All Of Microeconomics PiXL Flashcards
Why do economists need to make assumptions?
To simplify economic processes and make them easier to study and understand
What is Ceteris Paribus?
All other things being unchanged constant
Why is Ceteris Paribus used when making models?
- it is usually hard to isolate all the different variables that may influence the outcome of what you are studying
Why are we unable to make scientific experiments in economics?
Because of the Human Elements to the study (Irrational and Rational)
What are Positive statements?
Are statements that can be tested with reference EVIDENCE
What is a Normative statement?
Is an OPINION rather than a FACT
Explain the role of valued judgements in influencing economic decision making and policy.
Because people judge situations differently, or a decision will be different, so having a valued judgement should eliminate this disparity.
Explain the problem of scarcity.
- Because it is difficult to satisfy a society of unlimited wants, with limited resources.
Understand the distinction between renewable and non-renewable resources.
- Renewable Resources are replenished naturally - Non-renewable resources are finite resources
What is the importance of Oppertunity Cost?
plays a crucial part in attempts to ensure that scarce resources are used efficiently.
What is Oppertunity Cost?
the loss of other alternatives when one alternative is chosen.
On a Production Possibility Frontier (PPF) - Show the maximum productive potential of an economy.
The black curve is the Maximum Productive Potential of an Economy.
On a Production Possibility Frontier show - The opperunity cost.
The movement along the cruve with the red dots shows the opperunity cost - also shown along the axis of the graph.
On a Production Possibility Frontier show - Economic Growth or Decline.
Because the PPF curve has shifted outwards this shows economic growth.
On a Production Possibility Frontier show - Effeicient or inefficient allocation of resources.
Point D, the economy is inefficient.
On a Production Possibility Frontier show - Possible and Unobtainable allocation of resources.
Anything inside the PPF curve is possible however; anything outside the PPF curve is unobtainable.
Explain the distinction between movements along and shifts in production possibility curves, cosidering the possible causes for such change.
- If there is an increase in land, labour or capital or an increase in the productivity of these factors, then the PPF curve can shift outwards.
- Increase in capital goods has an opportunity cost of fewer consumer goods. Investment in different areas.
Understnad the difference between capital and consumer goods.
- A capital good is any good used to help increase future production.
- Consumer goods are any goods used by consumers and have no future productive use
What is Specialisation?
- Specialization is when a nation or individual concentrates its productive efforts on producing a limited variety of goods
What is the Division of Labour?
Narrow specialization of tasks within a production process so that each worker can become a specialist in doing one thing.
Advantages of Specialisation and the Division of Labour?
- Higher productivity and efficientcy
- Lower unit costs leading to higher profits
- Encourages investment in specific capital - economies of scale
Disadvantages of Specialisation and the Division of Labour.
- Worker alienation
- Risk to disruptions during the production process
What are the functions of money?
- A Medium of Exchange
- A Measure of value
- a store of value
- a method of deffered payment
Understand the distinction between free market, mixed and command economies.
- A free market economy is based on supply and demand where prices set freely between seller and consumer, without intervention from the government. It was created by Adam Smith (who also founded the idea of Division of Labour)
- A mixed economy means that part of the economy is left to the free market, and part of it is managed by the government.
- A command economy occurs when the government controls all major aspects of the economy and economic production
Advantages of a Free market economy.
- More choice for the consumer
- Competition between firms causes efficientcy to improve because they want to lower their prices, less resources are wasted
- Profits are reinvested into the company
Disadvantages of a free market economy?
- Some firms may reduce costs unethically by polluting the environment and exploiting workers
Advantages of a Command Economy.
- Low Unemployment levels : Command economies can open jobs, control wages as it likes.
- Common good versus Profit a Priority : Command economy government can tailor prices and products to specially suit the people.
Disadvantages of a Comman Economy.
- Lack of Competition Inhibits Innovation
- Inefficientcy : Free market competition forces businesses to become more efficient those who arent cannot keep prices as low and are forced out the market, whereas in command economies the government sees no pressure from other firms so is notoriously inefficient.
