Economics Module 2 Flashcards
What is microeconomics?
The study of small-scale units and markets, and individual decision making within the economy
What is macroeconomics?
The study of major units and aggregate decisions that make up the economy (national spending and national output)
Who makes microeconomic decisions?
Businesses, individuals, and consumers
What impacts do macroeconomics have?
- Level of inflation
- Growth of economy
- Changes in employment/unemployment
- Total level of imports/exports
- Level of development within an economy
Who are the key decision makers in the macro-economy?
- Groups of consumers (households)
- Groups of producers/firms
- Exporters and importers
- The government
- The financial sector
- International government bodies and non-government organisations (NGOs)
What are the three main sectors in any economy?
Firms, households and the government
What is a market system?
A situation that brings buyers (consumers) and sellers (suppliers) together
How does the market allocate resources?
Prices act as signals that communicate to suppliers the wishes of consumers
What is market price?
The price of a good that is reached through competition based on supply and demand - i.e the equilibrium
What does market equilibrium mean?
A market with no tendency to change
What does market disequilibrium mean?
A market in a state of change because either supply or demand forces are in a state of change
What state is a market usually in?
Disequilibrium
What state is a market seeking to be in?
Equilibrium
What are examples of decisions involving the allocation of resources?
- What resources will be used
- How the resources will be used
- Who decides how the resources will be used
- Who benefits from the use of the resources
What is an economic system?
The way in which resources are allocated in an economy
What is the difference between the USA’s, UK’s and Japan’s mixed economy with China’s, Venezuela’s and North Korea’s?
The former have little government decision making, while the latter’s governments have control over entire industries and make most economic decisions
What decides how resources are allocated in a market economy?
The interaction between consumers and suppliers
What do consumers and suppliers base their economic decisions on?
Prices, which act as signals of supply and demand
What is a mixed economy?
An economy where some decisions are made by the government and the rest by the market
What is the market mechanism?
How a market allocates resources
What is effective demand?
A want for a good or service supported by the money to purchase it
What is demand’s relation to prices?
When prices go up, demand goes down. When prices go down, demand goes up.
What is the term for when prices rise and demand falls?
A contraction in demand
What is the term for when prices fall and demand rises?
An extension in demand
Which direction do supply and demand curves slope in?
Demand is downwards (left to right) and supply is upwards (left to right)
How does a demand curve move during a change in price, and during a change in demand?
Price: There is a movement along the curve.
Demand: The curve itself moves.
Why might demand for a product change?
- Popularity or fashion
- Income
- Age distribution of the population
- Price of substitute or complementary goods (complements)
What is supply?
The quantity that producers supply to the market at different prices
What is supply’s relation to prices?
When prices go up, supply goes up. When prices go down, supply goes down.
What causes extensions and contractions in supply?
Changes in price
What can cause changes in supply?
- Rising/falling production costs
- Changes in physical conditions
- Taxation and subsidies
- Joint supply
What is equilibrium price?
When demand and supply are balanced
What market clearing price?
The equilibrium price
How is the market clearing price illustrated?
Supply and demand curves
What is the difference between demand and quantity demanded?
Change in demand = shift in demand curve
Change in quantity demanded = movement along the demand curve
What causes a change in demand or supply?
A change in conditions of demand or supply
What causes a change in quantity demanded or supplied
A change in price
What does a change in demand or supply cause?
A new market quantity and new market price
What is elasticity of demand?
The way to measure how demand responds to a change in price
Can goods/services be elastic?
No. Only demand for a good/service can be elastic
How to you measure price elasticity of demand?
Price elasticity of demand = % change in quantity demanded / % change in price
Price elasticity of demand is an inverse relationship. What does this mean?
The figure is always negative
How can you tell if demand is elastic or inelastic?
It is elastic if the figure is less than -1 (-2 = elastic, -0.5 = inelastic)
What do elastic and inelastic demand look like on a demand curve?
Elastic = shallow sloping curve
Inelastic = steep curve
What is revenue?
The sum of money a business receives from sales of goods
How do you calculate revenue?
Revenue = Quantity sold x Price per item
What can influence the price elasticity of demand of products?
- Whether it is essential (inelastic) or a luxury (elastic)
- How much is spent on the product. (Small % of income = inelastic, large % of income = elastic)
If demand is elastic, should a business increase or decrease price for more revenue?
It should decrease price
If demand is inelastic, should a business increase or decrease price for more revenue?
It should increase price
What do governments use knowledge of price elasticity for?
To set tax rates on goods
What do governments use knowledge of price elasticity of demand for?
To set tax rates on goods
How do you measure price elasticity of supply?
Price elasticity of supply = % change in quantity supplied / % change in price
Is price elasticity of supply positive or negative?
