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Economics > Exam > Flashcards

Exam Flashcards

1
Q

Economic models (hot hands)

A

Simplified representation of economic reality to better understand our choices and their effect

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2
Q

Types of economy

A
  • command/planned = all gov
    -mixed = lots of gov intervention
    -free market = Australia, no gov
    What to produce, how and who
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3
Q

Substitution effect

A

If price of good up, consumers will sub for another good. Demand for good decrease, demand for sub increase

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4
Q

Income effect

A

Price of normal good down, demand up. Price of inferior good down, demand down. (Veblen)

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5
Q

Law of diminishing marginal utility

A

Each additional good consumers buy, happiness down *applies equally to inferior and normal

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6
Q

Factors that shift overall demand

A
  • tastes and preferences
  • number of consumers
  • price of related goods
    -income
    -expectations
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7
Q

Consumer surplus

A
  • the benefit consumers get when the price of a good is less than what they were willing to pay.
  • CS = (consumers max price - actual price) x quantity bought
  • area under demand curve and above price paid, up to quantity boight
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8
Q

Law of supply

A
  • costs producers more money to produce higher quantity so higher price is needed to be eonomically viable
  • increased demand signals producers can change higher price and earn more profit
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9
Q

5 factors that shift supply

A
  • technology
  • number of producers
  • price of resources
  • taxes and subsidies
  • expectations
    *- natural disasters
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10
Q

Market equilibrium

A

Occurs when buying decisions of households and selling decisions of producers are equaled.

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11
Q

Importance of equilibrium

A
  • market is maximising total surplus
  • market is efficient
  • price in market will naturally move to reach equilibrium
  • equilibrium price is stable
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12
Q

Shortage

A

EXCESS DEMAND
- quantity demanded = more than supply given
- competition amongst buyers bids price up until equilibrium is reached

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13
Q

Surplus

A

EXCESS SUPPLY
- quantity demanded = less than quantity supplies
- competition amongst producers eventually bids down price until equilibrium price is reached

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14
Q

Producer surplus

A

PS = (quantity produced x price producers receive x 0.5)

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15
Q

Total subsidy

A

Quantity produced/consumed x size of subsidy

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16
Q

Productions probability frontier (PPF model)

A

Model showing all possible production combinations, with a set amount of resources / technology.
PPF model illustrates trade-offs, opportunity cost, efficiency in economy, economic growth.

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17
Q

Coefficients

A

Inelastic - elasticity less than 1
Elastic - elasticity more than one
Unitary - elasticity is ome

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18
Q

PED

A

Measure of how responsive consumers are to a change in price

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19
Q

Determinants of PED

A
  • availability of close substitutes
  • necessities v luxuries
  • proportion of income spent
  • definition of market (broad / narrow)
  • time horizon
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20
Q

Total revenue

A

Amount a firm earns by selling goods / services

21
Q

Percentage change method

A

Percentage change in quantity demanded DIVIDED by percentage change in price

22
Q

Mid point method

A

(Change in quantity DIVIDED by average quantity) x (average price DIVIDED by change in price)

23
Q

PES

A

Price elasticity of supply measures the responsiveness of quantity supplied to a change in price

24
Q

Determinants PES

A

-time: if producer can respond quickly supply will be elastic
-nature of industry: manufactured goods are more elastic as its easier to increase production
-ability to store inventories : perishable v non perishable

25
Q

Income elasticity of demand

A

Refers to the responsiveness of demand to a change in consumer income
(Percentage change in quantity DIVIDED by percentage change in income)
Normal good: positive coefficient or more than one
Inferior = opposite

26
Q

Cross elasticity of demand

A

Measures the responsiveness of demand for one good (a) to a change in the price of a related good (b). Can reveal whether goods are substitutes or compliments
(Percentage change in Qa DIVIDED by percentage change in Qb)
Substitute = positive

27
Q

Gov setting taxes

A

Gov sometimes sets taxes on specific goods to counteract unseen costs to society
BUT gov doesn’t want tax burden on producers as this leads to unemployment and a low economic growth

28
Q

Market efficiency

A

The allocation of resources to maximise total surplus

29
Q

Price ceiling

A

A legislated maximum price that sellers are allowed to charge. Must be set BELOW equilibrium. ALWAYS leads to a shortage

30
Q

Price floor

A

A legislated minimum price that sellers are allowed to charge. Must be set ABOVE equilibrium price. ALWAYS leads to a surplus

31
Q

Market restrictions

A

Regulation of a quantity of a good/service supplied e.g. taxi licenses. Causes high prices and excess demand.

32
Q

Taxes

A

Gov sets a tax on specific goods that have an unseen cost to society that gov pays for.
Inelastic goods will have a smaller DWL after tax

33
Q

Subsidies

A

Gov often subsidises to producers to increase production. Cost of supply paid for by tax payer, DWL represents taxpayers money that didn’t boost economic benefit.

34
Q

DWL

A

Lost value of transactions that do not occur due to poor allocation of resources.

35
Q

Market failure

A

An instance where the market does not naturally allocate resources efficiently therefore the market fails

36
Q

Market power

A

Firms can use market power to exploit market by varying output and changing prices. Monopoly = one
Firms with market power have incentive to reduce competition to grow market power ANTI COMPETITIVE BEHAVIOUR
-leads to higher PS but lower CS resulting in DWL

37
Q

Externality

A

Anytime economic activity affects someone outside market its called an EXTERNALITY

38
Q

Negative externality

A

Market produces MORE than efficient quantity because costs to society aren’t reflected in price consumers pay.
Solution = tax

39
Q

Positive externality

A

Market produces LESS than efficient quantity because benefits to society aren’t reflected in price consumers willing to pay
Solution = subsidy

40
Q

Rival

A

The consumption of the good prevent another consumer from consuming

41
Q

Excludable

A

A non-payer can be excluded from consuming it

42
Q

Public goods

A

-non-excludable/non-rival
-private producers wont produce these goods because of no profit even though they are often essential

43
Q

Free rider problem

A

-public goods
-non tax payers enjoying benefit of good
-to avoid it gov imposes universal taxes so they have enough revenue to fund these goods and make them universally accessible

44
Q

Common property goods

A

Non excludable but it is rival.
Lack of price tag consumers are incentivised to overuse

45
Q

Tragedy of the commons

A

Overuse of common property goods I.e fishing
To avoid this - gov uses regulations such as licenses and quotas to avoid depletion

46
Q

Opportunity cost

A

Choosing one option over another and giving up the opportunity to get benefits of the other option

47
Q

Production possibility frontier

A

-model showing all possible production combinations, wth a set amount of resources/technology. Illustrates trade-offs, opportunity cost, efficiency in the economy, econ growth.
-points inside/on are attainable, inside inefficient and outside unattainable

48
Q

Anti competitive behaviour

A

Incentive to reduce competition to grow market power e.g price fixing, collective boycotts, collusion

Economics (5 decks)

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