Bens Quick Econ flashcards Theme 1
What is ceteris Paribus?
When all other things remain unchanged
What is opportunity cost ?
The next best alternative foregone between 2 or more choices.
What is a positive statement?
Statements that can be testable, amendable and rejectable tend to have factual evidence
What is a normative statement ?
Statement that is a value judgement which tend to be opinion based.
What is the economic problem?
There are infinite wants and scarce resources allocated.
What are the four factors of production?
Land
Labour
Capital
Enterprise
What are examples of Land(Factors of production)
Non-renewable resources
renewable resources
Animals found in Area
Water
materials
What is Labour?(Factors of production)
Labour force
Employed (Active population)
What is Capital?
Capital is equipment used in producing goods and or services
What is enterprise ?
Entrepreneur who takes on risk and creates products or services using the other three factors of production.
Name some stakeholders impacted by the economic problem?
Consumers(Decide what they want to buy and for how much)
Government (How much to intervene on how consumers and producers act)
Producers(What to make how much to sell for)
Explain how firms,Government and Consumers act rationally
Consumers(Maximise utilities)
Government (Maximise social welfare)
Firms(Maximise profits)
What is a PPF(Production possibility frontier)
Shows the maximum amount of combinations for good x and good y an economy can produce
What is a trade-off?
You have to choose between conflicting objectives because you cannot achieve at the same time(Opportunity cost)
What factors affect a PPF to shift outwards?
Increased resources
Improved tech
Improved labour
suggests economic growth
What factors affect a PPF to shift inwards?
Fewer resources
natural disasters
suggests negative economic growth
What is a market?
A market is where buyers and sellers come together to exchange something they have for something they’d prefer to have.
What is a free market economy?
a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers
What are the pros and cons of a free market economy?
Pros:
Efficiency
(Only best value items will be in demand, Motivate for good items innovation )
Entrepreneurship
(risk to reward ratio , reward for good innovation)
Choice
(greater choice for consumers)
Cons:
Inequalities
(different incomes)
Non-profitable goods may not be made
monopolies
(dominating markets)
What is a command economy ?
Command economy government decide how resources should be allocated
pros and cons of a command economy
pros:
Maximise social welfare
(Prevent inequality , redistribute income fairly)
Low unemployment
Prevent monopolies
Cons:
Poor-decision making
(Lack of information asymmetric information gaps)
Restricted choice
Lack of risk-taking and efficiency
What is a mixed economy ?
Government and markets both play a part in allocating resources
Adam Smith context
Invisible hand (Resources allocated in societys best interest)
No Monopolies , Low barriers to entry, maximise competition
What does Margin mean?
The change in variable caused by an increase of one unit of additional variable
How to calculate marginal cost?
Total cost(new output level)- Total cost(one unit less than that)
The total cost of producing 100 ice creams is £100 and the Total cost of producing 101 ice creams is £102
£102-£100=2 =MC
What is marginal utility?
benefit gained from consuming one additional unit of a good
What is total utility?
Overall benefit gained from consuming a good
What is the law of diminishing marginal utility? How does this affect demand?
each additional unit consumed decreases satisfaction of previous unit consumed
From a demand and supply diagram Demand always slope downwards as The more consumption the cheaper price and higher price less demand.
What are Producers economic objectives?
Maximise profits(TR-TC)
(Survival, reinvest for greater profits, expand )
Maximise total sales
(Become a monopoly, dominance)
Ethics
(May buy from a supplier nearby to help domestically)
What are consumers economic objectives?
Maximise utilites
(Security,consumption)
Maximise Income
(can work as workers)
What are government economic objectives ?
Maximise Net welfare
stable Economic growth
stable/low inflation
High employment
Equal balance of payments
Why would consumers act irrationally ?
Habitual behaviour
Social Norm
Rule of thumb(Middle item)
What is bounded rationality ?
Limits on self-control(addiction to cigarettes does not maximise consumer utilities)
What is Demand?
The quantity of goods and services that will be bought at any time given price over a period of time
What is a Downwards movement along the demand curve called and a upwards movement?
Downwards movement(Expansion)
upwards movement(Contraction)
Why do shifts in demand occur?
Amount demanded increases or decreases for all prices
What affects Demand?
Popularity
Income elasticity
What is a Normal,Inferior and Luxury good?
Normal good(Goods that will be demanded more as income increases)(DVDS)
Inferior good(goods that will be demanded less as income increases)
(Lidl, Aldi, saver menu)
Luxury good(Goods that will be demanded as income increases)(sports cars)
What are substitute, complimentary goods, derived demand and composite demand
Substitute goods are goods that are alternatives to other such as Fish and red meat
Complimentary goods are goods that impact one another such as salt and fish
Derived demand is the demand for a good or factor of production used in making another good or service such as Wood for Fences
Composite demand is goods with more than one use such as oil
What is PED,YED , XED
PED(Price elasticity of demand) is how responsive demand is when price increases.