Positive
What is price elasticity of supply?
The way to measure how supply responds to a change in price
How can you tell if supply is elastic or inelastic?
It is elastic if the the % change in quantity supplied is greater than the % change in price
What can influence the price elasticity of supply of products?
- Time (perfectly inelastic supply)
- How easily a product can be stored
- The cost of increasing supply
What is perfectly inelastic supply, and what does it look like as a supply curve?
When supply cannot be increased at a moment in time. It is a straight vertical line. (Supply cannot increase, so as demand increases price must increase. Think Skylanders or MCSM.)
What is a free market system?
A capitalist system: Individuals set up their own enterprises and most decisions are made my consumers and producers
What are the key decisions in a free market system?
- What to produce
- How much to produce
- Who gets the products
Why are goods produced in a free market economy?
To create profits
What are the two main sectors in a market economy?
The private sector and the public sector
What is the private sector?
The part of the economy made up of small, medium and large-scale businesses set up by individuals.
What is the public sector?
The part of the economy run by the government. (i.e. tax department, public transport, central bank)
What are merits of the market system?
- Coordinated decision making
- Provides plenty of choice
- Competition keeps prices down
What are weaknesses of the market system?
- Does nothing to aid the vulnerable (emphasis on individuals)
- Pursuit of profit over employee safety, environmental standards and ethical behaviour
- Subject to falls in macroeconomic activity (trade cycle)
- Potential market failure
What is market failure?
Failure or inefficiency to produce goods that consumers want at prices they can afford.
What is a public good, and who provides it?
Something that must be provided to the whole community or not at all (i.e. police force). Is provided by the government.
What is a merit good, and who provides it?
Something that provides benefits to society as a whole rather than an individual (i.e. vaccination). Is provided by the government.
What are two main criticisms of the market system?
- Does not always produce desirable outcomes (fast food, cigarettes, alcohol)
- Failure to produce public or merit goods
How do governments combat market failure?
By managing the public and merit goods the market fails to provide (i.e. WHO, emergency services), and putting restrictions on certain goods (cigarettes, alcohol).
What are private costs and benefits?
The advantages and disadvantages of a financial decision for individuals or businesses.
What is net financial return/benefit/profit?
Private benefits minus private costs.
What is an externality?
The external/unintended effect of an economic activity. There are positive and negative externalities.
What are social costs and benefits?
Social costs: Private costs + external costs (traffic, pollution, noise)
Social benefits: Private benefits + external benefits (Jobs created, more transport connections)
What causes market failure?
- Monopoly
- Factor immobility
- Creation and ignorance of negative externalities
What are the consequences of market failure?
- Overproduction of demerit goods
- Overconsumption of goods with external costs (pollution, carbon footprint)
- Underproduction of merit goods (cannot provide external benefits by charging for them)
Market failure leads to overproduction and underproduction.
What is a demerit good?
A good that is unhealthy or damaging to an individual or society as a whole, i.e. drugs, cigarettes, alcohol, fast-food
How does the government intervene in the micro-economy?
Maximum prices and minimum prices.
What is nationalisation?
When the government takes ownership of industries previously in the private sector - sets up public corporation
What is a public corporation?
A body that runs a government-owned industry on behalf of the government (i.e. NHS)
What is privatisation?
When the government sells off industries previously owned by public corporations to entrepreneurs and companies
What is direct provision?
Where the government provides public and merit free of charge (i.e. education, road networks)
What is regulation, and what is its purpose?
Rules imposed by the government backed up by penalties. They are designed to modify the behaviour of businesses and individuals in a way that benefits society.
What are the advantages of regulation?
- Improve efficiency
- Redistribute income
- Prevent market failure
- Limit externalities
- Balances the interests of private firms (profit) with the interests of the wider public
What are the disadvantages of regulation?
- Raises business costs
- Affects productivity
- Lose competitiveness because of cost complying with regulations
What are subsidies?
Incentives provided by the government to individuals and households to carry out desired activities.
Why might subsidies be provided?
- Encourage production of essential products
- Develop new products and industries
- Support declining industries
- Protect domestic industries against foreign competition
How is the effect of subsidies illistrated?
They push the supply curve to the right
What are indirect taxes?
A tax payed by an intermediary (usually a business) to the government. The tax is added to the price of a product, so the intermediary collects the tax from the consumer on behalf of the government.
What is incidence of tax?
Who pays the most of indirect tax - either the buyer or the seller.
Who pays the most of indirect tax if demand is elastic or inelastic?
Elastic: The seller, because they cannot raise prices too high
Inelastic: The buyer, because the seller is able to raise prices
What are taxes seen as in terms of businesses?
A cost to business
How should taxes be designed?
To support government objectives without discouraging effort or intiative.
