2022 Advance Information Flashcards
What is the basic economic problem?
Resources are finite but wants are infinite
What 5 things should the PPC be used to show?
Maximum productive potential of an economy Economic growth that shifts the PPF Fully employed or unemployed resources Possible and unobtainable production Opportunity cost
Name four reasons why producers may not/fail to maximise profit.
Business performance influenced by behaviour of others
Having other objectives
Operating as social enterprises
Set up as registered charities
What are the 2 ‘Golden Rules’ of demand?
Any movement along the demand curve is price-related
Everything non-price related causes a shift
What are the 7 factors affecting demand?
Population Advertising Substitutes Income Fashion/trend/preference Interest rates Complements
How does population affect demand?
Direct relationship - as population increases, so does the demand for goods and services
How does advertising affect demand?
It increases customer awareness, therefore increasing demand for the good/service
How do substitutes affect demand?
If the price of a good increases, its demand decreases as its substitutes will be cheaper.
How does income affect demand?
Normal goods - Direct relationship
Inferior goods - Inverse relationship
What are normal goods?
Goods for which demand will increase if income increases (eg. luxury goods)
What are inferior goods?
Goods for which demand will increase if income decreases
How does fashion/trends/preference affect demand?
If a good/service is fashionable, demand for it will increase.
How do interest rates affect demand?
Inverse relationship - as they increase, demand for goods/services decreases
How do complements affect demand?
When the demand of a good increases, so does the demand of its complementary good.
What is a substitute good?
A good bought as an alternative to another but performs the same function
What are complementary goods?
Goods purchased together as they are consumed together
What are the two ‘Golden Rules’ of supply?
Any movement along the supply curve is price-related.
Everything else causes a shift.
Name the seven factors affecting supply.
Productivity Indirect tax No. of firms Technology Subsidies Weather Cost of production
How does productivity affect supply?
Direct relationship - as it increases, so does supply
How does indirect tax affect supply?
Inverse relationship - indirect taxes increase costs of production, therefore reducing supply
How does the number of firms affect supply?
The more firms there are, the more supply is created
How does technology affect supply?
New technology can increase efficiency and reduce cost of production, therefore increasing supply
How do subsidies affect supply?
Subsidies reduce costs of production therefore increasing supply
How does weather affect supply?
Good weather can improve crop yields, increasing supply but bad weather can decrease supply
How does the cost of production affect supply?
If production costs rise, firms will reduce supply as their profits will be reduced
Define ‘excess demand’.
Where demand is greater than supply and there are shortages in the market
Define ‘excess supply’.
Where supply is greater than demand and there are unsold goods in the market
What is the equation for PED?
PED = %∆ in QD ➗ %∆ in Price
What is the formula for PES?
PES = %∆ in QS ➗ %∆ in Price
What are the numerical ranges for each of the 3 types of YED?
Luxury goods: > 1
Normal goods: Always positive
Inferior goods: Always negative
What is a mixed economy?
An economy where goods and services are provided by the public and private sector
What is the public sector?
Any organisations owned/controlled by the government
What is the private sector?
Any organisations owned/controlled by individuals and firms
What are the four types of public sector organisations? Name an example of each.
Central government departments (eg. Central Bank)
Public corporations (eg. DEWA)
Local authority services (eg. KHDA)
Other public service organisations (eg. police)
What are the four aims of the public sector?
Improving quality of services
Minimising costs
Allowing for social costs and benefits
Profit
What are the three types of private sector organisations?
Sole Traders
Partnerships
Companies
What is the aim of the private sector?
They are usually driven on self-interest or profit maximisation but can have other objectives.
What are public goods?
Goods and services provided by the public sector
What are the 2 characteristics of public goods?
Non-excludability - no individual consumer can be excluded from or refuse consumption
Non-rivalry - consumption by one individual cannot reduce amount available to others
What is the free rider problem?
Involves individuals who enjoy the benefit of goods but allow others to pay for them
What are private goods?
Goods and services that are provided by the private sector
What is the relative importance of the public sector and private sector in different economies?
Some countries rely on public sector - has large stake in large commercial organisations
Other countries rely more on private sector
Define ‘external benefits’.
Positive spillover effects of consumption or production that bring benefits to third parties
Name five positive externalities.
Job creation Infrastructure development Training and education Research & development Improved technology
What are the 4 factors of production?
Land
Labour
Capital
Enterprise
What does the primary sector involve?
Any activities that extract resources from the Earth to provide essential raw materials
What does the secondary sector involve?
Any activities that turn raw materials/semi-finished goods into finished goods
What does the tertiary sector involve?
