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Economics AS > 1.2 > Flashcards

1.2 Flashcards

1
Q

What are the two approaches to make an assumption ?

A

Deduction and Induction

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2
Q

What is Deduction ?

A

Deduction is when you start with a hypothesis

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3
Q

What is Induction ?

A

When you collect evidence

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4
Q

What is neoclassical economics ?

A

It is a theory that focuses on supply and demand being the driving forces behind the production, pricing, and consumption of goods and service

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5
Q

What is behavioural economics ?

A
  • It is a school of economic thought based on evidence and observations to develop assumptions of economic decision making.
  • It assumes that individuals have bounded rationality
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6
Q

What is bounded rationality ?

A

Individuals wish to maximise utility but are unable to do so due to a lack of time, information and ability to process information

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7
Q

What prevents consumers form being rational ?

A
  • A lack of time
  • A lack of information
  • A lack of ability to process information
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8
Q

What do consumers aim to maximise ?

A

Consumers aim to maximise utility

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9
Q

What is meant by a customers utility ?

A

The satisfaction they gain from consuming a good or a service

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10
Q

What do firms aim to maximise ?

A

Firms aim to maximise profits

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11
Q

How do firms maximise profits ?

A

Through producing as efficiently as possible and making things that consumers want and need

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12
Q

What do economic agents require to make rational decisions ?

A
  • Time
  • Information
  • The ability to process information
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13
Q

What are the aspects of human behaviour that prevent rationality ?

A
  • Habitual behaviour / Consumer inertia; when they are satisfied with what they have
  • Being influenced by the behaviour of others
  • Consumer weakness at computation; when the consumer does not understand the data or information
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14
Q

What is Privatisation ?

A

The process of transferring economic activity from the state to the market

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15
Q

What is Nationalisation ?

A

The process of bringing economic activity under state control

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16
Q

What is Demand ?

A

Demand is the quantity of a good or service purchased at a given price over a given time period

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17
Q

What is the law of demand ?

A

Ceteris paribus, as the price of a good increases quantity demanded decreases; conversely, as the price of a good decreases quantity demanded increases

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18
Q

What is meant by Diminishing Marginal Utility ?

A
  • It refers to the falling satisfaction for every additional unit consumed
  • The more you have of something, the less satisfied you are with it
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19
Q

What is the income effect ?

A

Assuming a fixed level of income, the income effect means that as the price level falls the amount that consumers can afford increases, and so demand increases

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20
Q

What is marginal utility ?

A

The utility or satisfaction obtained from consuming one extra unit of a good or service

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21
Q

Explain diminishing marginal utility

A

As successive units of a good are consumed, the marginal utility gained from each extra unit will fall

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22
Q

How do you work out government spending on subsidies ?

A

Subsidy rate x quantity sold

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23
Q

How do you work out total tax revenue ?

A

Tax revenue = tax rate x quantity sold

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24
Q

What is a reason for the demand curve being downward sloping ?

A

When the price of the good is lower, more can afford it and/or are willing to buy it. So consumer demand increases

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25
Q

How do changes in prices affect the demand curve?

A

You go along the demand curve, but it doesn’t shift

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26
Q

What does a decrease in price lead to ?

A

A decrease in price results in an extension/expansion in demand. We can represent this on a diagram by movement along the demand curve, to the right

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27
Q

What does an increase in price lead to ?

A

An increase in price results in a contraction in demand. This can be represented by a movement along the demand curve, to the left.

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28
Q

What causes a shift in the demand curve ?

A

Non price related factors such as PIRATES

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29
Q

What is PIRATES ?

A
  • Population; larger the population, higher the demand
  • Income; more disposable income means more demand
  • Related goods
  • Advertising; good advertising will increase demand
  • Tastes and fashions
  • Expectations; if the price of something is likely to increase in the future than demand is likely to increase in the present
  • Seasons; demand changes according to the seasons
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30
Q

What is a substitute good ?

A

Substitute goods are alternative products that could be used for the same purpose

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31
Q

How does the price of a substitute good impact demand ?

A
  • As the price of a substitute good increases, demand for the original product increases. Less people will buy the substitute good.
  • As the price of the substitute good decreases, demand for the original product will decrease. More people will buy the substitute good.
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32
Q

What is a complementary good ?

