AS Economics 2021 Flashcards
What is the basic economic problem
Scarcity - Wants are unlimited and resources are finite, so choices must be made.
What is opportunity cost
The next best opportunity forgone when making a choice
What 3 things must be considered when producing goods
What to produce
How to produce it
For whom to produce
What term refers to all other things being held equal and constant
Ceteris Paribus
What is the Law of diminishing returns
The idea that each extra unit of a good or service consumed gives the consumer less utility
What does thinking at the margin refer to
To think about the what next step or action means for the consumer
What are the 3 periods of time
Short run,
long run,
very long run
What does short run mean for production
At least one factor of production is fixed, there is a limit on the extent at which it can respond to price changes
What does long run mean for production
All factors of production are variable, firms can increase production capacity by increasing factors of production.
What does very long run mean for production?
All factors are variable, and are out of the firm’s control.
What are positive statements
They are objective, can be tested with factual evidence and can be accepted or rejected.
What are normative statements
Statements based on value judgements. They are subjective and based on opinion rather than facts.
What are the factors of production - CELL
Capital
Entrepreneurship
Land
Labour
What are capital goods
Goods which can be used in the production of other goods.
What is meant by entreprenuership
Managerial ability - someone who takes risks and innovates.
What is meant by land
Natural resources such as oil, coal, wheat, water
What is meant by labour
Human capital - the workforce
What is specialisation
When each worker completes a specific task in the production process.
What is a free market economy
An economy where decisions are taken by private individuals and firms and private individuals own everything. No government intervention.
Advantages of a free market economy
Firms are likely to be efficient
Bureaucracy from govt intervention avoided
Some argue people have more freedom
Disadvantages of a free market economy
Ignores inequality
There could be monopolies
Demerit goods overconsumed, merit goods underprovided.
What is a planned economy
Where the government allocates all scarce resources to where they think its needed.
Advantages of a planned economy
Easier to coordinate resources in a crisis
Government can compensate for market failure
Inequality reduced
Disadvantages of planned economy
Governments fail - don’t know what to produce.
May not meet consumer preferences
Limits democracy and personal freedom
What is a mixed economy
A mix between planned and free market, where governments try to subsidise merit goods and tax demerit goods.
What is does a PPC show
The maximum productive potential of an economy, using a combination of 2 good or services, when resources are fully and efficiently employed.
What does a straight line PPC represent?
When the opportunity cost is constant. However this is not realistic.
What are 4 functions of money
- A medium of exchange
- A measure of value
- A store of value
- A method of deferred payment
What is a cheque
An order to pay a bank a certain amount from the drawer’s account
What is near money
An asset which can be converted into cash easily.
What is liquidity
The availability of liquid assets such as cash.
What is an excludable good.
A good which can only ne consumed by one consumer or the other.
What are public goods.
Goods missing from the free market, but are beneficial to society. E.g street lamps. They are NON Excludable
What are private goods.
Goods which are rival and excludable.
What are economic goods.
Goods which benefit society, but have the problem of scarcity and have an opportunity cost.
What are free goods.
Good which have no opporunity cost, because there is no scarcity of that good. E.g water and air.
What are merit goods.
Goods with positive externalities, e.g healthcare and education. Underprovided in the free market and are often subsidised by the government.
What are demerit goods.
Goods with negative externalities, e.g. tobacco, alcohol. Overprovided usually and sometimes taxed by government.
What is effective demand
The quantity consumers are willing to buy at the current market price.
What is individual demand
the demand of an individual or firm, measured by the quantity bought at a certain price at one point in time
What is market demand
The sum of all individual demands in a market.
What are the factors that shift the demand curve?
Hint: PIRATES
- Population, higher population, higher demand
- Income, higher income, higher demand
- Related goods, Substitutes and Complements
- Advertising
- Tastes and Preferences
- Expectations, of future price changes etc.
- Seasons, e.g. Ice cream higher demand in summer
What is individual supply
The supply that a producer is willing and able to sell at a given price in a given period of time
What is market supply
The sum of all individual supplies in a market.
Why do supply curves slope up
- If price increases, firms are more tempted to supply the good as it brings more profit.
- With larger output, firms need to charge more to cover the additional costs.
What are the factors that shift the supply curve?
Hint: PINTSWC
- Productivity
- Indirect taxes
- Number of firms
- Technology
- Subsidies
- Weather
- Cost of production.
What is the PED formula
PED = %ΔQD / %ΔP
What is a unitary elastic good
A good that has a change in demand which is equal to the change in price
What are 7 factors influencing PED
- Necessity - more necessary, less elastic
- Substitutes - more substitutes, more elastic
- Addictiveness - more addictive, less elastic
- Proportion of income spent on good
- Durability of good - More durable, more elastic
- Peak and off-peak demand - on peak, less elastic
What is the formula for total revenue
TR = Average price x Quantity sold
What is the formula for YED
YED = %ΔQD / %ΔY
What is the formula for XED
XED = %ΔQD of good A / %ΔP of good B
What is price elasticity of supply
The responsiveness of a change in supply to a change in price.
What are 5 factors influencing PES
- Time scale
- Spare capacity
- Level of stocks
- How substitutable factors are
- Barriers to entry in the market
What is a market shortage
When the quantity demanded is greater than the quantity supplied.
What is a market surplus
When the quantity supplied is greater than the quantity demanded
What is joint supply
When the increasing supply of one good causes the increase or decrease of supply of another good.
What does the price mechanism do
Determines the market price.
What 3 functions does the price mechanism use to allocate resources
- Rationing
- Transmission of preferences
- Signalling
What is consumer surplus
The difference between the price the consumer is willing and able to pay and the price they actually pay.
