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economics 1 Flashcards

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1
Q

What 2 factors are consumers choice limited by

A

income, price

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2
Q

What is a budget line/ constraint

A

line describing limits in consumption choices

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3
Q

How does a budget constraint change when price or income increases

A

if price increases only relative price changes. Gets smaller
if income increases then parallel shift

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4
Q

what does it mean if the slope of budget constraint changes

A

relative price between the two products has changed

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5
Q

blue= new line. How has the relative price between product 1 and 2 changed

A

relative price to buy product 2 increases compared to 1

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6
Q

How has the real income and the relative price changed in this graph

A

real income has increased. relative price is the same because gradient is the same

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7
Q

What is the relative price of beers to cocktails

A

10/5 = 2

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8
Q

What can the person afford and what can’t they

A

On the line are different consumptions possibilities

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9
Q

What is an opportunity cost

A

best alternative forgone

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10
Q

what is real income in terms of the graph

A

income expressed as the quantity of goods you can afford e.g (number of cocktails you can buy) if income is £10 and cocktails=£2 then your real income is 10/2=5 cocktails

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11
Q

What is the opportunity cost of buying a cocktail

A

(1 cocktail =) 2 beers

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12
Q

What is the opportunity cost of buying a beer

A

to buy two beers you must give up 1 cocktail. So opportunity cost 2 beers = 1 cocktail

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13
Q

What is a preference/ indifference curve

A

curve showing all possible good combinations that the individual is indifferent between/ yields same level of utility

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14
Q

What are the 4 rules of an indifference curve

A
  1. always slopes downwards
  2. convex
  3. more is always better
  4. curves cannot cross
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15
Q

Why is an indifference curve always convex

A

law of diminishing marginal utility/ substitution

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16
Q

Why does an indifference curve slope downwards

A

When one good is increased, the other has to go down to keep the same utility

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17
Q

What is the law of marginal rate of substitution (MRS)

A

rate at which a person will give up y to get an additional unit of x and at the same time remain indifferent

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18
Q

How do you measure the marginal rate substitution (MRS) of the curve

A

its magnitude

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19
Q

If the marginal rate substitution (MRS) is high/low what will the curves look like

A

high MRS- steep/ willing to give up large amount of y for small x
low MRS- flat/ give up only small amount of y for large x

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20
Q

Which curve is the most preferred

A

the higher/ more=better.
Anything on I3 gives higher utility than the others

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21
Q

What does ceteris paribus mean

A

all other influences being held constant

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22
Q

What are the 4 determiners of demand and ceteris paribus

A
  1. substitution effect (price of related goods)
  2. income
  3. tastes
  4. expectations
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23
Q

What is the law of demand

A

other things remaining the same- higher the price of the good= smaller the quantity demanded/ lower price= more quantity demanded

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24
Q

What happens to the sale of a product if its opportunity cost increases

A

opportunity cost= you could buy more of something else for one unit of this product
so people buy less of that good and buy more substitutes

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25
Q

If prices rise but income stays the same what happens to the sale of a product

A

price relative to income increases so people decreases their spending (consumers real income falls)

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26
Q

If a products substitute gets more expensive what will happen to the sale of a rival substitute

A

sales will increase/ opportunity cost becomes less

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27
Q

Which of the letters is optimal/ sub-optimal/ unattainable

A

b= unattainable
a= maximum utility on budget
c=sub optimal (utility not maximum)
d= sub-optimal (leaves budget unspent)

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28
Q

What is a normal good

A

a fall in price always increase the quantity bought/ quantity demanded rises with income

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29
Q

What is an inferior good

A

quantity demanded decreases with income/ If your income goes up you will eat better than pot noodles

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30
Q

What is libertarian paternalism

A

nudges/ someone is making the choice for us (cigarette packages and alcohol behind till)

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31
Q

How do firms find out how responsive quantity demanded is to changes in price

A

price elasticity of demand

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32
Q

Is D1/D2 and increase or decrease in demand

A

D1= increase in (quantity demanded) demand
D2= decrease (quantity demanded) in demand

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33
Q

what is a total revenue of a sale of a product

A

price x quantity sold

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34
Q

What its a demand curve

A

relationship between the price of a certain commodity and the quantity of that commodity that is demanded at that price

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35
Q

what does PED stand for

A

price elasticity of demand between 2 points

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36
Q

What is the equation for PED

A
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37
Q

PED are negative but we ignore the negative sign. If PED=-2, a 10% price cut will generate a — increase in quantity demanded

A

10% price cut = 20% increase in quantity demanded

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38
Q

Is a PED inelastic/ elastic at -2 or -0.5

A

-2= elastic (price cut has large effect on demand)
-0.5= inelastic (price cut has small effect on demand)

