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Microeconomics > EconPlusDal Micro Y1 > Flashcards

EconPlusDal Micro Y1 Flashcards

1
Q

Basic economic problem?

A

How to allocate scarce resources given unlimited wants.

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2
Q

What is opportunity costs

A

The cost of the next best alternative forgone when a choice is made.

If next best alternative forgone is better than current choice = bad choice.

Allocate resources towards opportunity cost instead of current choice.

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3
Q

What does a PPF curve show?

A

1) Maximum possible production of 2 goods/services with given factors of production.

2) The various combinations of 2 goods/services that can be produced with given factors of production

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4
Q

What does a linear (diagonal) PPF curve mean?

A

Constant opportunity cost

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5
Q

What does a concave (curved) PPF curve mean?

A

Law of increasing opportunity cost

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6
Q

What is productive, allocative, and Pareto efficiency?

A

Productive: all resources being used at maximum productive capacity.

Allocative: resources being used to match consumer demands.

Pareto: cannot make someone better off, without making someone worse off. Any point on curve is Pareto efficiency.

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7
Q

How can a business improve its productive capacity?

A

Q²CELL

Increase QUANTITY and QUALITY of factors of production.

However, may favour one good/service over the other depending on materials required to produce.

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8
Q

What is Demand?

A

the quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

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9
Q

What is the law of demand?

A

There is an inverse relationship between price and quantity demanded.

As price increases, quantity demanded decreases and vice versa assuming ceteris paribus.

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10
Q

What is ceteris paribus?

A

Ceteris paribus means all other things remaining equal.

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11
Q

Why is there a downward sloping demand curve?

A

Income effect
Substitution effect

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12
Q

What is the income effect

A

As prices go up, purchasing power falls, less able to buy the same quantity

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13
Q

What is the substitution effect?

A

As prices go up, substitute goods become more price competitive.

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14
Q

What non-price factors effect demand?

A

PASIFIC

Population
Advertising
Substitute’s price
Income
Fashion/Tastes
Interest Rates
Complement’s price

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15
Q

What shifts a demand curve and what causes a shift ALONG the demand curve?

A

Shift:
Non-price factors (PASIFIC)

Shift ALONG:
- Price levels & Law of demand

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16
Q

What is the definition of supply?

A

The quantity of a good/service producers are willing and able to produce at a given price in a given time period.

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17
Q

What is the law of supply?

A

There is a direct relationship between price and quantity supplied. As price increases, quantity supplied increases and vice versa according to ceteris paribus.

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18
Q

What will cause supply curve to shift.

A

Non-price factors, effect COSTS of production.

PINTS WC

Productivity
Indirect tax
No. of firms
Technology
Subsidy
Weather
Costs of production

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19
Q

What is the free market?

A

any place where buyers meet suppliers to exchange goods and services, free from government intervention.

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20
Q

What is equilibrium?

A

Where demand = supply, (market clearing)

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21
Q

What is disequilibrium?

A

Where demand ≠ supply

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22
Q

What does equilibrium in a free market represent?

A
  • Allocative efficiency
    supply is perfectly equal to demand
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23
Q

What’s another name for a free market?

A

Price mechanism

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24
Q

What do prices do at disequilibrium in a free market? Price mechanism (ARSI)

A

Prices:

4) Allocate scarce resources efficiently

3) Ration scarce resources by encouraging/discouraging consumption

1) Signal excess demand/supply and need for increase/decrease in resources

2) Incentivise producers to increase/decrease output to increase profit

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25
Q

What is consumer surplus?

A

Consumer surplus is the difference between the price consumers are willing and able to pay for a good/service and the price they actually pay.

  • Found below the demand curve and above the price line
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26
Q

What is producer surplus?

A

The difference between the price producers are willing and able to supply a good/service for and the price they actually receive

  • Found above the supply curve and below the price line
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27
Q

How is society surplus calculated?

A

Consumer surplus + Producer surplus

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28
Q

What is joint demand?

A

Complimentary goods
e.g.
printers & ink
razors & blades
coffee machines & capsules

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29
Q

What is competitive demand?

A

Substitute goods
e.g.
Coke & Pepsi
Iphone & Galaxy
Big Mac & Whopper

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30
Q

What is derived demand?

A

Input demand
e.g.
Cars & Aluminium
Airlines & Holidays

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31
Q

What is composite demand?

A

Same inputs for a good, opportunity costs.

Bread & Livestock
Cheese & Butter

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32
Q

What is joint supply?

A

Increase in supply of one good will increase supply of another.

e.g.
Honey & Beeswax
Crude oil & Petroleum

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33
Q

What is Price Elasticity of Demand (PED)?

