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econ > economics as a social science(1.1.1) > Flashcards

economics as a social science(1.1.1) Flashcards

1
Q

what are the 3 economic agents?

A

consumers,producers,government

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2
Q

what does ceteris paribus mean?

A

all things remain equal.

For example, if the price of Coca-Cola falls, ceteris paribus, its demand will increase.

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3
Q

why is there an inability to make scientific experiments in economics?

A

economists cannot undertake controlled experiments, so they must test their models in different ways.

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4
Q

define positive and normative statements.

A

positive statement-theories that are objective and can be tested
normative statement-subjective and value judgements and non scientific.

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5
Q

what is the basic economic problem?

A

there are finite resources and unlimited wants and needs

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6
Q

difference between renewable and non-renewable resources?

A

Non-renewable resources exist in fixed amounts whereas renewable resources are infinite

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7
Q

what do PPFs show?

A
  • the maximum productive potential of an economy
  • opportunity cost
  • economic growth or decline
  • efficient or inefficient allocation of resources
  • possible and unobtainable production
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8
Q

what is the definition of PPF?

A

maximum output potential for an economy when all its resources are fully employed

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9
Q

what is a capital good?

A

good that increase the future capacity of the economy.

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10
Q

what is a consumer good?

A

goods that are for the present and have no future value.

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11
Q

state the factors that cause the PPF to shift outwards.

A
  • new technology
  • division of labour(specialisation)
  • increased labour force
  • discovery of new raw materials
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12
Q

state the factors that cause the PPF to shift inwards.

A
  • resources run out
  • erosion of infrastructure
  • natural disaster
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13
Q

what is the difference between a straight PPF curve and and a curved one?

A

on a straight opportunity costs are constant e.g. 10 tablets always =100 bread whereas on a curved the opportunity cost of a good increases as we consume more of it.

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14
Q

what is specialisation?

A

when individuals,firms,regions and countries focus on producing good and services what they are best at producing.

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15
Q

what is division of labour?

A

when tasks are split up or shared so that workers and companies can become more efficient.

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16
Q

pros of specialisation to firms.

A
  • Benefit from economies of scale
  • Production levels are increased
  • Lower cost per unit leading to higher profits
  • Workers become quicker at producing goods
  • better quality goods(higher customer satisfaction)
  • cheaper and quicker to train staff
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17
Q

pros of specialisation to workers.

A
  • Specialised workers tend to get higher pay

- Workers’ specific skills will be improved

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18
Q

cons of specialisation to firms .

A
  • more expensive workers
  • diseconomies of scale
  • lack of flexibility
    -increase the rate of resource depletion
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19
Q

cons of specialisation to workers.

A
  • may suffer from boredom

- lack of flexibility (skills may not be transferrable AKA structural unemployment)

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20
Q

what did Adam Smith argue regarding specialisation?

A

through specialisation and the division of labour production could be increased and extra wealth could be created. Smith also argued for specialisation on a larger scale so that each country specialised in certain goods/services, he argued this would result in higher incomes and standards of living

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21
Q

what are the 4 functions of money?

A
  • medium of exchange
  • standard of deferred payment
  • store of value
  • unit of account
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22
Q

what is medium of exchange?

A

something used to facilitate transactions Without money, all transactions would have to be conducted by barter

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23
Q

what is store of value?

A

any commodity that would normally retain purchasing power in the future

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24
Q

what is unit of account?

A

something that can be used to value goods and services,record debts and make calculations.

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25
Q

what is rational behaviour?

A

economists assume people behave in a logical and reasoned way when making decisions and their decisions give the best possible out comes.

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26
Q

state what rational consumer behaviour is?

A

consumers aim to maximise utility(gain maximum satisfaction)

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27
Q

state what rational producer behaviour is?

A

firms aim to maximise profits

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28
Q

what are objectives for firms wanting to maximise profits?

A
  • survival
  • reinvest profits
  • maximising market share(monopoly power)
  • ethical objectives(donating to charity etc)
  • offer managers and staff better rewards
  • maximise revenue
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29
Q

define utility.

A

the enjoyment or usefulness a consumer can get from a good or services

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30
Q

define marginal utility.

