economics as a social science(1.1.1) Flashcards
1
Q
what are the 3 economic agents?
A
consumers,producers,government
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.
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.
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.
5
Q
what is the basic economic problem?
A
there are finite resources and unlimited wants and needs
6
Q
difference between renewable and non-renewable resources?
A
Non-renewable resources exist in fixed amounts whereas renewable resources are infinite
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
8
Q
what is the definition of PPF?
A
maximum output potential for an economy when all its resources are fully employed
9
Q
what is a capital good?
A
good that increase the future capacity of the economy.
10
Q
what is a consumer good?
A
goods that are for the present and have no future value.
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
12
Q
state the factors that cause the PPF to shift inwards.
A
- resources run out
- erosion of infrastructure
- natural disaster
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.
14
Q
what is specialisation?
A
when individuals,firms,regions and countries focus on producing good and services what they are best at producing.
15
Q
what is division of labour?
A
when tasks are split up or shared so that workers and companies can become more efficient.
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
17
Q
pros of specialisation to workers.
A
- Specialised workers tend to get higher pay
- Workers’ specific skills will be improved
18
Q
cons of specialisation to firms .
A
- more expensive workers
- diseconomies of scale
- lack of flexibility
-increase the rate of resource depletion
19
Q
cons of specialisation to workers.
A
- may suffer from boredom
- lack of flexibility (skills may not be transferrable AKA structural unemployment)
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
21
Q
what are the 4 functions of money?
A
- medium of exchange
- standard of deferred payment
- store of value
- unit of account
22
Q
what is medium of exchange?
A
something used to facilitate transactions Without money, all transactions would have to be conducted by barter
23
Q
what is store of value?
A
any commodity that would normally retain purchasing power in the future
24
Q
what is unit of account?
A
something that can be used to value goods and services,record debts and make calculations.
25
what is rational behaviour?
economists assume people behave in a logical and reasoned way when making decisions and their decisions give the best possible out comes.
26
state what rational consumer behaviour is?
consumers aim to maximise utility(gain maximum satisfaction)
27
state what rational producer behaviour is?
firms aim to maximise profits
28
what are objectives for firms wanting to maximise profits?
- survival
- reinvest profits
- maximising market share(monopoly power)
- ethical objectives(donating to charity etc)
- offer managers and staff better rewards
- maximise revenue
29
define utility.
the enjoyment or usefulness a consumer can get from a good or services
30
define marginal utility.
the utility gained by consuming an extra unit of good/service
31
what is the difference between command ,mixed economy and free market?
(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
32
Adam Smith (markets)
- advocate of the free market
- believed consumers and producers were drive by self interest
- believed there should be no monopolies
33
Friedrich Hayek(markets)
- was sceptical of command economies
| - believed firms and consumers know best and should use price mechanisms to interact effectively
34
Karl Marx(markets)
- argued free market creates inequality and working class is exploited
- his theories gave rise to communism
35
what is the role of the state in a mixed economy?
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
what causes a movement along a curve?
a change in price
37
what are the factors that shift demand?
```
Population
Advertisement
Substitutes
Income
Fashion
Indirect tax
Complements
```
38
difference between normal and inferior good?
normal good-as income increases demand increases
| inferior good-as income increases demand decreases
39
what does the law of diminishing utility state?
as quantity consumed increases the marginal utility derived from each extra unit decreases
40
formula for PED?
%change in QD/%change in price
41
what does <1 PED mean?
demand is inelastic
42
what does>1 PED mean?
demand is elastic
43
what does 1 PED mean?
demand is unitary elastic
44
what would a perfectly inelastic and elastic demand mean?
for inelastic there would be no change in demand and for elastic demand would fall to 0
45
factors that influence PED?
```
Substitutes(how many?)
Proportion of income
Luxury vs necessity
Addictive or habit forming
Time period
```
46
formula YED(income elasticity of demand)
%change in quantity demanded/%change in consumer income
47
what is YED?
Income elasticity of demand
| measures responsiveness of demand to a change in income
48
what is the YED for inferior goods?
<0
49
what is the YED for normal necessary goods?
between 0 and 1
50
what is the YED for normal luxury goods?
>1
51
formula for XED(cross price elasticity of demand)
%change in QD of good x / %change in price of good y
52
what factors cause a shift of the supply curve?
```
Productivity
Indirect tax
Number of firms
Technology
Subsidies
Weather
Cost of production
```
53
what is the law of supply?
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
why do firms exist?
to organise production and bring together various FOP in order to produce output.
55
formula for profit?
revenue-total costs
56
what is the formula for PES?
%change in QS/%change in price
57
what are the factors that influence PES?
Ease of switching production
Availability of stock
Spare production capacity
Time period
58
explain the how factors influence PES.
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
explain how the factors affect PED.
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
what do PED/S do?
they measure the responsiveness to supply/demand to a change in price
61
what happens to elasticity of supply in short and long run?
elasticities are usually lower in the short run than in the long run
62
what is comparative static analysis?
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
what are the 3 functions of price and explain them?
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
what are disadvantages of price mechanisms?
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
what is the consumer surplus?
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
what is the producer surplus?
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
what are the consumer surplus' for different elasticities?
perfectly elastic-0
perfectly inelastic-infinite
inelastic-greater potential consumer surplus
68
what is an indirect tax and give an example?
a tax on consumption paid by the seller e.g. V.A.T, sugar tax, fuel duty
69
what are the 4key assumptions behind rational behaviour?
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
why might people not act rationally?
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
what is the law of diminishing marginal utility?
The law of diminishing marginal utility suggests that every extra unit consumed provides a smaller benefit to the consumer
72
what determines the incidence of tax?
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
define ad valorem tax,
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
define opportunity cost.
benefits forgone of the next best alternative when a choice/decision is made.
75
what is XED?
Cross elasticity of demand
| measures the percentage change in quantity demand for a good after a change in the price of another.
76
example of specialisation
the UK specialises in finances
77
draw a PPF curve
78
define demand
the amount consumers are willing and able to buy at any given price in time
79
pros and cons of a free market
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
pros and cons of command economy
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
where does producer surplus occur on a graph
above the supply curve below price
82
where does consumer surplus occur
below the demand line above price
83
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