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A Level Economics > 1: Introduction to Markets > Flashcards

1: Introduction to Markets Flashcards

1
Q

Certius Paribus

A

All things being equal

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2
Q

Positive Statements

A

Can be tested by evidence

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3
Q

Normative Statements

A

Express an opinion on what ought to be

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4
Q

Value Judgements

A

A view of the rightness or wrongness of something based on a personal view

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5
Q

Economic Problem

A

Infinite human wants and needs but finite resources to satisfy

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6
Q

Opportunity Costs

A

The loss of other alternatives when another is chosen

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7
Q

Economic Agents

A

Producers
Governments
Consumers

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8
Q

Production Possibilities Frontier (PPF)

A

Explains constraints experienced by society. Only a finite amount of goods and services produced with a fixed amount of resources. (P1 for diagram)

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9
Q

Where is it imossible to produce at on a PPF?

A

Outside it

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10
Q

When are all factors of production being used on a PPF?

A

On the line

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11
Q

When are factors of production being underemployed on a PPF?

A

Inside it

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12
Q

What will happen to the PPF curve if there is economic growth?

A

It will shift outward

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13
Q

Where is productive efficiency achieved on the PPF curve?

A

Any point on the PPF curve

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14
Q

Where is allocative efficiency achieved on the PPF curve?

A

A specific point on the PPF curve that maximises social welfare

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15
Q

What are the two types of goods?

A

Consumer goods and capital goods. If the output of a consumer good increases the output of a capital good decreases. However, can depend on if a country invests in producing more capital goods -> shift PPF curve outwards

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16
Q

Division of Labour

A

When modern businesses divide their labour force, allocating specific tasks to individuals

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17
Q

Specialisation

A

Workers become more efficient at their task, improving the productivity of the entire production process. Proved by Adam Smith in Wealth of Nations (4800 pins with 10 specialised workers or 10-20 pins with unspecialised workers making the whole pin each)

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18
Q

Advantages of specialisation

A

Economies of scale
Reduces costs of training workers
Increase labour productivity

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19
Q

Disadvantages of specialisation

A

Less flexibility
Workers may become bored and less productive
Countries may become less self-sufficient

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20
Q

What are the functions of money

A

Unit of amount
Store of value
Deferred payment
Medium of exchange

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21
Q

Free market

A

Where people can buy and sell freely with no government intervention. Allocates scarce resources based on the price mechansim

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22
Q

Advantages of free market

A

Efficient
Rewards entrepreneurship
Consumers have greater choice due to more innovation

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23
Q

Disadvantages of free market

A

What is fair in the free market may not be fair in reality
Goods needed in society may not be produced if they don’t generate a profit
Monoplies may arise

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24
Q

Command economy

A

Resources allocated by the government

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25
Q

Advantages of a command economy

A

Can correct inequalities that exist in the free market
Reduction in unemployment
Break up monoplies

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26
Q

Disadvanatges of a command economy

A

Less efficient
Asymmetric infomation
Choice restriction

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27
Q

Mixed economy

A

Resources partly allocated by the government and partly allocated by firms

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28
Q

Who was Adam Smith?

A

Free market and ‘Invisible Hand’ believer
No monoplies and low barriers to entry and exit
Interaction of profit maximising firms and consumers would lead to mutually beneficial allocation of resources

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29
Q

Who was Karl Marx?

A

Believed free market has inequalities and workers are exploited
This lead to revolution and means of production would be seized
Gave rise to communism without explaining how it would work

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30
Q

Who was Friedrich Hayek?

A

Skeptical about command economies and believed asymmetric infomation stopped them from making good decisions about resource allocation. Firms and consumers knew best

31
Q

Rational agents

A

Economic agents who use utility to guide their decision making

32
Q

Rational producers

A

Want to maximise profits to survive, reinvest profits and offer staff and managers better rewards
In a world of asymmetric information firms may want to maximise revenue, maximise market share and achieve ethical objectives

33
Q

Rational governments

A

Act to best serve the country i.e. achieving economic growth, reducing inflation, reducing or elimination unemployment and achieving equilbrium in payments in and payments out

34
Q

Rational consumers

A

Maximise utility within their income
Different consumers and different interpretations of utility (some may save, some my spend)
Maximise work-life balance

35
Q

Demand

A

Quantity of a good or service a consumer is willing and able to buy at a given price and quantity

36
Q

What happens if the price of a substitute good rises?