A

the utility gained by consuming an extra unit of good/service

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31
Q

what is the difference between command ,mixed economy and free market?

A

(free) a market system where pricing of goods and services is primarily determined by the sellers and buyers, and is hence based on demand and supply.
(command) a market system that is controlled by the government
(mixed) A mixed economy is partly run by the government and partly as a free market economy

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32
Q

Adam Smith (markets)

A
  • advocate of the free market
  • believed consumers and producers were drive by self interest
  • believed there should be no monopolies
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33
Q

Friedrich Hayek(markets)

A
  • was sceptical of command economies

- believed firms and consumers know best and should use price mechanisms to interact effectively

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34
Q

Karl Marx(markets)

A
  • argued free market creates inequality and working class is exploited
  • his theories gave rise to communism
35
Q

what is the role of the state in a mixed economy?

A

to provide some regulation in areas where there is market failure e.g. taxation on negative externality goods & providing subsidies for under consumed goods/services in free market

36
Q

what causes a movement along a curve?

A

a change in price

37
Q

what are the factors that shift demand?

A 
Population
Advertisement
Substitutes
Income
Fashion
Indirect tax 
Complements
38
Q

difference between normal and inferior good?

A

normal good-as income increases demand increases

inferior good-as income increases demand decreases

39
Q

what does the law of diminishing utility state?

A

as quantity consumed increases the marginal utility derived from each extra unit decreases

40
Q

formula for PED?

A

%change in QD/%change in price

41
Q

what does <1 PED mean?

A

demand is inelastic

42
Q

what does>1 PED mean?

A

demand is elastic

43
Q

what does 1 PED mean?

A

demand is unitary elastic

44
Q

what would a perfectly inelastic and elastic demand mean?

A

for inelastic there would be no change in demand and for elastic demand would fall to 0

45
Q

factors that influence PED?

A 
Substitutes(how many?)
Proportion of income 
Luxury vs necessity
Addictive or habit forming 
Time period
46
Q

formula YED(income elasticity of demand)

A

%change in quantity demanded/%change in consumer income

47
Q

what is YED?

A

Income elasticity of demand

measures responsiveness of demand to a change in income

48
Q

what is the YED for inferior goods?

A

<0

49
Q

what is the YED for normal necessary goods?

A

between 0 and 1

50
Q

what is the YED for normal luxury goods?

A

> 1

51
Q

formula for XED(cross price elasticity of demand)

A

%change in QD of good x / %change in price of good y

52
Q

what factors cause a shift of the supply curve?

A 
Productivity
Indirect tax
Number of firms
Technology
Subsidies
Weather
Cost of production
53
Q

what is the law of supply?

A

the law of supply states that a rise in price of a good/service will lead to an increase in the quantity supplied (an extension in supply)

54
Q

why do firms exist?

A

to organise production and bring together various FOP in order to produce output.

55
Q

formula for profit?

A

revenue-total costs

56
Q

what is the formula for PES?

A

%change in QS/%change in price

57
Q

what are the factors that influence PES?

A

Ease of switching production
Availability of stock
Spare production capacity
Time period

58
Q

explain the how factors influence PES.

A

E-if capital and labour are occupationally mobile then elasticity of supply is higher than if they cannot easily switched e.g. printing papers–>greeting cards

A-if stock of raw materials and products are high then firm can easily respond to change in demand

S-if there plenty spare capacity a firm can increase output without a rise in costs=elastic in response to a change in demand

T-supply is more elastic the longer the time period firms have to adjust production levels e.g. momenetary supply in agriculture is fixed as planting decisions are made months before+ weather conditions which makes it quite inelastic

59
Q

explain how the factors affect PED.

A

S-if a good has lots of substitutes is relatively elastic as as if price rises consumers can easily switch

P-if a good is a large share of household expenditure=relatively elastic demand e.g. car/sofa

L/N-if luxury good demand is elastic and it is a necessity=inelastic

H-addictive goods are more price inelastic e.g. cigarettes

T-demand will become more elastic over a long period of time e.g. fuel prices rise consumer switches to electric vehicle

60
Q

what do PED/S do?