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39
Q

If PED=0.5, a 10% price cut will generate a — increase in quantity demanded

A

10% price cut = 5% increase demanded

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40
Q

How to calculate PED from A to B

A

5

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41
Q

How the elasticity of a demand curve change down the curve

A

starts elastic at the top and becomes less elastic

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42
Q

If elasticity= 1, a 10% change in price will generate a — increase in quantity demanded

A

10% price change= 10% quantity change

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43
Q

PED> 1 = inelastic/ elastic
PED< 1 = inelastic/ elastic
PED= 1 = inelastic/ elastic

A

PED> 1 = elastic
PED< 1 = inelastic
PED= 1 = unitary elasticity

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44
Q

if PED> 1, then a 10% change in price= bigger/smaller than 10% change in quant demanded

A

PED> 1= elastic
bigger than 10% change

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45
Q

if PED< 1, then a 10% change in price= bigger/smaller than 10% change in quant demanded

A

PED< 1= inelastic
smaller than 10% change

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46
Q

What are each of these graphs elasticity

A
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47
Q

For an inelastic graph how does a price change effect a demand change

A

price change= small impact on amount demanded

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48
Q

For an elastic graph how does a price change effect a demand change

A

price change= large impact on amount demanded

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49
Q

what is the equation for profit

A

profit= revenue - costs

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50
Q

What are the 4 factors of production

A

land (resources)
labour
capital (machines or human capital such as investments)
entrepreneurship

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51
Q

In a bar setting what is capital and what is labour

A

capital= bar pumps, glasses etc
labour= staff

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52
Q

What is the production function

A

Y= output
L= labour
K= capital

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53
Q

What is fixed in the short run

A

(K) capital is always fixed and labour is the variable

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54
Q

How does a firm increase profit in the short term

A

increase labour

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55
Q

What does this mean

A

capital is fixed

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56
Q

In the long run which ones are variable

A

both

57
Q

Define total product (TP)

A

total amount produced

58
Q

Define marginal product (MP)

A

change in total product resulting from a 1 unit increase in a variable (labour)/ how much extra output each worker gives

59
Q

What is the (MP) marginal product of a worker

A

the extra Y they bring in

60
Q

Define average product (AP)

A

total product / quantity of input used (number units of labour). It is the average amount of output each worker can produce

61
Q

What does the average product (AP) basically tell us about labour

A

the average productivity of the workers within the firm

62
Q

Define short run

A

time frame in which the quantity of at least 1 factor of production is fixed

63
Q

Define long run

A

time frame where all quantities are variable

64
Q

What are the shape of production process curves in both the long and short run

A

U shaped

65
Q

What does diminishing marginal return mean in writing

A

As each worker is added to a fixed amount of capital, each worker has less and less capital to be productive with. After a point the addition to output per added worker will diminish

66
Q

How is the total product and marginal product effected by diminishing marginal return

A

total product increases at a decreasing rate + marginal product starts to fall

67
Q

Why does output initially increase when more labour is added

A

specialisation/ division of labour boots productivity

68
Q

Define each of the terms in relation to a bar setting

A
69
Q

What is a total product curve plotted against

A

plotted against labour

70
Q

What side of the total product curve is attainable and unattainable. Where is the graph efficient/inefficient

A

inefficient in the attainable section. Anything not on the line is using more labour than necessary for a given output. On the line = technologically efficient

71
Q

What is a marginal product curve plotted against

A

plotted against labour/ marginal product is the product per additional worker

72
Q

Which side of the graph is increasing/ decreasing marginal return

A

diminishing= too many workers for capital

73
Q

Where does the marginal product curve always interact with the average product curve

A

MP curve interacts AP curve at its highest point.
MP= change in total product from 1 addition labour
AP= how much average output per worker adds

74
Q

What is the total fixed cost (TFC)

A

cost of the fixed inputs (capital in short run)

75
Q

What is total variable costs (TVC)

A

cost of the variable inputs (labour in short run)

76
Q

What are the total costs (TC)

A

(TFC + TVC) total fixed costs + total variable costs

77
Q

What are the total fixed costs in a bar setting

A

how much the capital costs to run per day

78
Q

What are the TVC total variable costs in a bar setting

A

cost of variables which is labour. So will be workers wages

79
Q

The TVC shape follows the law of the diminishing marginal returns. Which part of the curve is increasing marginal returns and which one is diminishing

A

DMR- cost increases at an increasing rate so this must be the steep part of the graph

80
Q

The TVC shape follows the law of the diminishing marginal returns. Which part of the curve is increasing marginal returns and which one is diminishing

