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Economics ME :) > Economics revision > Flashcards

Economics revision Flashcards

1
Q

What are constant returns to scale ?

A

Long run average cost as output rises

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2
Q

What are diseconomies of scale ?

A

Business may expand beyond its maximum size , they will see an increase in long run average cost

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3
Q

What are economies of scope ?

A

When it becomes cheaper to produce a range of products - cost saving from diversification

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4
Q

What are external economies of scale ?

A

When an expansion of industry leads to growth of ancillary services causing a downwards industry supply curve

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5
Q

What are Increasing returns to scale ?

A

When output is rising faster than inputs when all inputs can be varied in the long run

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6
Q

What is minimum efficient scale

A

When internal economies of scale have been maximised - corresponds to the firms lowest point on the long run average cost curve

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7
Q

What are some examples of internal economies of scale ?

A

Technical economies - containerisation of products + tourism

Financial economies - Lower interest on loans for larger firms

Marketing economies - Spreading the cost of marketing easily

Managerial economies - Employing specialised staff to raise efficiency

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8
Q

What is marginal profit ?

A

The increase in profit when one more unit is sold

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9
Q

What is normal profit ?

A

The minimum reward for an entrepreneur to keep them running the business / stay in the industry

Reflects the opportunity cost of using funds to finance a business

If the price of a product covers the AC then the firm is making normal profits

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10
Q

What is profit maximisation ?

A

Marginal cost = marginal revenue

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11
Q

What is profit per unit ?

A

Average revenue - average total cost

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12
Q

What are subnormal and supernormal profits ?

A

Subnormal - Profits are less than normal

Supernormal - Profit exceeded of normal profit - there is an incentive for other producers to enter the market

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13
Q

What is the importance of profit ?

A

Finance for capital investment / R and D - for example retained profit to fund acquisition + capital investment

Market entry - sends signals to other producers in a market

Demand for and flow of factor resources

Signals about the health of the economy - if profits are high then the economy is doing good

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14
Q

What is the difference between accounting profit and economic profit ?

A

Accounting profit is total revenue - total cost

Economic profit -

Total Rev - Total Cost - Opportunity cost - Income lost out on

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15
Q

What is the equation for average revenue ?

A

AR = Total revenue / output

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16
Q

What is the equation for marginal revenue ?

A

MR = Change in total rev / Change in total output

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17
Q

What are some motives for a firm ?

A

Profit motive - profit maximisation
Cost motive - economies of scale
Market power - monopoly / oligopoly
Risk motives - reducing risks
Revenue maximisation

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18
Q

What is the equation for average costs ?

A

AC = Fixed costs + total variable cost + normal profit / quantity

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19
Q

What is Average and marginal revenue on a diagram

A

AR is the demand curve ( downward facing )

MR is half the gradient of the AR curve

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20
Q

What are fixed costs ?

A

Costs that have to be paid even if there is a change in output

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21
Q

What are sunk costs ?

A

Costs that cannot be recovered . E.g. set up costs

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22
Q

What are unit variable costs ?

A

Costs that vary with output . E.g. raw materials and packaging

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23
Q

What are Marginal costs ?

A

Costs of producing one more additional unit

24
Q

What is dynamic efficiency ?

A

Production innovation : Small scale , frequent changes to a characteristic and performance of a good or service

Process innovation : Changes in the way in which production takes place or is organised / changes in business model and pricing strategies

25
Q

What is social efficiency ?

A

When the socially efficient level of output or consumption occurs
( when marginal social benefit = the marginal social cost )

+ and - externalities mean that the private level of consumption differs from social optimum

The free market does not always take into account the social cost and benefits

26
Q

What is allocative efficiency ?

A

When no one can be made better off without making someone worse off

The value that a consumer places on a good or service = the cost of the factor resources used up in production

Output which maximised consumer welfare , at the equilibrium point producer surplus is maximised and economic welfare is maximised

27
Q

What is minimum pricing ?

A

Is a price floor for a market - suppliers cannot sell the product legally at a lower price

A form of Govt intervention

28
Q

What needs to be done to make a minimum pricing policy to become efficient ?