A

PED measures the responsiveness of quantity demanded given a change in price.

%△Qd/%△P

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34
Q

PED always negative due to law of demand, but what does each value mean?

A

> 1 = Demand is elastic

<1 = Demand is price inelastic

0 = Demand is perfectly price inelastic

∞ = Demand is perfectly price elastic

1 = Demand is unit price elastic

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35
Q

What shape is a perfectly inelastic demand curve?

A

Vertical

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36
Q

What determines price elasticity? SPLAT

A

Substitutes (no.)
Percentage of income
Luxury/Necessity
Addictive/Habit forming
Time period

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37
Q

What should firms do when PED changes? Remember, Elastic Only Irritates Skin (EOIS).

A

Elastic
Opposite
Inelastic
Same

Demand is price elastic
- Price increase, TR falls
- Price falls, TR increases

Demand is price inelastic
- Price rises, TR rises
- Price falls, TR falls

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38
Q

What is price elasticity of supply (PES)?

A

PES measures the responsiveness of quantity supplied given a change in price.

PES =
%change in Qs
/%change in P

YOU Q BEFORE YOU P

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39
Q

PES is always negative because of law of supply, but what does each value mean?

A

> 1 = supply is price elastic

<1 = supply is price inelastic

0 = supply is perfectly
price inelastic

∞ = supply is perfectly price elastic

1 = supply is unit price elastic

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40
Q

What determines supply elasticity? PSSST

A

Production lag
Stocks
Spare capacity
Substitutability of FoPs
Time

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41
Q

What is Cross Elasticity of Demand (XED)?

A

XED measures the responsiveness of quantity demanded of a good/service given a change in price of another.

XED = %changeQd/%changeP

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42
Q

What does each value of XED mean?

A

Party, Season, Near, Christmas

Positive, Substitute, Negative, Compliment

+ number = substitutes
- number = compliments

> 1 = Demand between the goods is price elastic
(strongly related)

<1 = Demand between the goods is price inelastic
(weakly related)

0 = Demand between the goods is perfectly price inelastic
(no relationship)

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43
Q

What does the demand curve of a XED compliment good look like?

A

Downward sloping

> 1 elastic
<1 inelastic

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44
Q

What does the demand curve of a XED substitute good look like?

A

Upward sloping

> 1 elastic
<1 inelastic

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45
Q

What does income elasticity of demand measure?

A

YED measures the responsiveness of quantity demanded given a change in income

Formula: Q before you P (Y)

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46
Q

What does the value of each YED mean?

A

+ = Normal good
- = Inferior good

Normal Good
>1 Demand is income elastic, normal luxury

<1 Demand is income inelastic, normal necessity

Inferior Good
>1 Demand is income elastic
<1 Demand is income inelastic

0 = Demand is perfectly income inelastic

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47
Q

What does the demand curve of a YED Inferior good look like?

A

Downward sloping:

<1 = inelastic
>1 = elastic

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48
Q

What does the demand curve of a YED normal good look like?

A

Upward sloping:

<1 = inelastic
>1 = elastic

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49
Q

How does PED value help a business?

A
  • Pricing decisions for TR (EOIS)
  • Employment, Stocks, Output
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50
Q

How does PES value help a business?

A
  • Find ways to make supply price elastic (PSSST)
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51
Q

How does XED value help a business?

A
  • Pricing decisions
  • Non-price competition
  • Employment, Stocks, Output
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52
Q

How does YED value help a business?

A
  • Pricing decisions
  • Employment, stocks, output
  • Plan for recession and booms
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53
Q

Why are elasticity values not always helpful for businesses?

A
  • Elasticity figures only estimates from: surveys, past data, competitors
  • Assumes ceteris paribus
  • PED varies along the demand curve
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54
Q

What are the 2 reasons for indirect taxes?

A
  • Raise government revenue
    e.g. VAT
  • Solve market failure
    e.g. alcohol duty
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55
Q

Indirect tax definition

A

Expenditure tax that increases costs of production for firms but can be transferred to consumers via higher prices

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56
Q

Direct tax definition

A

Tax on income that can’t be transferred

e.g. income tax, NI, corp. tax

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57
Q

What are the two types of indirect taxes?

A
  • Specific
  • Ad Valorem
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58
Q

What do specific indirect taxes do to the supply curve?

A

Shifts the supply curve parallel to S1 + tax

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59
Q

What is a specific tax?

A

Tax per unit price

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60
Q

What is an Ad Valorem tax?

A

Tax as a % of Price, e.g. VAT 20%

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61
Q

What does an Ad Valorem tax do to the supply curve?

