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Economics > 2. Allocation of resources > Flashcards

2. Allocation of resources Flashcards

2.1 Microeconomics and macroeconomics 2.2 The role of markets in allocating resources 2.3 Demand 2.4 Supply 2.5 Price determination 2.6 Price changes 2.7 Price elasticity of demand (PED) 2.8 Price elasticity of supply (PED) 2.9 Market economic system 2.10 Market failure 2.11 Mixed economic system

1
Q

Public Sector

A

Economic activity directly involving the government. Eg. Healthcare, education

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2
Q

private sector

A

Economic activity of private individuals and firms. Their main aim is to earn profit for their owners.

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3
Q

Law of Demand

A

When goods are cheap, people buy more. When goods are expensive people buy less.

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4
Q

Demand

A

The quantity of a product that consumers are willing and able to buy at a price over a period of time.

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5
Q

Market economy disadvantages

A

Large rift between rich + poor // Monopoly power (higher prices bc one company dominates, eg. google) //under/non - provision of public goods (eg. busses in UK, controlled by private sector) // Underprovision of merit goods and many cannot afford (USA)

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6
Q

Market economy advantages

A

Freedom for everyone // No government intervention // Variety of goods + services // High consumer satisfaction (consumer choice) // Its efficient (cheaper) because of mass production

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7
Q

Mixed economy

A

A combination of free and planned economy. Some resources are owned + controlled by private individuals + firms. Some resources owned + controlled by government (public sector) (eg. Sweden)

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8
Q

Planned economy

A

The government controls the facotrs of production. It is often associated with a communist political part, striving for social equality (eg. North Korea)

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9
Q

Market Economy

A

Relies on the market forces of demand and supply to allocate resources, with minimal government intervention.

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10
Q

GDP

A

Gross Domestic Product. The value of all the goods and services sold in an economy.

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11
Q

Economic Growth

A

An increase in the production of goods and services in an economy.

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12
Q

Recession

A

6 or more months of negative GDP growth, (typically standards of living fall)

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13
Q

Macroeconomics

A

The study of the economy as a whole, to consider economic decisions and economic policies taken by the government to achieve overall economic growth.

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14
Q

Microeconomics

A

The study of individual consumers, individual firms and households in making decisions about resource allocation. It applies to different markets of goods and services.

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15
Q

Demand + Supply Coefficient

A

0 - Perfectly inelastic // <1 - Relatively inelastic // 1 - Unit elastic // >1 - Relatively elastic // Inifinity symbol - Perfectly elastic

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16
Q

Elasticity

A

Measures the responsiveness of demand/supply after a change in the goods price.

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17
Q

PSSST

A

Production lag // Stocks // Spare Capacity // Subsitutability of factors of production // Time

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18
Q

Factors affecting elasticity of supply

A

PSSST

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19
Q

Price Increase, Total revenue Increase // Price decrease, Total revenue decrease

A

Inelastic

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20
Q

Price Increase, Total revenue decrease // Price decrease, Total revenue increase

A

Elastic

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21
Q

SPLAT

A

Determinants of Price Elasticity of Demand

Substitutability - More substitutes = more elastic

Proportion of income - Larger proportion of income spend on good/service → the more elastic (+ vice versa)

Luxury or need - Need = inelastic, luxury = elastic

Addictive - Inelastic

Time - The longer time a consumer takes in buying a product → the more elastic (bc they will have time to research substitutes)

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22
Q

Elastic Demand Coefficient (Formula)

A

% Change in quantity / % Change in Price

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23
Q

% Change

A

(Difference / Original) * 100

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24
Q

Substitute

A

A good or service consumers seen as the same of similar enough to another product (eg. Pepsi and Cola)

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25
Q

Complement

A

A good/service whose use is related to the use of an associated or paired good/service (eg. cd + cd player)

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26
Q

Regulatory policies

A

Rules established by government decree (Laws).

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27
Q

Market-based policies

A

Policies designed to manipulate markets, prices and incentives to correct market failures (tax, subsidies (funds).)

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28
Q

Positive externality

A

When producing or consuming a good causes benefits to a 3rd party. eg. walking instead of driving.

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29
Q

Negative externality

A

When producing or consuming a good causes a cost to a 3rd part. eg. Driving to work (pollution).

