Key concepts Flashcards
What is supply?
Supply is the quantity of goods or services that producers are willing or able to produce at a given price level.
What is PES (Price Elasticity of Supply)?
PES is the responsiveness of quantity supplied to a change in price. PES is always positive because of the positive/direct relationship.
What is the formula of PES?
% Change in Price
How do you calculate a % change?
% Change= Difference
—————- x 100
Original
State the factors affecting PES
- Production lag (e.g. agriculture)
- Spare capacity
- Stock
- Time
- Sustitutability of the factors of production.
Define market.
Any place where buyers meet suppliers and exchange goods or services
What is equilibrium (not a definition)
When quantity demanded = quantity supplied
What is joint demand?
When two products are demanded equally as they are complementary goods e.g. Printer & Ink.
What is competitive demand?
Products that are substitutes, replace each other, e.g. ccoke and Pepsi.
What is composite demand?
When a good is demanded for more than one use e.g. milk for cheese and butter.
What is derived demand?
When a good is needed for the production of another e.g. steel workers are needed for steel production.
What is joint supply?
The production of one good leads to the production of another e.g. cows can be used for milk.
What is the formula of elasticity of demand for labour
Elasticity of % Change in Q of workers
= ————————————–
Demand Level % Change in Wages
State the factors that affect elasticity of DL
- Substitutability with other factors of production e.g. capital (higher sust. higher elast.)
- Elasticity of the underlying good (the higher elast. the higher elast. of labour)
- Cost of labour as a percentage of total cost (high %, high elasticity)
- Time period (more time more elasticity)
Factors affecting change in the supply of labour
- Trade Unions
- Changes in population
- Value of leisure time
- Better training & education
What is the formula of supply of labour
Elasticity of supply of labour
% Change in QL supplied
= --------------------------------------
% Change in Wages
Factors affecting the elasticity of the supply of labour in comparison of two jobs e.g. doctor vs waiter
- Time taken to train for the profession
- Vocations
- Nature of skills required
- Time period
What is the marginal product theory?
The theory that shows the effect of the next additional unit e.g. effect of another cook in a pizzeria on pizzas made.
What does the law of diminishing return state
Each additional worker provides less units than the one before.
What are the reasons for the diminishing law of return being correct.
- Capital fixed
- Communication harder
- Lack of space
- Lack of tasks
What does a perfectly competitive labour market include?
- Many workers
- Many firms
- Workers accept the wage determined by the market
- Firms accept the wage offered by the market
What makes a labour market imperfect?
- Few firms or just 1 firm
- Imperfect information
- Trade unions (push for higher wages)
What is a monopoly?
When there is 1 firm selling e.g Microsoft
What is a monopsony?
When there is 1 firm buying e.g Amazon
How do trade unions impact the labour market?
PROS:
- Higher wages for workers
- Security
- Working conditions/safety
CONS:
- Higher cost to firms
- Workers reliant and falling productivity
- Corruption in unions
What is the national minimum wage?
A legal minimum wage used to increase the earnings of the lowest paid.
State pros and cons of the national minimum wage
PROS:
- Increase income of the lowest paid (higher standard of living of the lowest earners)
- Reduces inequality
- Increase consumption
CONS:
- Increased consumption can cause inflation
- Higher cost to firms
- May discourage firms from hiring
What are wage differentials?
Differences in wages that come up between individuals, occupations, industries and regions.
What is income?
A flow of money to a factor of production, usually labour.
What is wealth?
Stock of valuable assets such as property, savings, shares.
What is equality?
It is the equal sharing of income & wealth across all members of society.
What is equity?
Equity is about fairness, not necessarily equal.
How do you measure inequality?
- Lorenz curve
- Gini coefficient
What is a positive statement?
Statements based on evidence that can be tested and proved.
What is a normative statement?
It is a value judgement that can’t be proved right or wrong.
What is relative poverty?
When individuals in a society are worse off than others e.g. earning less than 60% of the median salary in that country.
What is absolute poverty?
When individuals in society can’t afford the basic necessities e.g food, water, shelter.
What are the three tax systems?
- Progressive tax system
- Proportional tax system
- Regressive tax system
What is progressive tax system?
When high-income people are taxed more than low-income people.
What is proportional tax system?
Everyone pays the same % tax
What is regressive tax system?
When low-income people are taxed more than high-incomes people.
State the policies to reduce poverty
- Progressive taxes
- Reducing unemployment
- National minimum wage
- Welfare benefits
- EDUCATION AND TRAINING
- Promotion of ‘‘trickle down’’
What is the market failure?
When the free market leads to a misallocation of resources in an economy.
What is the complete market failure?
When the market is missing and it completely fails to provide a good or service.
What is the partial market failure?
a market for a good or service exists but is under or overproduced ie. does not maximise economic welfare.
What are the function of prices?
- Signalling function (tells producers when to + or - production)
- Incentive function (higher prices means higher profit so producers incentivised to produce more)
- Rationing function (when prices increase, excess demand is removed, helping the market to clear i.e supply=demand)
- Allocative function (resources go intro growing markets and out of declining markets)
What is a public good?
A public good is one which is non excludable and non-rival
What is non excludable?
Non-paying customers cannot be excluded once the good is produced e.g. streetlights.
What is non-rival?
One person’s utility is not diminished by another person’s utility e.g the radio as my use doesn’t diminish someone else’s use.
What is a free-rider?
A free rider is someone who wants others to pay for a public good but plans to use the good themselves; if many people act as free riders, the public good may never be provided.
What are private goods?
Private goods are excludable and rival in its consumption.
What are quasi-public goods?
Nearly public goods. Almost partially excludable or rival e.g. roads become more rival and they fill up.
What is an externality?
An externality is the knock on effect of an economic activity on a third party.