What is a Mixed Economy?
A mixed economy means that part of the economy is left to the free market, and part of it is managed by the government (Command Economy)
What are the underlying assumptions of economic decision making?
- Consumers aim to maximise utility
- Firms aim to maximise profits
What causes a movement ALONG the demand curve?
A change in price
What causes a SHIFT in the demand curve?
This occurs when, even at the same price, consumers are willing to buy a higher (or lower) quantity of goods.
What are the Conditions of Demand? (Factors that causes a shift in the demand curve)
- Income
- Quality
- Advertising
- Substitutes
- Complements
- Expectations
Explain the concept of Diminshing Marginal Utility and how this influences the shape of the demand curve.
The Law of Diminishing Marginal Utlity state that marginal utility decrease as consumption increases
- As price depends on the marginal utility of a good, price also decreases as consumption increase (like economies of scale)
- So price and QD are inversely proportional, which is THE LAW OF DEMAND
What causes a movement ALONG the supply curve?
A change in price and then a change in QD according to that price
What causes the supply curve to SHIFT? (Conditions of Supply)
- Changes in the Costs of production (Appreciation of Currency)
- Changes in Technology
- Government Tax and Subsidy regulations
- Change in price of a substitute product
What does Equilibrium mean?
a state of equality or balance between market demand and supply
How do you determine the point of Equilibrium?
It is the point where the demand and supply curves intersect.
Where is Excess Supply shown on a Demand and Suppy Diagram?
Where is Excess Demand shown on a Demand and Supply Diagram?
How do Market Forces eliminate Excess Demand?
Market price rises
How do Market Forces eliminate excess Supply?
Lower prices increase demand to bring it back to Equilibrium.
What is Price Elasticity of Demand?
measures the responsiveness of demand after a change in a product’s own price.
What does Inelastic demand look like on demand and supply diagram?
What does Elastic Demand look like on a Demand an Supply diagram?
What is the Signalling Function in the Price Mechanism?
- they adjust to show where resources are required, and where they are not.
- Prices rise and fall to reflect scarcities and surpluses
- If prices are high because of high demand it will signal to producers to produce more.
- If there is excess supply in a market the price mechanism will eliminate the excess by allowing prices to fall
What is the Price Mechanism?
describes the means by which decisions are taken by consumers and businesses interact to determine the allocation of scarce resources.
What is the Incentive Function?
- where consumers send information to producers about the changing nature of needs and wants
- Higher prices act as an incentive to raise output because the supplier stands to make a better profit.
- When demand is weaker in a recession then supply contracts as producers cut back on output.
What is the Rationing Function?
- Prices serve to ration scarce resources when demand in a market outstrips supply
- When there is a shortage, the price is bid up – leaving only those with the willingness and ability to pay to purchase the product
What is Price Elasticity of Demand?
- Price elasticity of demand measures the responsiveness of quantity demanded for a product to a change in price.
What is Income Elasticity of Demand?
- measures the relationship between a change in quantity demanded for good X and a change in real income
What is Cross Elasticity of Demand?
- measures the responsiveness of demand for good X following a change in the price of a related good Y.
What kind of good is a good that has a Price Elasticity of Demand coefficient of 0?
Perfectly Inelastic
What kind of good is a good that has a Price Elasticity of Demand coefficient between 0 and 1?
Inelastic
What kind of good is a good that has a Price Elasticity of Demand coefficient of 1?
Unit Elastic
What kind of good is a good that has a Price Elasticity of Demand coefficient of more than 1?
Elastic
In terms of income elasticity of demand, what coefficient does a NORMAL good have?
Positive number
In terms of income elasticity of demand, what coefficient does a NORMAL NECESSITY have?
Between 0 and 1
In terms of income elasicity of demand, what coefficient value does a LUXURY good/service have?
Smaller value than 1
What coefficient value do inferior goods have?
When income elasticity of demand is negative.
