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Micro Economics > definitions > Flashcards

definitions Flashcards

1
Q

What is scarcity?

A

any situation in which factors of production are finite, whereas wants are infinite

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2
Q

What is ceteris paribus?

A

All other things are assumed to be constant or unchanging.

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3
Q

What are consumers?

A

Those who demand goods and services.

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4
Q

What are producers?

A

Those who provide goods and services

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5
Q

What is government?

A

Those who tax and distribute certain goods and services to both consumers and producers

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6
Q

What is a positive statement?

A

Statements that can be tested to be true or false and are value-free

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7
Q

What is a normative statement?

A

Statements that cannot be tested to be true or false as they are based on value judgement.

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8
Q

What is opportunity cost?

A

The foregone value (lost benefit) of the next best alternative.

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9
Q

What are factors of production?

A

The different elements required to produce goods and services

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10
Q

What is human capital?

A

The unique value attached to each worker

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11
Q

What are economic goods?

A

Goods that are scarce and have an opportunity cost

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12
Q

What are free goods?

A

Goods that are in an unlimited supply, and have no opportunity cost.

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13
Q

What is specialisation?

A

The process of concentrating on a a particular area

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14
Q

What is division of labour?

A

The assignment of different tasks to different works to increase productivity (matching human capital with physical capital)

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15
Q

What is productivity?

A

Output/input - a measure of the efficiency of production.

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16
Q

What is economies of scales?

A

When the output increases and the cost of production decreases.

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17
Q

What are the 4 functions of money?

A

Medium of exchange, measure of value, store of value, deferred payment

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18
Q

What are the 6 characteristics of money?

A

Durability, portability, divisibility, uniformity, limited supply, accessibility

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19
Q

What is money?

A

Anything that fulfils the four functions of money

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20
Q

What is barter?

A

Trading one good or service for another.

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21
Q

What is a PPF?

A

Represents all combinations of maximum output of two goods and services when all factors of production are being fully and efficiently employed

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22
Q

What is productive efficiency?

A

All factors of productions are being fully and efficiently employed, not possible to produce more of one good without reducing the production of another

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23
Q

What is near (quasi) money?

A

highly liquid, very stable

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24
Q

What is non money?

A

Not highly liquid, value fluctuates

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25
Q

What is liquidity?

A

How quickly you can convert money to cash

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26
Q

What is a command economy?

A

Where production, investment, prices, and incomes are determined. centrally by the government

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27
Q

What is a free market economy?

A

Resources are allocated through market forces, no gov. control, FoP are allocated by demand and supply

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28
Q

What is a mixed economy?

A

Resources are allocated by a combination of market and government forces

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29
Q

What is marginal utility?

A

The extra satisfaction gained from consuming the next unit

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30
Q

What is herd behaviour?

A

When behaviour is based on social norms/peer effect

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31
Q

What is habitual behaviour?

A

When behaviour is based on routine

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32
Q

What is computational weakness?

A

When behaviour is based on poor numeracy/understanding

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33
Q

What is diminishing marginal utility?

A

As more units of a good is consumed, the utility/satisfaction the good provides decreases

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34
Q

What are the advantages of a command market?

A

Maximises social welfare, nothing is monopolised so everything is distributed

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35
Q

What are the disadvantages of a command market?

A

There is a lack of choice since the government allocates resources, and there is a lack of competition due to less innovation

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36
Q

What are the advantages of a free market?

A

There is choice for the consumers as the government doesn’t allocate resources, competition is high which forces companies to innovate

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37
Q

What are the disadvantages of a free market?

A

Social welfare is minimised and there are monopolies so not an equal distribution of resources

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38
Q

What is demand?

A

the quantity of goods consumers are willing to buy at a given price, an inverse relationship, as quantity decreases, price increases

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39
Q

What is supply?

A

the quantity goods producers are willing to sell at a given price, a direct relationship

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40
Q

What is equilibrium price?

A

the price at which there is no tendency to change because demand = supply

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41
Q

Why is the demand curve downward sloping

A

Income effect - As prices fall, consumers can purchase more
Substitution effect - as the price of one good rises, consumers find substitute goods more attractive
Law of diminishing marginal utility - prices must fall for Qd to increase

42
Q

What is a movement in the demand curve?

A

A change in price

43
Q

What is a shift in the demand curve?

A

Non price factors

44
Q

What is profit incentive?

A

As prices increase, firms have a larger incentive to produce more

45
Q

What is crowding out of fixed factors?

A

as firms produce more, costs increase, so firms must set higher prices

46
Q

A shift in the demand curve is caused by what acronym?

A

Population
Advertising
Substitutes
Income
Fashion/trends
Interest rate (increase interest rates = decrease demand)
Complements
Speculation

47
Q

A shift in the supply curve is caused by what acronym?

A

Productivity
Indirect tax
Number of firms
Technology
Subsidies
Weather
CoP

48
Q

What is total revenue?

A

price x quantity

49
Q

What is excess demand?

A

When Qd>Qs

50
Q

What is excess supply?

A

When Qs>Qd

51
Q

What is market clearing?

A

When there is no excess supply or demand S=D

52
Q

What is the price when there is excess supply?

A

Above market equilibrium

53
Q

What is the price when there is excess demand?

A

Below market equilibrium

54
Q

What is the signalling function?