Any business that provides a service
Define the term ‘de-industrialisation’.
The decline in manufacturing and growth of service industries
Give 5 reasons why de-industrialisation occurs.
Service jobs being more skilled and paying more
Automation and machinery replacing workers
Countries’ low labour costs (outsourcing)
Demand rising with GDP per capita increasing
Governments growing stronger
What are the changes in the importance of the sectors in terms of employment and output in developed and developing countries?
Developed countries - Primary sector much less important than tertiary sector
Developing countries - secondary sector is now growing, some expansion in tertiary sector
What 4 factors of land affect productivity?
Use of fertiliser - increases yield
Drainage - improves flow of water
Irrigation - increases level of water in land
Reclamation - creates more land
What 4 factors of labour can affect productivity?
Improving quality of labour using:
Training - increases workers’ knowledge
Improved motivation - using incentives
Improved working practices - adopting new ones
Impact of migration - attracting skilled workers from overseas
What 2 factors of capital affect productivity?
Increased quantity
Technological advances
Define the term ‘division of labour’.
Breaking down of the production process into small parts with each worker allocated to a specific task
Define the term ‘total revenue’.
The total income earned by a business from selling their product to customers
What is the formula for total revenue?
Total Revenue = Starting Price x Quantity Sold
Define ‘total costs’.
The total expenses incurred when producing goods and services
What is the formula for total costs?
Total Costs = Fixed Costs + Variable Costs
Define the term ‘fixed costs’.
Costs that don’t vary with output and have to be paid even if the business produces nothing
Define the term ‘variable costs’.
Costs that will increase as the firm expands output
Define ‘average costs’.
The cost per unit of output
What is the formula for average costs?
Average Costs = Total Costs ➗ Quantity Produced
Define ‘profit’.
The revenue remaining after all costs are paid
What is the formula for profit/loss?
Profit/Loss = Total Revenue - Total Costs
Define the term ‘economies of scale’.
The reduction of a firm’s average costs as it increases output and becomes more efficient
Define ‘internal economies of scale’.
The cost benefits that an individual firm can enjoy when it expands
Define ‘external economies of scale’.
The cost benefits that all firms in the industry can enjoy when the industry expands
What is the difference between internal and external economies of scale?
Internal - due to firm itself increasing in size
External - due to external/industry/market factors
What are the 6 internal economies of scale?
Risk-Bearing Financial Managerial Technical Marketing Purchasing
What are the 3 benefits of economies of scale?
Increase in profitability
Firms can lower prices - attract customers and increase market share
Firms can invest in R&D - become more competitive
How might technical economies of scale reduce average costs (3 steps)?
- More efficient machinery
- Output is increased
- Cost is spread over units
How might managerial economies of scale reduce average costs (2 steps)?
Specialist managers being hired
Their skills and ideas (or design/use of ICT control systems) lead to increased production
In what 2 ways might marketing economies of scale reduce average costs?
Large organisations can hire specialist marketing staff - can negotiate discounts when bulk-buying
Advertising costs can be spread over more units produced
In what 2 ways might financial economies of scale reduce average costs?
Lower interest rates on loans due to firm’s financial power and stability
Raising extra capital to invest in improving the production process - eg. selling shares
How might risk-bearing economies of scale reduce average costs?
Manufacturers selling to many international markets and with a wide product range can spread their risk
What are the 4 external economies of scale?
Skilled labour
Infrastructure
Ancillary services
Cooperation
How might skilled labour reduce average costs (2 steps)?
- When identical businesses locate near to each other, there will be a bigger number of skilled staff in one area
- Training and recruitment costs will be lower for them
How might infrastructure reduce average costs (2 steps)?
- More infrastructure is likely to be provided in an area where more businesses are located (eg. railways, roads, airports)
- Allows suppliers to provide and customers to receive goods and services quicker
How might ancillary services reduce average costs (2 steps)?
- They are other businesses that set up to support a particular industry (eg. laundromat near hotels)
- Costs will be lower for all services
How might cooperation reduce average costs?
Businesses in the same industry may cooperate with each other to ensure reduced costs
Eg. if one hotel is full, they may contact another to fill each other’s rooms
How might purchasing economies of scale reduce average costs (2 steps)?
- Large firms bulk-buy - buy lots of resources
2. Suppliers give discounts for bulk purchases - reduces cost of production
What are diseconomies of scale?
Rising average costs when a firm becomes too big
What are the 3 diseconomies of scale?
Bureaucracy
Staff Relations
Control and Coordination
How might bureaucracy increase average costs (2 steps)?