A

DMR- cost increases at an increasing rate so this must be the steep part of the graph

81
Q

Define marginal cost (MC)

A

change in total cost resulting from 1 unit increase in output/ increase in production costs with 1 more unit of output

82
Q

What is the equation for marginal cost (MC)

A
83
Q

Question- An increase in output from 10–> 13 jumpers, increases total cost from £75 –> £100. What is the marginal cost (MC)

A

change in output= 3 jumpers
change in total cost= £25

84
Q

What the average fixed cost (AFC)

A

total cost per unit of output

85
Q

What is the average variable cost (AVC)

A

total variable cost per unit output (cost for (labour) per unit output )

86
Q

What is the average total cost (ATC)

A

total cost per unit output + total variable cost per unit output
ATC= AFC + AVC

87
Q

Describe the shape of the MC curve

A
  1. initially decreases at low output because of greater specialisation
  2. Increases due to law DMR.
    Over time, to get 1 additional unit output more and more workers are needed. Therefore the MC must increase (change in total cost resulting from 1 unit increase in output)
88
Q

Describe the shape of the ATC curve

A

ATC= AFC + ATC
is an average of the AVC and ATF curve together, which is why It is that U shape

89
Q

Describe the shape of the AVC curve

A

AVC= total variable cost per unit output
1. As output increases more and more labour is needed to produce 1 extra unit due to DMR, so eventually the curve slopes upwards

90
Q

Describe the AFC shape

A

AFC= total cost per unit of output TFC/Q
When output increases, the firm spreads its total fixed costs over a larger output, so its average fixed cost decreases, so the curve slopes downwards

91
Q

What is the equation for ATC, AFC and AVC respectively/ another way of writing this equation

A
92
Q

What is the difference between accounting profit and economic profit

A

economic profit= includes entrepreneurship
accounting profit= doesn’t include

93
Q

What is the difference between diminishing marginal return in the long run and the short run/ why are long run curves flatter than short run curves

A

DMR doesn’t exist in long run as you can alter any level of capital
In the short run DMR sets in quickly as you apply more labour to a fixed capital

94
Q

This is a long run average total cost curve (LRATC) which section is the economies of scale and which is the diseconomies

A
95
Q

What is economies of scale

A

As a company gets bigger they can operate at smaller costs per unit output

96
Q

What is internal economies of scale

A

The cost of producing a unit decreases as the scale of your business expands as a result of factors controlled by the firm

97
Q

What is external economies of scale

A

A firm’s costs per unit of output decrease as the size of the whole industry grows/ driven by factors associated with a firm’s industry but external to the firm. Benefits all firms not just one

98
Q

What are some examples of external economies of scale (factors outside firm)

A

innovations+ new tech, benefits all companies involved and lowers all of their average costs or benefits from more efficient labour
e.g. if gov invests in infastrcutre (railroads)
gov can set up Agglomeration economies

99
Q

What are some examples of internal economies of scale

A

1.Specialisation in departments/ managers
2.Purchasing Economies (Bulk-Buying) ​
3.Technical Economies ​
4.Financial Economies

100
Q

Agglomeration economies can help economies of scale. What are they

A

Benefits of clustering business in a geographical location (create a hub)
-reduces transit costs so cost per unit output will decrease

101
Q

What does CRS, IRS and DRS stand for

A

CRS- constant returns to scale (10% increase in price= 10% increase in output)
IRS- increasing returns to scale
DRS- decreasing returns to scale

102
Q

CRS is constant returns to scale (10% increase in price= 10% increase in output). If a business grows and it get economies of scale, how does this percentage change

A

economies of scale lower price per unit output so 10% price increase will give higher than 10% increase in output

103
Q

What are the reasons for increasing returns to scale

A
  1. specialisation/ division of labour
  2. financial economies- bigger firms can get loans at lower interest
  3. can afford to invest in expensive specialised equipment
104
Q

Where is the most technically efficient point on the graph

A

CRS

105
Q

What are the reasons for decreasing returns to scale

A
  1. difficulties in managing a large company/ communication along chain of command becomes difficult/ less clear instructions from managers
  2. loss of direction- workers might not all be working towards same goal
  3. management problems and communication failure
106
Q

What are normal profits

A

the profit an entrepreneur could have earned in the next best alternate buisness/job

107
Q

You start your own buisness and give up a job that paid £20,000. Your business earnt £100,000 but you paid out £70,000 for all land and labour. What is the economic profit and what is the accounting profit