A

The supply curve will shift pivoted from S1 to S1 + tax

62
Q

How to analyse the effect of an indirect tax on graph?

A

Describe:

1) S curve
2) P & Q
3) Gov. Revenue
4) Consumer Burden
5) Producer Burden
6) Producer Revenue
7) DWL

63
Q

What is a subsidy?

A

A subsidy is a money grant to firms by the government to reduce costs of production and encourage an increase in output

64
Q

What is the goal of subsidies, why are they used?

A
  • Solve market failures
  • Increase affordability
65
Q

How to analyse the effect of a subsidy on a graph?

A

Describe:

1) S curve
2) P & Q
3) Gov. Cost
4) Producer Revenue
5) Consumer Savings
6) DWL

66
Q

What is a minimum price?

A

A fixed price (price floor) enacted by the government usually sat above the equilibrium market price

67
Q

What is the aim of enacting a minimum price?

A
  • Protect producers from price volatility
  • Solve Market Failure
68
Q

How to analyse a graph with a minimum price

A

Describe:

1) Price
2) Qd
3) Qs
4) Excess supply
5) Cost of intervention buying (IB)
6) Producer revenue,
with IB: All supply bought
without IB: Only consumers
7) DWL

69
Q

What is intervention buying?

A

When the government buy excess supply in the market

70
Q

What is a maximum price/price ceiling?

A

A fixed price (price ceiling) enacted by the government usually sat below the equilibrium market price

71
Q

What is the aim of setting a maximum price?

A

Aims to increase the affordability of necessity goods/services

72
Q

How to analyse the effect of a maximum price graph?

A

1) Price:
2) Qd
3) Qs
4) Excess demand
5) Producer revenue
6) DWL

73
Q

What are private costs (PC)?

A

Producer’s cost of production

74
Q

What are social costs?

A

Social costs = PC + EC (external costs)

75
Q

What are private benefits (PB)?

A

Individual consumer benefit upon consumption

76
Q

What are social benefits (SC)?

A

PB + EB (external benefits)

77
Q

What three things happen at allocative efficiency?

A
  • Maximisation of society surplus (CS + PS), where demand = supply
  • Maximisation of net social benefit, where MSB = MSC
  • Where resources perfectly follow consumer demand, where demand = supply
78
Q

What are the assumptions made when there is allocative efficiency in a free market?

A
  • Many buyers and sellers
  • Perfect information
  • No barriers to entry
  • Firms profit max
  • Consumers utility max
79
Q

What is the social optimum?

A

Where MSC = MSB

80
Q

What is the private optimum?

A

Where MPC = MPB

81
Q

What is market failure?

A

When the free market fails to allocate scarce resources at the socially optimum level of output

82
Q

What are 6 reasons for market failure?

A
  • Self interest
    negative externalities
    positive externalities
    tragedy of the commons
  • Information failure
    de-merit goods
    merit goods
  • Free rider problem & Profit
    motivated firms
    (public goods)
  • Inequity
    income inequality
  • One dominant seller & High barriers to entry
    (monopoly power)
  • Factor immobility
83
Q

What are negative externalities in production?

A

Costs to 3rd parties as a result of the actions of producers

84
Q

Examples of negative externalities in production?

A

Air pollution, resource depletion, deforestation

85
Q

How are negative externalities in production shown on a graph?

A

MSC > MPC

marginal social cost > marginal private cost

86
Q

How to analyse a negative externality in production

A
  • Firms act in self interest
  • Over production/consumption
  • Price too low
  • Misallocation of resources
87
Q

What is a negative externality in consumption and examples?

A

Costs to 3rd parties as a result of the actions of consumers

Smoking
Excessive alcohol
Fast food

88
Q

How to show a negative externality in consumption on a graph?

A

MSB < MPB
marginal social benefit < marginal private benefit

89
Q

How to analyse a negative externality in consumption on a graph?

A
  • Self interest
  • Over consumption/production
  • Misallocation of resources
90
Q

What is the definition of positive externalities in consumption?

A

Benefits to 3rd parties as a result of the actions of consumers

91
Q

Examples of positive externalities in consumption?

A

Healthcare
Education
Exercise
Healthy eating

92
Q

How can positive externalities in consumption be shown on a diagram?

A

MSB > MPB

marginal social benefit > marginal private benefit

93
Q

What are the effects of positive externalities in consumption in a free market?

A
  • People act in self-interest
  • Leads under-consumption/production
  • Results in a misallocation of resources
94
Q

What are positive externalities in production?

A

Benefits to 3rd parties as a result of the actions of producers.

95
Q

Examples of positive externalities in production?