In terms of cross elasticity of demand, what value will a substitute good be?
Coefficient value will be positive
In terms of cross elasticity of demand, what coefficient value is a complementary good?
High negative values
In terms of cross elasticity of demand, what will the coefficient of an unrelated good be?
Zero (0)
Factors affecting elasticities of demand.
- The number of close substitutes (the more close substitutes there are in the market, the more elastic is demand because consumers find it easy to switch)
- The cost of switching between products (If there are costs when switching the product is fairly inelastic)
- If the good is a neccessity or a luxury good (necessities tend to have an inelastic demand whereas luxuries tend to have a more elastic demand)
Why is elasticities of demand in terms of real incomes important for firms?
- Helps firms predict the effect of the economic cyle of sales
Luxury goods and Normal Goods
Why is elasticities of demand in terms of real incomes important for government?
Like businesses it indicates the economic cycle the economy is in.
Government can prepare for economic booms and reccesions before they occur.
Why is elasticities of demand significant in terms of changes in the price of substitutes and complementary goods for businesses?
- If rival firms lower their prices firms can predict the effect of demand and total revenue on their own product.
- If firms have a reliable Cross Price Elasticity of Demand, they can estimate the effect of another product sales on thier own
What is the significance of subsidies on the elasticity of demand for businesses?
When a subsidy is put on a elastic good then the producer can supply more, so the producer benefits from the subsidy more.
When a subsidy is put on a inelastic good then the consumer gets more of the subsidy
- An INDIRECT TAX on producers will cause their costs to go up so cause an inward shift of supply.
What is the relationship between price elasticity of demand and total revenue?
- If an increase in price leads to an increase in total revenue then the good is said to be inelastic vice versa for elasticity
What is Price Elasticity of Supply?
measures the relationship between change in quantity supplied following a change in price
What is the formula for price elasticity?
Percentage change in quantity supplied divided by the percentage change in price
Product that has a Price Elasticity of greater than 1?
Supply is Price Elastic
Product that has a Price Elasticity smaller than 1?
Supply is Price Inelastic
Product that has a Price Elasticity of 0?
Supply is perfectly elastic
Product when Price Elasticity equals infinity?
Supply is perfectly elastic
Factors that influence price elasticity of supply.
- Number of producers (ease of entry into the market)
- Spare Capacity (is it easy to change production if there is a shift in demand)
- Ease of storage (can goods be stored easily, elastic response increases demand)
What is meant by short run and long run in economics?
- Long run is a period of time were all factors of production and costs are variable
- In the short run firms are only able to influence prices
What is the difference between consumer and producer surplus on a graph?
What is the difference between the consumer and producer surplus?
- The consumer surplus is the difference between what the customer pays and what he would have been willing to pay
- The producer surplus is the differences between the price the firm receives and the price the firm would be willing to sell at.
How does changes in supply and demand affect consumer and producer surplus?
- Falls in prices cause producer surplus to increase
- Increase in market demand causes producer surplus to increase.
-
How does an indirect tax impact cosumers?
Consumers have to pay more for the good/service so demand falls
How will an indirect tax affect poducers?
Theamount supplied decreases so the supply curve moves to the left
How does an indirect tax affect government?
Government gets more revenue because people have to pay more tax.
What is the incidence of indirect taxes on consumers?
Indirect tax is determined by the price elasticity of demand of the consumer.
What is the incidence of the indirect tax to a producer?
Is dependant upon the price elasticity of supply.
Impact of subsidies on Consumers.
Prices for subsidised products are cheaper.
Where is the area that represents the producer subsidy and the consumer subsidy?
Why do some consumers may not behave rationally?
- Consideration of the influence of other peoples behaviour
- The importance of habitual behaviour
- Consumer weakness at computation
Define Market Failure.
appens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss
Types of market failure.
- Negative Externalities
- Positive Externalities
- Under-provision of public goods
- Information gaps
What are Private Costs?
refer to direct costs to the producer for producing the good or service.