A

Complimentary goods are products that are used together

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33
Q

How does the price of a complimentary good impact demand ?

A
  • If A is a complement to B, an increase in the price of A will result in a negative movement along the demand curve of A and cause the demand curve for B to shift inward; less of each good will be demanded.
  • Conversely, a decrease in the price of A will result in a positive movement along the demand curve of A and cause the demand curve of B to shift outward; more of each good will be demanded
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34
Q

What is revenue ?

A

Revenue is the income that a government or company receives

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35
Q

How do you calculate total revenue ?

A

Price × Quantity

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36
Q

What is supply ?

A

Supply is the quantity of a good or service that firms are willing to sell at a given price over a given time period

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37
Q

What is the law of supply ?

A

Ceteris paribus, as the price of a good increases, the quantity supplied increases and as the price of a good decreases, the quantity supplied also decreases

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38
Q

What does the supply curve assume ?

A
  • Firms are motivated to produce by profit

- The cost of producing a unit increases as output increases

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39
Q

Why does the supply curve slope upwards from left to right ?

A

This is because an increase in price will also lead to an increase in supply and the quantity produced

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40
Q

What does an increase in price lead to (supply curve) ?

A
  • An increase in price leads to an extension in supply.

- Movement along the curve towards the right

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41
Q

What does a decrease in price lead to (supply curve) ?

A
  • A decrease in price leads to a contraction in supply.

- Movement along the curve towards the left.

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42
Q

What causes an extension in supply ?

A

An increase in price

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43
Q

What causes a contraction in supply ?

A

A decrease in price.

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44
Q

What are the factors that shift the supply curve ?

A
  • Productivity; higher productivity causes an outward shift because average price for the firm decreases
  • Indirect taxes; inward shift in supply
  • Number of firms; More firms there are, the larger the supply
  • Technology; more advanced the technology causes an outward shift
  • Subsidies; subsidies can cause an outward shift in supply
  • Weather; favourable conditions will increase supply, shift to the right
  • Costs of production; If it falls, shift to the right. If it rises, shift to the left
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45
Q

Why does the number of firms in a market affect supply ?

A

If there are more firms in a market, there are likely to be more firms producing the same good. This increases the amount of the good available.

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46
Q

How can we represent an increase in the number of firms on a curve ?

A

A shift to the right on the diagram

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47
Q

What is a market ?

A

A market is anywhere where buyers and sellers meet to exchange goods and services

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48
Q

What is excess demand ?

A

Excess demand is when there is too much demand in relation to supply

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49
Q

How is excess demand eliminated by market forces ?

A
  • Excess demand is easily eliminated by market forces. If either the price or the supply goes up, demand will decrease exponentially
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50
Q

What is excess supply ?

A

Excess supply is when there is more supply than there is demand

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51
Q

How is excess supply eliminated by market forces ?

A
  • Excess supply is easily eliminated by market forces. This is resolved when firms reduce prices to sell off excess supply.
  • Lower prices discourage supply and encourage demand until the excess is removed.
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52
Q

What is the equilibrium price?

A
  • The equilibrium price is the price where demand equals supply
  • Where consumers and producers willingly meet
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53
Q

Why is the equilibrium price also known as the market-clearing price?

A

It is also known as the market clearing price because all the products supplied to the market are bought or cleared from the market.

54
Q

What is a direct tax ?

A

A tax levied directly on an individual or organisation

55
Q

What is an indirect tax ?

A

A tax levied on a good or service

56
Q

What is a specific tax ?

A
  • Tax is the same fixed amount at all prices

- Causes a parallel shift in the supply curve

57
Q

Examples of a specific tax

A

Fuel duty, beer duty

58
Q

What is an ad valorem tax ?

A
  • The tax increases as the amount sold rises

- Causes a non parallel shift in the supply curve

59
Q

Examples of an ad valorem tax

A

VAT, Import tariffs

60
Q

What does the government aim to do by imposing taxes ?

A
  • To raise government revenue

- To reduce certain economic activities

61
Q

What is a subsidy ?

A

Money given to firms by the government in order to encourage production

62
Q

What do subsidies lead to ?

A
  • Increased production
  • Lower production costs
  • Lower costs for customers
  • Shift right in the supply curve
63
Q

Why does the government give subsidies ?