A

they measure the responsiveness to supply/demand to a change in price

61
Q

what happens to elasticity of supply in short and long run?

A

elasticities are usually lower in the short run than in the long run

62
Q

what is comparative static analysis?

A

examines the effect on equilibrium of a change in the external conditions affecting a market. Its called static because it holds all other factors that influence S&D constant(ceteris paribus)

63
Q

what are the 3 functions of price and explain them?

A

signalling-prices help to determine where and how resources should be allocated e.g. high prices signal to producers demand is high and they should increase production

rationing-resources=scares & finite and when demand is higher than supply prices rise so the good is rationed to those who can afford.

incentive-high prices attract suppliers to the market as it = higher profits

64
Q

what are disadvantages of price mechanisms?

A

realism-models oversimplify how economic activity

market failure-over reliance of price mechanism to allocate resources efficiently

equality-doesn’t produce fair outcomes-income and wealth not distributed equally

65
Q

what is the consumer surplus?

A

consumer surplus is is the difference between the maximum that consumers are willing and able to pay for a G/S and the total amount they actually pay whereas

66
Q

what is the producer surplus?

A

producer surplus is the difference between the price received for a G/S and the price they would have been prepared to supply that G/S

67
Q

what are the consumer surplus’ for different elasticities?

A

perfectly elastic-0
perfectly inelastic-infinite
inelastic-greater potential consumer surplus

68
Q

what is an indirect tax and give an example?

A

a tax on consumption paid by the seller e.g. V.A.T, sugar tax, fuel duty

69
Q

what are the 4key assumptions behind rational behaviour?

A
  1. agents chose independently of one another
  2. agent has fixed and stable tastes and preferences
  3. agent gathers complete info on all alternatives
  4. Always makes an optional choice with given preferences
70
Q

why might people not act rationally?

A
  1. influenence of others behaviours-purchasing goods because they are trendy or peer pressure-results in emotional decisions not rational
    or
    use advanced behavioural psychology techniques to influence consumer choices e.g. Neuro branding
  2. habitual behaviour-may not react to price change due to consistently purchasing the good/service and consumer inertia develops as consumers prioritise convenience

2 computational weakness- wider the range of choice, the harder it is for a consumer to gather information and computer which one offers the highest net benefits or are unable to make the calculations that will allow them to act rationally

71
Q

what is the law of diminishing marginal utility?

A

The law of diminishing marginal utility suggests that every extra unit consumed provides a smaller benefit to the consumer

72
Q

what determines the incidence of tax?

A

PED, if demand were perfectly inelastic, sellers would be able to pass the burden onto the buyer in an increase in price equal to tax.
if demand were perfectly elastic sellers wouldn’t be able to raise prices at all so they would have to bear the entire burden of the tax.

73
Q

define ad valorem tax,

A

Ad valorem taxes are taxes determined by the assessed value of an item. One prime example is the Value Added Tax (VAT), which varies in percentage depending on the assessed value of the goods sold.is not constant unlike specific tax

74
Q

define opportunity cost.

A

benefits forgone of the next best alternative when a choice/decision is made.

75
Q

what is XED?

A

Cross elasticity of demand

measures the percentage change in quantity demand for a good after a change in the price of another.

76
Q

example of specialisation

A

the UK specialises in finances

77
Q

draw a PPF curve

A
78
Q

define demand

A

the amount consumers are willing and able to buy at any given price in time

79
Q

pros and cons of a free market

A

pros:
-competiton-innovation

-better standard of living due to unlimited access to wealth

cons:
-greater inequality between rich and poor
-consumers can get exploited by monopoly power

-enivronmental degradation

80
Q

pros and cons of command economy

A

pros:
-higher standards of living
-greater equality as everyone has the same wage

cons:-recieving the same wages can disincentivise people(doctor same wages as person with no degree)

-Black market can arise

-lack of innovation-poorer quality

-no personal freedom

81
Q

where does producer surplus occur on a graph

A

above the supply curve below price

82
Q

where does consumer surplus occur

A

below the demand line above price

83
Q
A
84
Q
A

econ (37 decks)

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