What is producer surplus
The difference between the price the producer is willing to charge and the price they actually charge.
What is economic welfare.
The total benefit society receives from an economic transaction.
What us a maximum price
A price set by the government where the consumption or production of a good is to be encouraged.
What is a minimum price
A price set by the government where the consumption or production of a good is to be discouraged.
What is an example of maximum price set
Price caps on data roaming in the EU
What is an example of minimum price set
The minimum wage
What are direct taxes
Taxes which are paid directly to the government from the tax payer.
What are indirect taxes
Taxes which increase production costs for consumers, resulting in an increase in market price.
What is ad valorem tax - give an example
Taxes which are percentages, such as GST.
What are specific taxes - give an example
A set tax per unit, such as 15c per litre of petrol.
What is a producer subsidy
A payment from the government to lower costs of production to increase supply.
What is a consumer subsidy
A subsidy encouraging consumers to buy more of a particular good.
What is state provision of public goods
When the government provides public goods which are underprovided in the free market.
What is provision of information
When it is made mandatory to make information public so consumers and firms can make informed economic decisions.
What is the equation that makes up aggregate demand
C + I + G + (X-M)
What are the determinants of aggregate demand
Consumer spending
Investment
Government spending
Exports - Imports
What are 3 influences on consumer spending
Interest rates
Consumer confidence
Wealth effects
What is an example of wealth effect
If the price of a house rises, the owner consequently has more wealth
What are 5 influences on investment
Rate of economic growth Business expectations/confidence Demand for exports Interest rates Access to credit
What is an example of government spending
Welfare benefit
Define AS
The total supply of goods and services produced within an economy at a given overall price in a given period
Define AD
The total amount of demand for all finished goods and services produced in an economy
Why is the LRAS curve vertical
Price is assumed not to change as price changes in the long run
3 factors influencing AS
Cost of labour
Cost of materials
Government intervention
Define inflation
An increase in the general price level over time.
Define deflation
A decrease in the general price level over time.
Define disinflation
A period over which the rate of inflation decreases.
What is real GDP
The value of GDP adjusted for inflation.
What is nominal GDP
The value of GDP without being adjusted for inflation. Can sometimes be misleading.
What is demand pull inflation
Inflation caused by a rise in AD which exceeds AS. Causes the general price level to increase.
What are 3 triggers for demand pull inflation
Depreciation in exchange rate
Fiscal policies decreasing taxes, increases AD
Lower interest rates increase AD
What is cost push inflation
A rise in the general price level caused by a decrease in AS, falling below AD.
What are 3 triggers for cost push inflation
Increase in raw material prices
Increase in labour costs
Expectations of inflation
Indirect taxes
Affect of inflation on consumers
Real value of debt decreases.
Real value of income decreases.
Affect of inflation on firms
Interest rates are likely to be higher, so firms are less likely to invest.
Costs of production increase.
Less price competitive.
What are 3 components of balance of payments
The current account
Capital account and financial account
Balancing item
What is balance of payments equilibrium
The sum of accounts is zero - inflows match outflows. There are no current account deficits or surpluses.
What are 5 causes of current account deficits or surpluses
Appreciation of currency Economic growth Deindustrialisation Membership of trade union Attractiveness to foreign investors
Define nominal exchange rate
The weight of one currency relative to another, NOT adjusted for inflation
Define real exchange rate
Exchange rate which has been adjusted for inflation
Define trade-weighted exchange rate
The weighted average exchange rate, of the domestic currency relative to foreign currencies. The more the domestic country trades with the foreign country, the greater the weight of their currency.
Define floating exchange rate
The exchange rate which is determined by the forces of supply and demand.
Define fixed exchange rate
An exchange rate with a value determined by the government
Define managed float
A floating exchange rate which is influenced by the central bank buying or selling currencies.
8 factors influencing changes in exchange rate
Inflation Interest rates Speculation Other currencies Government finances Balance of payments International competitiveness Government intervention
What is the marshall-lerner condition
States that the devaluation in a currency only improves the balance of trade if the absolute sum of long run export and import demand elasticities is greater than or equal to 1.
What is the J-curve effect
Occurs when a currency is devalued. This causes imports to become more expensive, which worsens the deficit. Eventually, the value of exports decreases, which leads to a reduction in the trade deficit.
What is the effect of an appreciating exchange rate on AD
AD is likely to fall since imports become cheaper and exports become more expensive.
Define absolute advantage
If a country can produce a good or service using fewer resources or at a lower cost than another country
Define comparative advantage
If a country can produce a good or service at a lower opportunity cost than another country.
What is an example of a free trade area
European union
What is trade diversion
When trade shifts to a less efficient producer. usually due to external tarrifs.
Define protectionism
The act of guarding a country’s domestic industries from foreign competition.
What are 5 methods of protectionism
Tariffs Import duties/quotas Export subsidies Embargoes Excessive administrative burdens
Define fiscal policy
The use of government spending and revenues from taxation to influence AD.
What is the aim of fiscal policy
To stimulate growth and stabilise the economy
What is expansionary fiscal policy
Aims to increase AD. Governments increase spending or reduce taxes to do this.
What is deflationary fiscal policy
Aims to decrease AD. Governments reduce spending or increase taxes to achieve this.
What is monetary policy.
Policy used to control the money flow of the economy. This is done with interest rates and quantitative easing.
What is quantitative easing
Asset purchase by the government to increase the money supply.
What is the aim of supply side policies?
To improve the long run productive potential of the economy.