What is a External Cost?
is an economic activity that imposes a negative effect on an unrelated third party.
What is Social Costs?
Social cost is the total cost to society. It includes both private costs plus any external costs.
What are Private Benefits?
is the benefit derived by an individual or firm directly involved in a transaction as either buyer or seller.
What is a External Benefit?
positive externality is a benefit that a transaction or activity provides to a party that is not part of the transaction or activity.
What is a Social Benefit?
is the total benefit to society from producing or consuming a good/service.
External Costs Diagram.
Diagram showing the difference between market equilibrium and social optimum position.
Diagram showing the welfare loss area.
Diagram showing the external benefits of consumption.
Diagram showing the welfare gain area.
Explain the impact on economic agents of externalities and government intervention in various markets.
- A tax on goods / services that create negative externalties to discourage consumption
-
Characteristics of public goods.
- Non-excludability - Non-payers can enjoy the benefits of consumption at no financial cost
- Non-Rival Consumption - Consumption by one consumer does not restrict consumption by other consumers
Characteristics of Private Goods.
- Excludable - buyers can be excluded from enjoying the product if they are not willing and able to pay for it
- Rival in Consumption - one person’s consumption of a product reducesthe amount left for others to consume and benefit from
What is the Free Rider Problem?
This occurs when people can benefit from a good/service without paying anything towards it.
Difference between symmetric and asymmetric information.
Asymmetric information happens when one party to a transaction has greater material knowledge than the other party
Symmetric information is when both parties have equal knowledge.
How does asymmetric information lead to market failure?
Accurate information is essential for sound economic decisions, when there are imbalances of information it can lead to market failure.
Why indirect taxes (ad Valorem and Specific tax) is used to solve market failure?
The aim of an indirect tax is to make the polluter pay and so internalise the externality.
How does using subsidies solve market failure?
Subsidies create positive externalities, this is because it encourages people to consume a good which is under-consumed because people usually ignore the external benefits their decisions make.
How does using Maximum and Minimum prices solve market failure?
- They stop Monopoly exploitation (if firms have market dominance they can charge higher prices, so maximum prices stop them from doing so)
- If the good is a neccessity (some may not be able to afford the neccessity, it can help reduce relative poverty)
- Minimum prices are put on de-merit goods
Government Intervention - Tradeable Pollution Permits.
Pollution permits involve giving firms a legal right to pollute a certain amount
If the firm produces less pollution it can sell its pollution permits to other firms.
However, if it produces more pollution it has to buy permits from other firms or the government.
The aim of pollution permits is to provide market incentives for firms to reduce pollution and reduce the external costs associated with it.
Government Intervention - State Provision of Public Goods
Public goods are provided by the state because they are:
Non-excludable (free rider problem)
Non-Rival Consumption (If it is supplied to one person, it is available to all.)
Non-Rejectable (it cannot be rejected by people)
Government Intervention - Provision of Information
When people dont understand, misinformed about a decision so potentially make the wrong decision.
Government can intervene in a market such as:
Health Warnings (Smoking & Alchol)
Nutritional Labelling
Government Interventions - Regulations.
Regulations are a form of government intervention in markets - there are many examples we can use
What does some Government Failure as intervention lead to?
Net Welfare Loss (The economic welfare that is lost as a result of too much or too little production and consumption of a good or resource.)
Reasons of Government Failure - Lack of Incentives
- In the public sector, there is no profit motive.
- Workers and managers lack incentives and can cause inefficientcies
Reasons of Government Failure - Assymetric Information
- politicians may have poor information about the type of service to provide.
- So may not make the best decision for social welfare and economic benefits.
Reasons for Government Failue - Political Interferance
- Decisions made for short-term political gain – rather than sound economics
Reasons for Government Failure - Unintended Consequences
- Eg, benefits make can solve poverty but can lead to greater government spending
Example of goverment failure in a market.
Fisheries Policy in the EU (overfishing, due to the failure to enforce fishing regulations)