A

In-work training
R&D
Other firms being able to capitalise on trained workers

96
Q

How can positive externalities in production be shown on a diagram?

A

MSC < MPC

97
Q

What are the effects of positive externalities in production in a free market?

A
  • People act in self-interest
  • Under - production/consumption
  • Results in misallocation of resources
98
Q

Where does the welfare loss triangle point to?

A

Always points towards the social optimum

99
Q

What are merit goods?

A

Goods deemed more beneficial to consumers than they realise

There is imperfect information
- info. failure
- asymmetric info

Generate positive externalities in consumption

They are under-consumed/produced

100
Q

Examples of merit goods?

A

Healthcare
Education
Exercise

101
Q

What are de-merit goods?

A

Goods deemed more harmful to consumers than they realise

Imperfect information
- info. failure
- asymmetric info.

Generates negative externalities in consumption

They are over-consumed/produced

102
Q

Examples off de-merit goods?

A

Cigarettes
Alcohol
Gambling

103
Q

What are the two characteristics of a pure public good?

A

Non-excludable
- no price can be charged for the good
- benefits of consuming the good cannot be confined to the individual that has paid
- there is no cost efficient way to price

Non-rival
- the quantity of good doesn’t diminish upon consumption

104
Q

Examples of pure public goods?

A

Flood defences
Road signs
Street lights
Roads
Beaches

105
Q

What is the free-rider problem?

A

People believe that others will pay for the good and so they free ride of that idea, this results in nobody paying for the good.

Leading to complete market failure and a missing market.

106
Q

What is the solution to free rider problem?

A

Quasi Public goods

sometimes shows the characteristics of a pure public good and sometimes of a private good, e.g. can sometimes be excludable or rival.

e.g. toll roads

107
Q

What are common access resources?

A

Natural resources over which no private ownership has been established.

e.g.
- forests
- seas
- air

Lack of private ownership leads to the tragedy of the commons.

108
Q

What is the tragedy of the commons?

A

An economic problem where the individual consumes a resource at the expense of society by acting in their best interest, leading to over-consumption.

109
Q

What is government failure?

A

When the costs of intervention outweigh the benefits of intervention

The end result is a worsening of the allocation of scarce resources harming social welfare

110
Q

What are the four reasons for government failure?

A

Information failure
- valuing externalities the right level of policy required

Regulatory capture
- When regulating monopoly power

Admin & enforcement costs very high
- regulation
- subsidies
- state provision
- price controls

Unintended consequences
- Black markets
- Impact on poor
- Impact on firms
- Employment

111
Q

What does indirect taxation do to a firms costs?

A

Indirect tax increases a firm’s costs of production BUT can be transferred

112
Q

How does indirect tax promote allocative efficiency?

A
  • Increase cost of production
  • Internalises externality
    (polluter pays)
  • Solves overconsumption/production
  • Promotes allocative efficiency whilst generating gov. revenue
113
Q

Why may implementing an indirect tax on producers not work, when trying to achieve allocative efficiency?

A
  • Price inelastic demand
  • Setting tax at right level
  • Regressive
  • Black markets (over-tax)
114
Q

How do subsidies help fix market failure?

A
  • Lowers costs of production
  • decrease price, increase quantity
  • solves underconsumption/production
  • allocative efficiency, welfare gain
115
Q

Why may providing a subsidy to producers not always be beneficial when trying to fix market failure?

A
  • Cost
  • Setting subsidy at the right level
  • How will firms use subsidy
  • Price inelastic demand
116
Q

Regulation definition

A

Rule/law enacted by the government that must be followed by economic agents to encourage a change in behaviour

117
Q

Examples of regulations and laws, or command/control?

A

Command:
- Bans
- Compulsory (cig. packaging)
- Limits
- Caps
- Innovative regulations

Has to be control:
- enforcement
- punishment

118
Q

What are the benefits of implementing regulations?

A
  • Non-market based approach
  • Incentive to change behaviour
  • Solve issues in free market
  • Allocative efficiency & welfare gain
119
Q

What are the negatives of implementing regulations?

A
  • Cost
  • Settling the right regulation
  • Black markets & unintended consequences
  • Equity
120
Q

How do tradable pollution permits work?

A

1) Cap set at Q*

2) Permits issued to match the cap
(market for permits is created)

3) Firms make decision based on least cost

4) Enforcement

5) Pollution falls to social optimum, allocative efficiency

Always LR incentive to invest in green tech, because:
- profits from permit sale
- not burdened when permit prices rise

121
Q

What are the negatives of tradable pollution permits?

A
  • Enforcement
  • Imperfect information for government
  • Unintended consequences
    higher prices, inflationary
    moves pollution elsewhere
  • Need for international cooperation
122
Q

What is state provision?