A

Demand for the other good will rise

37
Q

What happens if the price of a complementary good rises?

A

Demand for the other good will fall

38
Q

Income effect

A

When prices fall consumers can afford more. Demand increases

39
Q

Price elasticity of demand

A

% change in quantity demanded / % change in price

40
Q

PED values:

Elastic -
Inelastic -
Unitary -
Perfectly elastic -
Perfectly inelastic -

A

> 1
<1
1
infinity
0

41
Q

Income elasticity of demand (YED)

A

% change in quantity demanded / % change in income

42
Q

YED values:

Normal goods (income rises, demand increases) -
Inferior goods (income rises, demand decreases) -

A

> 0
<0

43
Q

Cross price elasticity of demand (XED)

A

% change in demand for good A / % in price of good B

44
Q

Cross Price Elasticity (XED) values:

Positive -
Negative -
Close to zero -

A

Substitute
Complementary
Unrelated

45
Q

Factors affecting elasticity of demand

A

Availibility of substitutes
Indirect tax/subsidies
Type of good
Percentage of income and time

46
Q

Total revenue =

A

Price per unit x quantity

47
Q

Revenue values:

Max total revenue -
Zero demand or high price -
Zero price or high quantity -
Midpoint -

A

PED of +/- 1
Minus infinity
0
minus 1

48
Q

Law of supply

A

Rise in price causes a rise in supply and vice versa

49
Q

Price elasticity of supply (PES)

A

% change in quantity supplied / % change in price

50
Q

PES values:

Elastic -
Inelastic -
Unitary -

A

> 1
1>PES>0
0

51
Q

What does high elasticity of supply give firms?

A

Allows them to react quickly to changes in price and demand

52
Q

What products have more inelasticity of supply?

A

Ones perishable to weather conditions i.e. crops, agriculture

53
Q

What gives firms more elasticity of supply?

A

Ones that keep extra stock. In periods of high unemployment we see more elastic supply as labour pod is larger

54
Q

Short run

A

Capacity is fixed
One or more factors of production is fixed
Hard to increase supply in this period
Supply = inelastic

55
Q

Long run

A

No factors of production are fixed
Firms able to increase capacity
Supply = more elastic than short run as firms have more time to react

56
Q

What has different time scales for long and short run?

A

Industries i.e. long run is shorter for software comapnies than aeroplane manufacturers

57
Q

Equilibrium

A

Where supply and demand meet

58
Q

Disequilibrium

A

When supply and demand don’t meet and cause excess supply or demand. Market forces stabilise this overtime

59
Q

What affect how much the equilibrium price and quantity change by?

A

Price and elasticity of demand and supply i.e. a rightward shift along an elastic supply curve will influence quantity more than price

60
Q

Price mechanism

A

Shows how demand and supply interact

61
Q

Functions of the price mechanism

A

Incentive - rise in price, encourages firms to produce more
Signalling - price changes, consumer/producer adapts accordingly
Rationing - resources are scarce, price of a good rations it and decides who is willing and able to pay for it

62
Q

Advantages of price mechanism

A

Allocate efficiently
No time lost as no one is paid to monitor it
Efficient as prices are as low as possible
Consumers have control on what producers make

63
Q

Disadvantages of price mechansim

A

Some goods not produced through price mechansim
Missing markets
Disparity in wages between low and skilled workers causes inequalities
No moral overlay or beliefs before a government intervenes

64
Q

Consumer surplus

A

Sum of all the extra benefit consumers get in buying/consuming a good/service

65
Q

Producer surplus

A

Sum of the extra money earned above the cost of production

66
Q

Total Surplus =

A

CS + PS. Benefit to society as result of buying and selling a particular good or service. If the market isn’t at market clearing equilibrium there is deadweight loss. This is due to the extra benefit to society not being generated as result of over or under production/consumption

67
Q

Specific taxes

A

Taxes paid per unit. Increase cost of production by the tax amount on each unit and leads to a decrease in supply

67
Q

Ad valorem taxes

A

Based on the value of the good being sold. They increase price by a fix percentage

68
Q

Indirect tax

A

Tax on consumption

68
Q

Direct tax

A

Tax on income/wealth

69
Q

When is the tax burden more on the consumer?

A

When the good is inelastic

70
Q

When is the tax burden on the producer?

A

When the good is elastic

71
Q

Subsidy

A

Money given by the government to enourage production for firms. Causes producer and consumer surplus to rise

A Level Economics (15 decks)

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