YED(Income elasticity of demand) is how responsive demand is when income increases.
XED(Cross elasticity of demand) is how responsive demand for good A when Price B increases
When PED>1, PED<1 what does this mean to elasticity ?
PED>1(Elastic with demand)
PED<1(Inelastic with demand)
When PED=Infinity, PED=0 what does this mean to elasticity ?
PED=Infinity (Perfectly elastic)
PED=0(Perfectly inelastic)
What affects PED(Price elasticity of demand)?
Substitutes (more goods,More elastic)
Type of good(Habitual, Necessities )
Percentage of income spent(Fridge elastic)
Time(Price over time becomes elastic)
How does PED affect Revenue
Revenue = Price x quantity
Elastic demand =(Lower price, More revenue)(Higher price, lower revenue)
Inelastic demand(Higher price , more revenue, Lower price lower revenue)
How does XED prove that goods are substitutes or complimentary?
XED=+(Substitutes are positive higher XED more correlation )
XED=-(complimentary are negative )
XED=0 (independent goods)
How is YED useful to Firms and government?
YED is useful to firms to predict sales forecasting
Firms may supply multiple different goods to maximise revenue even in booms and recessions
What is supply?
Supply is the quantity of goods and or services produce to the market at a given price and time
Why does Supply shift?
A supply curve shifts due to changes in factors such as production costs, technology, government policies, expectations, or the number of suppliers in the market.
What factors affect supply?
Changes to cost of production
Tech improv
Productivity
Taxes + subsidies
Competitors(Number of suppliers)
Price of other goods
What is PES?
Price elasticity of supply
How responsive Quantity supplied is regard to price
When PES>1,PES<1 what does this mean?
PES>1(Elastic supply )
PES<1(Inelastic supply)
When PES= Infinity , PES= 0 what does this mean?
PES= Infinity (Perfectly elastic)
PES=0(perfectly Inelastic)
Why is PES important to firms?
Firms aim to be elastic as possible
Helps strategic decision making on pricing Strats and production levels
What factors affect PES?
Unemployment (new workers)
Perishable goods(food)
Inventory
What is price mechanism(Invisible hand)
Interaction of supply and demand to determine prices
What is signalling ?
(Fall in prices,Signals consumers want fewer goods)
(Increase in prices, Signals consumers want more goods)
Producers
What is Incentivising ?
(fall in prices , Reduces incentives less profit to be made)
(Rise in prices , Incentives more profit to be made)
Producers
What is rationing ?
(Limiting consumption, Rising prices eliminates fewer consumers as not many people willing to pay higher prices)
Consumers
Where is excess demand and supply on a supply demand diagram when a market is equilibrium ?
Top (supply)
Bottom(demand)
What is Producer surplus and Consumer surplus?
Producer surplus is when they obtain more than they were originally wanted to sell for
Consumer surplus is when they are willing to pay a higher price Than original price.
What is a subsidy ?
Money paid from the government to incentivise producers to lower prices
What are the benefits of subsidy ?
Increase production
Partly to consumer and producer
What is division of labour?
The assignment of different parts of a manufacturing process or task to different people in order to improve efficiency.
What are the advantages and disadvantages of specialisation?
Advantages:
Higher output
Variety
A bigger market
Disadvantages:
Unrewarding, repetitive work that requires little skill can lower motivation and eventually causes lower productivity.
Workers may take less pride in work and quality suffers.
Dissatisfied workers cause absenteeism to increase
People move to less boring jobs creating a problem of high worker turnover and increased hiring/training costs
Increased risk of repetitive strain injuries at work
Some workers receive little training and may not be able to find alternative jobs when out of work – they suffer structural unemployment / occupational immobility
Mass-produced standardised goods may lack variety
What is a externality ?
It occurs when there is an external impact on a third party not involved in the economic transaction
What is market failure?
Price mechanism leads to misallocation of resources
What are the types of market failure ?
Negative externalities
Positive externalities
Information gaps
Public goods
How do government intervene Asymetric information gaps?
Regulation
Providing information (advertising)
Subsidies
taxes
What is Imperfect information?
someone docent have full information on the costs and benefits of their decisions
What is asymmetric information?
When one party knows more than another party in a transaction.
What is a public good ?
A good or service that is non-excludable and non -rivalry .
What is the free rider problem?
Consumer wait for others to buy and free ride
Producers won’t produce public goods as no profits
What are examples of public goods?
Flood defences
Police, Fire brigade
Roads
Parks