A

Price changes signal important information to consumers and producers

55
Q

What is the incentive function?

A

Price changes encourage firms to produce more/less

56
Q

What is rationing function?

A

Price increases will limit consumption to those who can afford it

57
Q

what is consumer surplus?

A

The difference between the price buyers are willing to pay versus what they actually pay

58
Q

what is producer surplus?

A

the difference between the price produces are willing to sell it versus the price they actually sell at

59
Q

What is total surplus?

A

Consumer surplus + producer surplus

60
Q

An increase in demand leads to what Cs Ps and Ts?

A

Increase in Cs Ps and Ts

61
Q

An increase in supply leads to what cs ps and ts?

A

Increase in cs ps and ts

62
Q

A decrease in demand leads to what cs PS and ts?

A

Decrease in cs ts and PS

63
Q

A decrease in supply leads to what cs ps and ts?

A

A decrease in cs PS and ts

64
Q

What is PED?

A

Measures how sensitive consumers areas a change in price, always negative due to P Q inverse relationship
%change in Qd / %change in price

65
Q

What does price elasticity of demand elastic mean?

A

Consumer is very responsive to a change in price, between -1 and -infinity

66
Q

What does price inelastic mean?

A

Consumer not very responsive to a change in price, between 0 and -1

67
Q

What are the PED determinants?

A

Substitutes
Proportion of income
Luxury or necessity
Addiction
Time
Breading market

68
Q

What is income elasticity of demand?

A

How receptive consumers are to a change in income, normal good have a positive value, inferior good have a negative value
% change in Qd / % change in income

69
Q

What does elastic YED mean?

A

Goods are luxuries

70
Q

What does inelastic YED mean?

A

Goods are necessities

71
Q

What is XED?

A

How is the quantity demanded of one good affected by a change in price of another good
%change in Qd if Good A / %change in price of Good B

72
Q

What is a substitute good?

A

Goods with a positive XED, they are in competitive demand

73
Q

What is a complementary good?

A

Goods with a negative XED, they have joint demand

74
Q

What is price elasticity of supply?

A

responsiveness of the quantity supplied given a change in price, it is always positive
%change in Qs / %change in price

75
Q

What are PES determinants?

A

Barriers to entry
Raw materials available
Inventory stockpile
Time to produce
Spare capacity of FoP
Skilled labour required?

76
Q

What is an indirect tax?

A

A tax levied on goods and services rather than an income or profits. Indirect taxes can be specific or ad valorem

77
Q

What is a direct tax?

A

A tax that is levied against income or profits rather than on goods and services eg income tax, stamp duty.

78
Q

What is a specific tax?

A

A per unit tax based on quantity, not dependent on value

79
Q

What is ad valorem tax?

A

A tax whose amount is based on the value of the transaction or property. Eg VAT 20%

80
Q

Explanation for specific tax and ad valorem tax

A
  • Tax increases CoP for firms
  • Profit decreases
  • S shifts left
81
Q

Eval points for indirect taxes

A
  • Black markets can form
  • Deadweight loss Cs and Ps
  • Success depends on PED, if inelastic, consumer won’t be deterred
82
Q

What is an indirect subsidy?

A

A sum of money granted to firms to keep the price of a commodity or service low

83
Q

Explain indirect subsidies

A
  • Cash grant given to farmers
  • Decreases CoP
  • Increases profit
  • S shifts to the right
84
Q

What is market failure?

A

When a free market fails to allocate resources efficiently

85
Q

What are the three causes of market failure?

A
  • Externalities
  • Public goods
  • Information gaps
86
Q

What is an externality?

A

Third party costs or benefits that are not considered by the free market leading to societal benefits or societal costs

87
Q

What are public goods?

A

Goods that suffer from the free rider problem due to their non rivalrous and non excludable nature

88
Q

What are information gaps?

A

When a buyer or seller does not have access to the info needed to make a fully informed decision leasing to over/under consumption.

89
Q

What is allocative efficiency?

A

When scarce resources are allocated optimally. TS maximised, S=D, MPC=MPB

90
Q

What is social efficiency?

A

When social welfare is maximised

91
Q

What is a negative externality?

A

An economic activity producing negative third party effects

92
Q

What is a positive externality?

A

Economic activities producing positive third party effects

93
Q

Eval for externalities

A
  • Impossible to measure size/impact of externality accurately
  • Allocative inefficiency if we move away from E1 = DWL
94
Q

What is a public good?

A

Good that are non excludable and non rivalrous and suffer from the free rider problem

95
Q

What is non excludability?

A

If non paying consumers cannot be prevented from accessing it

96
Q

What is non rivalrous?

A

One person’s consumption does not restrict others consumption mc= o

97
Q

What is the free rider problem?

A

When those who benefit from goods/ services do not pay for them = underprovision since Na private firm will supply as no profit can be made

98
Q

Examples of excludable and rivalrous goods (private)

A

Private schools
Universities
Private healthcare
Flight tickets
Clothes, shoes, restaurants

99
Q

Example of non excludable and rivalrous goods (common goods)

A

Public schools
Selective schools
Internships/work experience
GP appointments

100
Q

Example o excludable and non rivalrous goods (quasi public)

A

Gym membership
Netflix subscription

101
Q

Example of non rivalrous and non excludable good (public)

A

Public parks
Street lights
NHS website

Micro Economics (1 decks)

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