A

A minimum price must be set above the normal free market equilibrium

If a minimum price is set below the market equilibrium then it will have 0 impact

29
Q

What are maximum prices ?

A

When the Govt or an industry regulator sets a maximum price to prevent a price from rising above a certain level

30
Q

What are some examples of maximum price policies in real life ?

A

Housing rent controls
Energy price cap
Cap on interest rates charged by lenders
Price capping water companies

31
Q

What must be done in order to make a maximum price policy effective ?

A

Maximum price must be set below the normal free market equilibrium price to have any affect on output and price

32
Q

What are buffer stock schemes ?

A

Schemes which seek to stabilise the market price of agricultural products by :

Buying suppliers stock when supply is high

selling supply onto the market when supply is low

33
Q

How does a buffer stock scheme use price standards to carry out its function ?

A

Some buffer stocks use a minimum and maximum price to sell goods

Anything above the maximum price protects customers from paying vast amounts

Anything below the minimum price protects producers from getting little for their products

34
Q

What are some alternatives for buffer stock schemes ?

A

Long term - Investment in capital goods like irrigation and wider access to insurance

Reducing dependency on a specific type of crop

35
Q

What are some arguments FOR buffer stock schemes ?

A

Lower chance of extreme food poverty for poor farmers

Helps more economic stability

More stable incomes for farmers

36
Q

What are some arguments AGAINST buffer stock schemes ?

A

High cost of storage of the product may decrease quality

Better long term solutions

Buffer may not be large enough to change the price

37
Q

What are subsidies ?

A

Any form of government financial support given to consumers or producers to help the economy

38
Q

What are some examples of government subsides ?

A

Eat out to help out
Solar and wind farm investment
Subsidies for the rail industry

39
Q

What are some justifications for subsidies for Producers ?

A

Encourage output / investment in loss making industries

reduces cost of training employees

Helps poorer families / Makes health care more accessible

40
Q

How do government subsidies affect the demand curve ?

A

They cause an outward shift in the supply curve as it becomes cheaper to produce the goods

Suppliers can produce more with the money they have

41
Q

What are indirect taxes ?

A

A tax imposed by the Govt that increases the supply costs faced by producers

42
Q

What is a valorem tax ?

A

Percentage tax on a unit price

43
Q

What is a specific tax ?

A

A set tax per unit

44
Q

What are some examples of indirect taxes ?

A

VAT
Landfill tax
Fuel duties / alcohol duties
Air passenger duties

45
Q

What do indirect taxes do to the supply curve ?

A

Indirect taxes cause the supply curve to move inwards

This is because Producers have more costs due to the tax , they have less money to produce , decreasing the supply

46
Q

How do government failures occur ?

A

When an intervention leads to deeper market failure - creates inefficiencies , a misallocation of resources + loss of welfare

47
Q

What is the law of unintended consequences ?

A

Actions of customers , producers and government - they have effects that are unanticipated or unitended

48
Q

What are some failures of Govt regulators ?

A

Regulators may limit innovation

Frequent rule changes can stifle business investment

May lack the powers to be truly effective

49
Q

How do negative externalities occur ?

A

When production / consumption impose external cost on third parties outside of the market .

50
Q

What are some negative externalities caused by production ?

A

Air pollution from factories
Pesticides in farming
Noise pollution from planes
Damage caused by overfishing

51
Q

What are some negative externalities caused by consumption ?

A

Vehicle pollution
Effects of smoking
Family problems from gambling
Traffic congestion on health

52
Q

What are some disadvantages of adding extra regulation

A

High cost of enforcement

Regulations could cause unwelcomed consequences

Cost of meeting regulation could put off small business + lower competition in markets

53
Q

What are some advantages of adding regulation

A

Acts as an incentive for businesses to innovate

Regulation that gradually changes , help stimulate capital investment

Regulations can be effective when demand is irresponsive to change

54
Q

What are private costs ?

A

Costs faced by the producer / consumer directly involved in the transaction

55
Q

What are private benefits ?

A

Benefits for the producer / consumer who are directly involved in the transaction

56
Q

What is social cost

A

The cost incurred by society as a whole

57
Q

What is social benefit ?

A

The benefits to society caused by a product or service

Economics ME :) (6 decks)

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