A

Governments give subsidies to firms in order to encourage production

64
Q

What does a subsidy do to the supply curve ?

A

It shifts the supply curve to the right

65
Q

What is derived demand ?

A

It is the demand for a factor of production used to produce another good or service

66
Q

What is effective demand ?

A

Effective demand is when a desire to buy a product is backed up by having an ability to pay

67
Q

What is joint demand ?

A

Joint demand is when demand for one product is positively related to demand for a related good or service e.g. fish and chips, they are complementary

68
Q

What is composite demand ?

A

Composite demand is where a product has more than one use, an increase in demand for one product leads to a fall in supply of the other.

69
Q

What is the price elasticity of demand ?

A

PED measures the responsiveness of demand given a change in price

70
Q

What is the equation for price elasticity of demand ?

A

Percentage change in quantity demanded / percentage change in price

71
Q

When is PED elastic ?

A

When the PED value is greater than 1

72
Q

When is PED inelastic ?

A

When the PED value is between 0 and 1

73
Q

When is PED unitary elastic ?

A

When the PED value is 1

74
Q

When is PED perfectly elastic ?

A

When the PED value is infinity

75
Q

When is PED perfectly inelastic ?

A

When the PED value is 0

76
Q

When is demand price elastic ?

A

When a change in price causes a proportionally larger change in demand

77
Q

When is demand price inelastic ?

A

When a change in price causes a proportionally smaller change in demand

78
Q

What are the determinants of price elasticity of demand ?

A
  • Number of substitutes
  • Necessity
  • Addictiveness
  • Time
  • Proportion of income spent on the product
79
Q

What effect does number of substitutes have ?

A
  • The more substitutes a product has, the greater the degree of consumer switching will be when there is a price change
  • The more substitutes a product has the more elastic demand must be
80
Q

What effect does necessity have ?

A

If a product is considered a necessity, demand is likely to be price inelastic as people require the product no matter what the price is

81
Q

What effect does addictiveness have ?

A

The more addictive a product is, the more price inelastic demand will be

82
Q

What effect does time have ?

A

Time gives consumers the opportunity to find alternatives. Therefore the greater the time period, the more price elastic demand will be

83
Q

What effect does the proportion of income spent on the product have ?

A

The greater the proportion of income spent on a product the less able consumers will be able to afford any price increases. Therefore, the greater the proportion of income spent on a product the more price elastic demand will be

84
Q

What is the price elasticity of supply ?

A

PES measures the responsiveness of supply given a change in price

85
Q

What is the equation for price elasticity of supply ?

A

Percentage change in quantity supplied / percentage change in price

86
Q

When is supply price elastic ?

A

When a change in price causes a proportionally larger change in supply

87
Q

When is supply price inelastic ?

A

When a change in price causes a proportionally smaller change in supply

88
Q

When is PES elastic ?

A

When the PES value is greater than 1

89
Q

When is PES inelastic ?

A

When the PES value is between 0 and 1

90
Q

When is PES unitary elastic ?

A

When the PES value is 1

91
Q

When is PES perfectly elastic ?

A

When the PES value is infinity

92
Q

When is PES perfectly inelastic ?

A

When the PES value is 0

93
Q

What are the determinants of price elasticity of supply ?

A
  • Time required to produce the product
  • Level of spare capacity
  • Number of stock available
  • Time
  • Perishability of the product
94
Q

What effect does the time required to produce the product have ?

A
  • The greater the amount of time needed to produce the product the more price inelastic supply will be.
  • Products with a shorter production time tend to be more price elastic.
  • If the product can be produced quickly, firms will be able to respond to changes in price rapidly and vice versa
95
Q

What effect does the level of spare capacity have ?

A
  • The greater the spare capacity is in an industry the more price elastic supply will be.
  • This is because there will be factors of production available to be used in production.
  • Therefore, if there was a price rise the industry/firm would likely to be able to respond quickly by increasing production.
  • Vice Versa
96
Q

What effect does the number of stock available have ?

A
  • The more finished goods available the more price elastic supply will be.
  • This is because firms will be able to respond to a price rise by releasing some/all of these stocks on to the market straight away.
97
Q

What effect does time have ?

A
  • Time gives firms the opportunity to expand or reduce production.
  • Therefore, the greater the time period, the more price elastic supply will be.
  • Vice Versa
98
Q

What effect does the perishability of the product have ?