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30
Q

Tragedy of commons

A

Common goods that everyone has access to are often misused and exploited.

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31
Q

Merit goods

A

Goods with positive externalities that are underproduced or underconsumed in a free-market.

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32
Q

Demerit goods

A

Goods with negative externalities that are overproduced and overconsumed in a free-market.

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33
Q

Regulatory policies

A

Rules established by government decree. (Laws)

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34
Q

Market-based policies

A

Policies designed to manipuate markets, prices and incentives to correct market failures (tax+subsidies)

35
Q

Free riders

A

Someone who wants others to pay for a public good but plans to use the good themselves. (Street-lamps)

36
Q

Causes of market failure

A
  1. The existence of costs and benefits that do not go through the price mechanism.
  2. A lack of financial incentive to produce certain important products.
  3. Under or overconsumption of products if left to market forces.
  4. Lack of information for consumers or suppliers.
  5. Firms exploiting their market power.
  6. Problems moving resources (eg. labour) from one use to another.
37
Q

Excludable

A

Need to pay a price. (eg. American healthcare system - some cannot afford)

38
Q

Rivalrous

A

If someone uses it no one else can. Eg. If I take a free sample no-one else can.

39
Q

MSC

A

Marginal Social Cost (externalities added, negatives outweighing positives)

40
Q

MSB

A

Marginal Social Benefit (externalities added, positive outweighing negative)

41
Q

How to answer Explain questions

A

BLT
Because
Leads to
Therefore

42
Q

Price Mechanism

A

The interaction of demand and supply that determines the prices of goods and services.

43
Q

Surplus

A

When quantity supplied of a good is larger than the quantity demanded in the market. The difference between the two is the surplus.

44
Q

Shortage

A

When quantity supplied of a good is smaller than the quantity demanded in the market. The difference between the two is the shortage.

45
Q

Market equilibrium

A

A situation in the market where at a given market price, demand for a product is equal to the supply of the product.

46
Q

Market disequilibrium

A

A situation in the market where market demand of a product is not equal to market supply of the product.

47
Q

Three economic decisions

A

What to produce?

Scarce reources can’t be used for everything - need to prioritise

How to produce it?

Capital or labour-intesive, How many employees are required, how much land is needed, how much capital etc.

For whom to produce?

Who are the consumers, should the goods be distrivuted to everyone (healthcare) etc.

48
Q

Effective demand

A

The ability and willingness of consumers to purchase goods and services at different prices.

49
Q

Ceteris Paribus

A

In economics this phrase means ‘all other things remaining constant’. There are no changes in other factors.

50
Q

Determinants of demand

A

Government policies - Rules + Regulations, + subsdies.
Economy - How well the economy is doing.

51
Q

Individual demand

A

The demand of one individual consumer in the market.

52
Q

Market demand

A

The sum of the demand of all consumers who are willing and able to buy goods and services at different price levels in a given period of time.

53
Q

Shifts of the demand curve to the right.

A

When demand increases (all of demand) due to changes in any non-price determinant, the demand curve shifts to the right.

54
Q

Factors increasing market demand

A

An increase in individual incomes.
A decrease in income taxes, which means consumers now have more disposable income.
A rise in the price of substitutes.
A fall in the price of complements.
Increased advertising.
A rise in population.
A decrease in interest rates, which means consumers now pay less interest on the money they have borrowed resulting in more disposable income.
Changes in consumer tastes and fashions in favour of the product.
Weather conditions (for example, demand for umbrellas and raincoats can increase due to rain).

55
Q

Shift of the demand curve to the left

A

When (total) demand decreases due to changes in any non-price determinant, the demand curve shifts to the left

56
Q

Factors decreasing market demand

A

A decrease in individual incomes.
An increase in income taxes, which means consumers now have less disposable income.
A fall in the price of substitutes.
A rise in the price of complements.
Advertisements of a certain product being banned.
A fall in population.
An increase in interest rates, which means consumers now pay more interest on the money they have borrowed, resulting in less disposable income.
Changes in consumer tastes and fashions in favour of other products.
Government rules and regulations, such as a ban on smoking cigarettes in public places.

57
Q

Law of Supply

A

As the price of goods and services increases, the quantity supplied increases.
As the price of goods and services decreases, the quantity supplied decreases.

