Introduction to microeconomics Flashcards
Define microeconomics
The study of how households and firms make decisions and how they interact in markets
What are 4 economic constraints?
Income
Labour
Capital
Land
What are the 3 fundamental economic problems?
What goods and services should be produced?
How should they be produced?
Who should get the goods and services produced?
What is a market economy?
An economy that allocates resources through decentralized decisions of many firms and households as they interact in markets in order to answer the 3 fundamental economic problems.
What do households decide?
What to buy and who to work for
What do firms decide?
Who to hire and what to produce
What does a pure market economy not have?
It doesn’t have government intervention
What is a centrally planned economy?
One where those in charge guide economic activity
Why have some initiatives not worked?
They have failed because they did not allow the market to work.
Who is the theorist behind “the invisible hand”?
Adam Smith
What is the invisible hand theory?
When self interest individuals interact in a free market, it can provide socially desirable results as if guided by an invisible hand.
What decides price and allocation?
Interaction of supply and demand
What is demand?
How much someone wants something
What is supply?
How much of something there is to have
Explain the water diamond dilemma
The demand for water is higher than that for diamond, but the supply of water is also larger. Therefore, whilst water is more important, it is still cheaper.
What causes the water diamond dilemma?
There is a different perceived utility from consuming different goods and services for example, diamond is often used as a gift for a special occasion whereas water is an abundant resource used every day.
What do governments aim to promote when trying to improve market outcomes?
Efficiency and equity
When does market failure occur?
When the market fails to allocate resources efficiently
What is externality?
The impact of one person or firm’s actions on the well-being of a bystander
What is market power?
This is the ability of a single person or firm to unduly influence market prices.
What can market power lead to?
A monopoly
Why was the sugar tax imposed?
To improve health and put less pressure on the NHS
What is the sugar tax going to fund?
Sports activities for primary schools
Who is the sugar tax imposed on?
Manufacturers which then leads to an increase in price for consumers
How can the producers change in response to the sugar tax?
They can increase their prices or reduce the sugar content of their drinks
What will affect whether or not consumption will decrease as a result of the sugar tax?
Elasticities of supply and demand
What is an ethical implication of the sugar tax?
There could be welfare implications for different groups of consumers
What is elasticity related to?
The response of consumers and producers as a result of a (price) change
What could happen as a result of the sugar tax?
Firms could close
Impacts on importing and exporting