- Lots of paperwork and form-filling needs to be done as firms grow larger
- May take up time and resources
How might staff relations increase average costs (2 steps)?
- May be harder for managers and staff to communicate as a firm becomes bigger
- May lead to demotivated and less productive staff
How might control and coordination increase average costs?
A business with many employees may be hard to control
More managers needed
What are the 4 reasons a firm might stay small?
Size of market
Nature of market – niche
Lack of finance
Aims of the entrepreneur
What are the 5 advantages of being a small firm?
Flexibility - quick response to changes in the market
Personal service - able to know their customers very well
Lower wages - employees less likely to be part of unions, may not negotiate higher wages
Better communication - few employees = easier to pass messages to staff
Innovation - competition forces them to innovate to attract customers
Define ‘oligopoly’.
A market dominated by a few large firms
What are the 7 features of an oligopoly?
Dominated by a few large firms Interdependence Price rigidity Collusion High barriers to entry Economies of scale Non-price competition
What are the 6 types of barriers to entry?
Marketing barriers Economies of scale Legal barriers Technical barriers Intellectual Property Financial barriers
What are the 4 advantages of oligopoly firms for consumers?
Lower prices - due to economies of scale
Price stability
Choice
Innovation - better quality G&S
What are the 4 disadvantages of oligopoly firms for consumers?
Diseconomies of scale - leads to higher costs
Price wars
High barriers to entry - prevents choices increasing
Collusion - no incentive to innovate
What are the 4 factors that affect demand for labour?
Labour is a derived demand
Cost/availability of substitutes
Productivity of labour
Costs of employing labour
How does labour being a derived demand affect the demand for labour?
The demand for labour increases or decreases depending on the demand for particular goods or services
How does the cost/availability of substitutes affect the demand for labour?
As machinery/technology becomes cheaper, businesses may switch to them from labour.
How does the productivity of labour affect the demand for labour?
If workers become less productive, firms may want to employ them for less hours - demand falls
How does the costs of employing labour affect the demand for labour?
If the government increases taxes on workers/the cost of recruitment increases, firms may decide to reduce the amount they use.
What are the 7 factors that affect supply of labour?
Retirement age Immigration Population size Labour mobility Aging population School-leaving age Skills/education and training
How does the school-leaving age affect the supply of labour?
Inverse relationship - the lower it is, the higher the supply of labour
How does the retirement age affect the supply of labour?
As the retirement age increases, so does the supply of labour
How does the aging population affect supply of labour?
The population is getting older in certain countries so there’s a large proportion of people beyond retirement age - supply of labour decreases.
How does immigration affect the supply of labour?
Countries with a high proportion of immigrants are likely to have a higher supply of labour.
How does population size affect the supply of labour?
The more a population grows, the greater the supply of labour.
How do skills and qualifications affect the supply of labour?
It increases the supply of labour as people tend to become more employable when they learn new skills.
Define the term ‘labour mobility.
The ease at which workers can geographically and occupationally move between jobs
How does labour mobility affect the supply of labour?
The more easily workers can switch jobs, the higher the supply of labour.
How do taxes reduce externalities?
It increases the cost of the product, making the supply curve shift inwards.
How do subsidies reduce externalities?
They offer financial incentives to producers to reduce negative externalities.
How do fines reduce externalities?
They impose a monetary cost on those who create external costs
How does regulation reduce externalities?
They provide a legal basis for individuals and firms to reduce externalities
What are pollution permits?
Permits that allow firms a licensed allocation to pollute
How do pollution permits reduce negative externalities?
‘Tradable’ - creates an incentive for companies to reduce their pollution as they can sell their permits for cash to raise profits
Name 2 reasons why there is a minimum wage for workers.
To prevent exploitation of workers
To ensure workers are paid fairly to maintain a decent standard of living
Why does minimum wage cause unemployment?
It leads to a disequilibrium in the labour market with the supply of labour being higher than the demand for labour.
Why might unemployment not increase if the minimum wage increases? Give 3 reasons.
Firms will continue to hire if workers increase productivity faster than wage increases - more profit
As income increases, expenditure increases - labour is derived demand
Depends on magnitude of wage increase
What are the 3 advantages and 3 disadvantages of minimum wage for firms?
Pros:
More motivated workers
Greater output/productivity
Increased demand
Cons:
Increased cost of production
Reduced profit
Redundancy payments
What are the 3 advantages and 1 disadvantage of minimum wage for workers?
Pros:
Increased standard of living
Improved poverty rates
Fair wage - lack of discrimination
Cons:
Some workers may be redundnant