A

accounting= 100,000-70,000= 30,000
economic= 100,000-70,000-20,000 = 10,000

108
Q

What is the law of supply

A

when prices are higher, firms are willing to supply more

109
Q

Why does a supply curve slope upwards

A

If the price of an item is expensive, firms are more willing to supply/ make it. Because of the higher price of the good its is profitable to supply.
Therefore new firms might be encouraged to enter the market and sell the product, so quantity available increases with price

110
Q

If supply increases/decreases does the curve shift to the left/right

A

when supply increases= curve to right
supply decreases= curve to left

111
Q

What are the determinants of supply/ when one of these change we need to draw a new curve

A
  1. prices of factors of production
  2. prices of related goods produced
  3. expectation of future prices
  4. number of supplies
  5. technology
111
Q

What are the 5 determinants of supply/ when one of these change we need to draw a new curve

A
  1. prices of factors of production (firms supply less if its expensive to make)
  2. prices of related goods
  3. expectation of future prices
  4. number of suppliers
  5. technology (can lower the cost of production+increase supply)
112
Q

Why can expectations of future prices determine wether a company will supply a certain item

A

If the company thinks an item price will go up in the future they may temporarily reduce the amount they sell, thus reducing supply. They build up stock then release the stock when prices are high

113
Q

On which line has there been an increase in input price and which has had a decrease in input price

A

green- increase in input price
blue- decrease in input price

113
Q

On which line has there been an increase in input price and which has had a decrease in input price

A

green- increase in input price
blue- decrease in input price

114
Q

When is there a surplus of a good

A

if price is too high- quantitiy supplied exceeds quantity demanded/ too much of the good

115
Q

When is there a shortage of a good

A

if price is too low- quantity demanded exceeds quantity supplied/ not enough of the good

116
Q

At which price its there a shortage and which is the surplus of a good

A

price 1= surplus. price is too high. customers want Q1 but suppliers have Q2
price 2= shortage. price too low. customers want Q2 but suppliers have Q1

117
Q

How is this government action price ceiling non-binding

A

price ceiling is above equilibrium price/ market retains Eq price as if the ceiling is not there

118
Q

How is this government action price ceiling binding

A

quantity demanded exceeds supply, resulting in a shortage of supply

119
Q

What is economic scarcity

A

gap between limited resources and theoretically limitless wants

120
Q

What is a public limited company

A

business managed by directors and owned by shareholders

121
Q

What are share prices

A

prices to buy one stock/ share in a company

122
Q

Define land

A

natural resources- land/mines/ farms

123
Q

Do total fixed costs include entrepreneurship

A

yes. in a question if there is an opportunity cost as well as capital cost, use both of them to calculate TC

124
Q

How would you work out the AFC column

A

average fixed costs= total fixed cost/total prod; 1200/20= 60
ATC = AFC + AVC
TC/Q= TFC/Q + TVC/Q

125
Q

How would you work out the AVC column

A

average variable cost= total variable cost/ total prod; 20/20= 1
ATC = AFC + AVC
TC/Q= TFC/Q + TVC/Q

126
Q

How would you work out the MC

A

MC= change total cost/ change total product
△TC/Q; 20/20 = 1

127
Q

What is the relationship between the Marginal Product of Labour and Marginal Costs

A

Inversely related. In increasing marginal returns, MC will decline because each additional worker is increasingly marginally productive

128
Q

What is the marginal product of labour

A

additional units sold per worker

129
Q

What is responsible for the U shape of the AVC curve

A

DMR

130
Q

What is the relationship between AVC and MC

A

If ATC is rising MC has to be greater than ATC
When MC is below AVC, AVC will be falling. When MC is above AVC, AVC will be rising

131
Q

When average cost is at its minimum what does it equal

A

MC

132
Q

Is MC effected by changes in variable prices

A

MC= TC/Q
yes-if variable factors change (eg labour) the amount in wages you have to pay changes (total variable costs). If the variable costs change this directly effects total costs and MC

133
Q

What does operating below capacity mean

A

not getting the maximum amount of customers

134
Q

Which is the lowest utility indifference curve

A

I2; higher vertically but consuming less of everything

135
Q

What are some advantages and disadvantages of advertising

A

disadvantages-
1.Cost of advertising doesn’t improve the product but leads to higher prices for consumers
2.needs regulating to prevent firms from making false claims
advantages-
1.High barriers to entry (cola and Pepsi) difficult for new entrants
2. Consumers like buying goods where they feel they can rely on a minimum standard

136
Q

What is the relationship between the demand curve and the MR curve

A

-if demand is downward sloping then the MR falls at twice the rate
-in perfect comp and in price discrimination D=MR because perfectly elastic demand curve

Chem year 1 (26 decks)

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