58
Q

Factors affecting the quantity supplied

A

The cost of factors of production - Prices of the factors of production increase, costs for the business decreases - supply decreases.
Technology - Technological advances can decrease costs per unit - supply increases.
Time - If production time is large it will take longer for companies to adjust changes in demand. –> eg farming, will take longer to increase supply.
Weather - Supply of agricultural products depends on favourable weather conditions. Eg. if weather is favourable the supply of agricultural products will increase.
Taxes - Taxes can increase costs - increased costs lower supply of these products
Subsidies - Subsidies reduce cost of production for firms + increase their supply.
Price of related goods - Goods in competition –> most profitable good = more likely to be produced + supplied by the firm.
Price expectation - If suppliers think prices can increase in the future they can withhold supply.

59
Q

Effective supply

A

When producers are not only willing and able to supply the good or service, they also have the finances to be able to produce them.

60
Q

Shift of the supply curve to the right

A

When (total) supply increases due to changes in any non-price determinant, the supply curve shifts to the right

61
Q

Factors increasing market supply

A

FoP costs decrease.
Substitute price increases
Complementary price decreases
Technological advances.
Optimism/business expectations.
Decrease in corporation tax.
Decrease in interest rates.
Changes in trade restrictions/global politics
Favourable weather conditions.

62
Q

Shift of the supply curve to the left

A

When supply decreases due to changes in any non-price determinant, the supply curve shifts to the left

63
Q

Factors causing a decrease in market supply

A

An increase in the costs of the factors of production.
Changes in the prices of related goods.
Business expectations of an economic downturn.
An increase in the level of taxes that firms have to pay on their profits (corporation taxpr).
An increase in bank interest rates.
Changes in global factors. For example, countries deciding to increase trade restrictions will discourage firms to supply less.
Unfavourable weather conditions.

64
Q

Price elasticity of demand

A

The responsiveness of quantity demanded to changes in the price of a product.

65
Q

Price Elastic

A

If a product is price elastic then an increase in its price will lead to a decrease in demand.

66
Q

Price inelastic

A

When a change in the price of a product causes a very small or minor change in the quantity demanded or quantity supplied for that product, the demand or supply for the product is said to be price inelastic.

67
Q

Price elastic formula

A

PED = percentage change in the quantity demanded of good X / percentage change in the price of good X

68
Q

Price elastic formula (Signs)

A

PED=%△Q / %△P

69
Q

PES formula

A

% change in quantity supplied / % change in price

70
Q

Effect on supply (Increase in demand)

A

Increase in price

71
Q

Effect on supply (Decrease in demand)

A

Decrease in price

72
Q

Effect on price (Increase in supply)

A

Decrease in price

73
Q

Effect on price (Decrease in supply)

A

Increase in price

74
Q

Market supply

A

Total quantity of goods and services all firms are willing and able to sell in the market at different possible prices during a particular time period.

75
Q

Individual supply

A

Supply of a single firm

76
Q

Private benefit

A

Revenues firms earn when selling their goods and services.

77
Q

External benefits

A

Positive spill-over benefits to the third party

78
Q

Social benefits

A

Private benefit + external benefit

Total benefits to the economy. (society)

79
Q

Socially optimum level

A

The quantity of output produced that produces maximum social benefit.

80
Q

Why is a minimum price put in?

A
  • To protect the industry –> increases revenue for supplier because a minimum price creates larger price

(That being said larger price means less demand –> so often gov. creates gauranteed price where they pay up until the price floor)

  • Technically also decreases consumption bc price increases
81
Q

Why is a maximum price put in?

A
  • To make product more affordable (only used in emergencies eg. energy)
  • Stops companies from raising prices too much
82
Q

Percentage change

A

(Difference/Original) * 100

83
Q

Dead-weight loss

A

A cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium (Socially optimum level)

Overconsumption of demerit goods
or
Underconsumption of merit goods.

Eg.

Say you baked 200 cookies, but only 176 were sold. The leftover 24 cookies sat out in the sun and went hard, and the chocolate melted, so they were inedible by the end of the day. Those 24 leftover cookies were a deadweight loss. You overproduced cookies, and the leftovers did not benefit you or the consumers.

Economics (8 decks)

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