Economics Flashcards
Define producer surplus.
The difference between the amount a producer of a good receives and the minimum the producer is willing to accept for the good.
What makes a product inelastic?
Fewer substitutes. Short run. Small part of budget. Difficult to increase production at constant unit cost. Global supply.
Define comparative advantage.
law referring to the ability of any giveneconomicactor to produce goods and services at a lower opportunity cost than othereconomic actors.
Define a positive externality and give an example.
The benefit that is enjoyed by a third party as a result of the consumption or production of a good. An example is education.
What is discounting?
The process of determining the present value of a payment that is to be received in the future. Makes current costs and benefits worth more than those occurring in the future because there is an opportunity cost to spending money now.
What is ‘pure time preference’?
The inclination of an individual to choose 100 units of purchasing power this year than 110 units next year due to the fear of becoming ill or dying and not being able to enjoy next year’s income.
Definition of a cost-benefit analysis.
an economic technique applied to public decision−making that attempts to quantify the advantages (benefits) and disadvantages (costs) associated with a particular project or policy.
Advantages of a Cost-benefit analysis.
Simplicity - easy to understand and means that it can be used in many scenarios.
Transparent, objective and repeatable - not bias.
Explicitly addresses trade-offs.
Disadvantages of a Cost-benefit analysis.
Estimation - you have to be able to perform accurate estimations about the benefits you would receive from the project. If your calculations are inaccurate, you could deem a project viable, only to later discover it ended up costing the company money
Unit of measurement - have to use a common measurement
Accuracy - accuracy with regard to benefits and costs must be closely monitored because benefits are easy to double count.
Example of a club good?
A non-congested toll road.
Example of an open access good?
Anything you can buy in a supermarket.
Club good?
Non-rivalrous and excludable
Open access good?
Non-excludable and rivalrous
Private good?
Rivalrous and excludable
Public good?
Non-rivalrous and non-excludable
What are the fundamental causes of economic growth?
The geography hypothesis.
The culture hypothesis.
The luck hypothesis.
The institutions hypothesis.
Examples of a public good?
defence, public fireworks, lighthouses, clean air and other environmental goods, and information goods.
Crime defence for a public.
Public service broadcasting.
Why do markets often under-supply public goods?
Public goods are hard to charge for as they are non-rivalrous and non-excludable. They can also lead to market failure due to a missing market for public goods.
What is the free-rider problem?
Because public goods are non-excludable it is difficult to charge people for benefitting form a good or service once it is provided
The free rider problem leads to under-provision of a good and thus causes market failure
How does the government attempt to overcome the free-rider problem?
The non-rival nature of consumption provides a strong case for the government rather than the market to provide and pay for public goods.
Many public goods are provided more or less free at the point of use and then paid for out of general taxation or another general form of charge such as a licence fee.
State provision may help to prevent the under-provision and under-consumption of public goods so that social welfare is improved.
If the government provides public goods they may be able to do so more efficiently because of economies of scale.
Differences between a financial cost-benefit analysis and a social cost-benefit analysis?
Financial CBA compares benefits and costs of the project to the enterprise whereas a social CBA compares benefits and costs to the whole economy.
Financial CBA uses market prices to check the balance of investment and sustainability of the project whereas a social CBA uses the economic price.
They also differ in their treatment of external effects.
Financial CBA:
Considers only private costs and benefits
Social/economic CBA:
Considers all costs and benefits.
Opportunity cost
The opportunity cost of a choice is the value of the things you lose. A benefit, profit, or value of something that must be given up to acquire or achieve something else
What causes market failure?
When institutions don’t align self-interest with social interest.
What is willingness to pay?
The maximum price a consumer is willing to pay for a good
Give 7 examples of market shifters?
Income Population of demanders Substitutes Complements Tastes Expectations Quality
Define consumer surplus?
The difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay.
Maximum price - market price
Define a negative externality
The cost suffered by a third party as the result of the consumption or production of a good.
What is a market composed of?
Buyers (consumers) and sellers (producers
The institutions, laws, norms, practices, and locations (including virtual locations) where trade takes place
Free market
What is a free market?
an economic market or system in which prices are based on competition among private businesses and not controlled by the government
Willingness to pay = demand curve
Willingness to accept = supply curve
:)
With taxation: What happens to quantity supplied? What happens to price charged? What happens to consumer surplus? What happens to producer surplus?
Decreased
Increased
Decreased
Decreased
How does specialisation and trade increase efficiency?
minimising opportunity costs of production
What resources are available for growth?
Natural capital (what we started with) Human capital (who we are) Man made/built capital Financial capital Social capital Knowledge capital
What is excludability?
a good or service is calledexcludable if it is possible to prevent people (consumers) who have not paid for it from having access to it. By comparison, a good or service is non-excludableif non-paying consumers cannot be prevented from accessing it
What is rivalry?
a rivalrous good cannot be simultaneously consumed by two consumers
What are externalities?
indirect effects of consumption or production activity
What makes a product inelastic?
Fewer substitutes Short run Categories of product necessities small part of budget Hard to increase production at constant unit cost global supply
What is positive economics?
How the world works
How people behave
What effect a policy would have
What is normative economics?
What should we do
How should we take decisions
What are the Cost-benefit analysis foundational principles?
Explicit - effects are explicitly considered
Broadly consequential
Additive accounting - addition and subtraction of effects
What are the deeper problems with a CBA?
Utilitarian
Ignores rights
Consequentialist