A

Direct provision of goods/services by the government, free at the point of consumption

123
Q

When is state provision used?

A

Merit goods, both:
- under consumption/production
- inequity

e.g. Healthcare, Education

Public goods:
- missing market

e.g. roads, defences.

124
Q

How does state provision work?

A

1) Gov. considers full SC & SB allocating resources at Q* (perfectly price inelastic)

2) Free at point of consumption

3) Solve UC/UP & inequity issues

4) Solve missing market issues

5) Allocative efficiency and welfare max.

125
Q

What are the issues of state provision?

A
  • Excess demand, because it’s free
  • Cost
  • Imperfect information
  • Inefficiency of state organisations
126
Q

What are the issues of setting a minimum price?

A
  • Price inelastic demand
  • Regressive
  • Black Markets
  • Set at right level?
127
Q

What are the issues of setting a maximum price?

A
  • Shortage
  • Black markets
  • Enforcement
  • Setting the right level
  • Cost
128
Q

What is information provision?

A

Government funded information provision/advertising/education to encourage or discourage consumption

Paternalistic method, not interventionist approach.

129
Q

How does information provision work?

A
  • Demand shifts to social optimum levels (MSB or MPB)
  • Consumers make rational decisions knowing true MPB
  • Solve under/over consumption
  • Allocative efficiency
130
Q

What are the negatives of information provision?

A
  • Cost
  • No guarantee of success
  • Long run not short run
131
Q

How can property rights fix market failure?

A
  • Incentive not to exploit common access resources
  • Negative externalities internalised
  • If enforced, will reduce quantity to the socially optimum level
132
Q

What are the issues with providing property rights to avoid market failure?

A
  • Can property rights be efficiently distributed? How will sea and air be split up?
  • Enforcement needed = cost
  • Equity, who gets the rights?
133
Q

What is a command economy?

A

Run by the government, aims to maximise welfare.

134
Q

What is a market economy?

A

Free market economy, aims to profit max.

135
Q

What is a free market?

A

A free market is any place where buyers meet sellers to exchange goods and services, free from government intervention

136
Q

Why is equilibirum in a free market allocative efficiency?

A
  • Resources perfectly follow consumer demand
  • Society surplus is maximised
  • Net social benefit is maximised
137
Q

What are the benefits of a free market?

A
  • Allocative efficiency
  • Encourage competition
  • Dynamic efficiency - investment
  • Job creation and economic growth
  • Freedom, liberty and choice
  • No risk of gov. failure
138
Q

What are the cons of a free market?

A
  • Markets can fail
  • Inequity given inequality
  • Excessive profitearing
  • Creative destruction
  • Price volatility
139
Q

What is specialisation?

A

Specialisation is the concentration of production on a narrow range of goods or services

140
Q

What are the advantages of specialisation?

A
  • Higher output - increased trade and growth
  • Wider range of goods/services
  • Greater allocative efficiency
  • Higher productivity through better use of workers
  • Quality improvements
141
Q

What are the disadvantages of specialisation?

A
  • Finite resources
  • Changes in fashion/tastes
  • De-industrialisation
  • National interdependence
142
Q

What is division of labour?

A

Division of labour is breaking down the production process into separate tasks upon specialisation

143
Q

What are the advantages of division of labour?

A
  • Workers highly productive
  • Specialist capital for workers
  • Lower prices, higher quality/choice and quality for consumers
144
Q

What are the disadvantages of division of labour?

A
  • Demotivation of workers
  • High worker turnover
  • Risk of long term u/e
  • Highly standardised goods/services
145
Q

What are primary commodities?

A
  • Oil
  • Wheat
  • Metals (copper)
    etc.
146
Q

Why are prices for primary commodities so volatile?

A
  • Price inelastic demand
    (lack of substitutes)
    (necessities)
  • Price inelastic supply
    (hard to store)
    (large production lag)
  • Regular demand & supply shifts
    (weather)
    (macro performance)
147
Q

What is the affect of price on primary commodities?

A

Demand is price inelastic
Supply is price inelastic

Price rises
- suppliers happy, supply less
- demand hardly changes

Price falls
- demand hardly changes
- Total Revenue falls
- Supply concerns
- Gov. Revenue & growth falls
- Investment falls

148
Q

What is natural science?

A

Natural science is when scientists observe aspects of the universe

149
Q

What is social science?

A

Social science is the observation of human behaviour

150
Q

What is a positive statement?

A

Positive statements can be tested with evidence

151
Q

What are normative statements?

A

Normative statements is a personal opinion, can’t be proved as a fact

Microeconomics (14 decks)

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