A
  • Some products are more perishable than others e.g. mushrooms.
  • The more perishable a product is the harder it is to build up stocks of it.
  • Therefore, the more price inelastic in supply the product will be
  • Vice Versa
99
Q

What is consumer surplus ?

A
  • The extra amount of money consumers are prepared to pay for a good or service above what they actually pay
  • It is the utility or satisfaction gained from a good or service in excess of the amount paid for it
100
Q

What is producer surplus ?

A
  • The extra amount of money paid to producers above what they are willing to accept to supply a good or service.
  • It is the extra earning obtained by a producer above the minimum required for them to supply the good or service.
101
Q

What does producer surplus show ?

A

Shows the economic gain for producers by selling the good

102
Q

What does perfectly elastic demand mean ?

A
  • Producer surplus is 0

- Consumer surplus is 0

103
Q

What does perfectly inelastic demand mean ?

A
  • Producer surplus is infinite

- Consumer surplus is infinite

104
Q

What does more inelastic demand lead to ?

A

The higher the consumer surplus is likely to be

105
Q

What does more inelastic supply lead to ?

A

The higher the producer surplus is likely to be

106
Q

How would a decrease in demand affect surplus ?

A

Lead to a fall in consumer and producer surplus, as both price and output decreases.

107
Q

What would happen if there was an increase in demand ?

A

Both consumer and producer surplus will increase

108
Q

How would a decrease in supply affect surplus ?

A

It would lead to a fall in consumer and producer surplus

109
Q

What would happen if there was an increase in supply ?

A

An increase in supply would lead to an increase in consumer and producer surplus

110
Q

What is XED ?

A
  • Cross price elasticity of demand

- It measures the responsiveness of demand for one good to changes in the price of another good

111
Q

What is the equation for XED ?

A

Percentage change in the quantity demanded of product A / percentage change in the price of product B

112
Q

What is the XED of substitute goods ?

A

They have a positive XED

113
Q

What is the XED of complement goods ?

A

Thet have a negative XED

114
Q

What is the XED of unrelated goods ?

A

They have a XED of zero

115
Q

What is YED ?

A

Income elasticity of demand measures the responsiveness of demand to changes in income

116
Q

What is the equation for YED ?

A

Percentage change in quantity demanded / percentage change in income

117
Q

What is the YED of inferior goods ?

A

Inferior goods have a negative YED

118
Q

What is the YED of normal goods ?

A

Normal goods have a positive YED

119
Q

How are normal goods classified ?

A

They are classified as either income elastic or income inelastic

120
Q

What does the YED have to be for them to be classified as income inelastic ?

A

The YED has to be between 0 and 1 for them to be classed as income inelastic

121
Q

What goods are income inelastic ?

A

These tend to be necessities

122
Q

What does the YED have to be for them to be classified as income elastic ?

A

The YED has to be larger than 1 for them to be classed as income elastic goods

123
Q

What goods tend to be income elastic ?

A

These goods are often luxuries

124
Q

What is the price mechanism ?

A

How price allocates goods and services in a market based on the levels of demand and supply

125
Q

What are the three functions of the price mechanism ?

A
  • Signalling
  • Incentive
  • Rationing
126
Q

What is the signalling function ?

A
  • Prices adjust to demonstrate where resources are required

- Prices rise and fall to reflect scarcities and surpluses

127
Q

What is the incentive function ?

A
  • An incentive is something that motivates a producer or consumer to follow a course of action or to change a behaviour
  • Higher prices provide an incentive to existing producers to supply more because they provide the possibility of more revenue and increased profits
128
Q

What is the rationing function ?

A
  • Rationing is done to ensure the proper distribution of resources without any unwanted waste
  • It refers to the capacity of a competitive market to equalise quantity demanded and quantity supplied
129
Q

When demand is price elastic what does a decrease in price lead to ?

A

A rise in total revenue

130
Q

When demand is price inelastic what does a decrease in price lead to ?

A

A decrease in total revenue

131
Q

When demand is price elastic what does an increase in price lead to ?

A

A decrease in total revenue

132
Q

When demand is price inelastic what does an increase in price result in ?

A

A rise in total revenue

Economics AS (11 decks)

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