….

A

Prices more elastic

33
Q

What is income elasticity of demand?

A

Shows how responsive the demand for a product is to a change in real income

34
Q

YED formula

A

% change in QD
/
% change in real income

(Always put + or - )

35
Q

XED formula

A

% change in good x
/
% change in good y

36
Q

Positive or negative XED for substitute

A

+

37
Q

Positive or negative XED for complements

A

-

38
Q

XED of unrelated products

A

0

39
Q

What does price elasticity of supply mean

A

PES measures the relationship between change in quantity supplied and a change in price

40
Q

If supply is elastic, producers can _________ their output…..

A

Increase output without a rise in cost or time delay

41
Q

If supply is inelastic, firms ____________

A

Find it hard to change their production in a given time period

42
Q

PES > 1

A

Elastic

43
Q

PES < 1

A

Inelastic

44
Q

PES = 0

A

Perfectly inelastic

45
Q

PES = infinity

A

Perfectly elastic

46
Q

Factors affecting PES

A
  1. Spare production capacity
  2. Stocks of finished products/components
  3. Ease and cost of factor substitution/factor mobility
  4. Production speed
47
Q

What is consumer surplus

A

The difference between the total amount that consumers are willing and able to pay for a good or service (shown by the demand curve) and the total amount they actually pay (market price)

48
Q

Where is consumer surplus on a demand curve

A

The area under the demand curve and above the market price

49
Q

What does elastic demand mean for consumer surplus

A

Relatively low

50
Q

What does a low PED mean for consumer surplus

A

High consumer surplus

51
Q

If demand is inelastic, what happens to consumer surplus

A

Greater consumer surplus as some buyers are willing to pay a high price to continue consuming the product

52
Q

Where is producer surplus on a supply curve

A

The area above the supply curve and below the current market price

53
Q

4 functions of the price mechanism

A
  1. Allocate
  2. Rationing
  3. Signalling
  4. Incentives

Micro Economics (2 decks)

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