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Micro-economics > Micro > Flashcards

Micro Flashcards

1
Q

Positive statement

A

An objective statement that can be proven to be correct or incorrect using available data

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2
Q

Normative statement

A

A subjective statement that is based on an opinion or judgement

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3
Q

The three economic problems

A

What should be produced?
How should it be produced?
Who should it be produced for?

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4
Q

Factors of production

A

Land
Labour
Capital
Enterprise

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5
Q

Land

A

Natural resources used in the production of other goods
e.g. coal, wood

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6
Q

Labour

A

Human input into production

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7
Q

Capital

A

Goods used in the supply of other products
e.g. machinery, factories

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8
Q

Enterprise

A

Having an idea of how land should be used

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9
Q

Opportunity cost

A

Measures the cost of a choice made in terms of the next best alternative foregone

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10
Q

Possible production frontiers (PPFs)

A

Shows alternative combinations of two goods and services attainable when all resources are fully and efficiently employed

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11
Q

Specialisation

A

When a specific factor of production is allocated to a particular job in the production process

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12
Q

Advantages of specialisation

A

Greater output
More revenue
Cost per product decreases

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13
Q

Disadvantages of specialisation

A

More training
More workers
More wages
Decrease in economic welfare of workers

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14
Q

Production

A

measure of the value of output (measured in GDP)

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15
Q

Productivity

A

The efficiency of the factors of production measured in output per person or output per person per hour

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16
Q

Advantages of a free market economy

A

Lots of competition
Lots of choice
Strong economic growth
Improving quality and innovation
Strong incentives to continue developing and keep output high

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17
Q

Free markets

A

allocates resources based on supply and demand and the price mechanism
Anything can be sold at any price that people will pay for

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18
Q

Disadvantages of a free market

A

Inequality
Non profitable goods not produced
Monopolies common

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19
Q

Planned economy

A

Government decides how resources are allocated

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20
Q

Advantages of planned economies

A

Maximises welfare
Reduces inequality
Low unemployment
Prevents monopolies

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21
Q

Disadvantages of planned economies

A

Poor decision making
Restricted choice
Lack of risk taking and innovation
Lack of efficiency

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22
Q

Demand

A

the quantity of goods and services that consumers are willing to purchase at a given time at market price

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23
Q

Effective demand

A

Demand is only effective when it is backed up by the willingness and ability to pay the market price

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24
Q

Basic law of demand

A

Demand varies inversely with price

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25
Q

Causes of shifts of the demand curve

A

Changing price of substitute goods
Changing price of complementary goods
Changes in real income
Changes in income distribution
Effects of advertising and marketing
Interest rates
Changes in size/age structure of population
Seasonal factors

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26
Q

Utility

A

measure of satisfaction we get from purchasing and consuming a good or service

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27
Q

Total utility

A

Total satisfaction from a given level of consumption

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28
Q

Marginal utility

A

Change in satisfaction from consuming an extra unit

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29
Q

Derived demand

A

Demand for a factor of production used to produce another good or service
e.g. wood, steel

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30
Q

Composite demand

A

Demand for a good that has multiple uses
e.g. milk - an increase in demand for yoghurt will lead to a decrease in supply for cheese

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31
Q

Normal goods

A

Increase in demand when average income rises

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32
Q

Inferior goods

A

Decrease in demand when average income rises

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33
Q

Giffen goods

A

Increase in demand as price rises as consumer is solely dependent on that good
e.g. rice, potatoes

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34
Q

Veblen goods

A

Increase in demand as price rises due to luxury status
e.g. clothes, handbags

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35
Q

Price elasticity of demand (PED)

A

measures the responsiveness of demand to a change in price

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36
Q

Elasticity

A

The extent to which one variable responds to a change in another variable

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37
Q

PED equation

A

PED = % change quantity demanded / % change price

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38
Q

PED = 0

A

perfectly inelastic (demand doesn’t change)

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39
Q

PED = >1

A

Inelastic (% change demand less than % change price)

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40
Q

PED = 1

A

Unitary elastic (change in price leads to a proportionate change in demand)

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41
Q

PED = < 1

A

Elastic (% change demand greater than % change price)

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42
Q

Factors effecting PED

A

Ease of substitutes
Addictive quality
Brand loyalty
Price of product as proportion of income

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43
Q

Revenue equation

A

Revenue = selling price x quantity sold

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44
Q

Revenue

A

amount of money generated through a firms sales

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45
Q

Uses of PED

A

Shows effect of a price change on total revenue
Shows price volatility
Price discrimination

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46
Q

Income elasticity of demand (YED)

A

Measures the responsiveness of demand to a change in income

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47
Q

YED equation

A

YED = % change quantity demanded / % change income

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48
Q

Normal goods and YED

A

Positive income elasticity
If inelastic are necessity
If elastic are luxury

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49
Q

Inferior goods and YED

A

Negative income elasticity

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50
Q

Uses of YED

A

Helps predict changes in the economic cycle
Important to have diversified product range to appeal to variety of people
Products with high YED and low PED increase profit margins

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51
Q

Cross elasticity of demand (XED)

A

Measure the responsiveness of good x following a price change in good y

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52
Q

XED equation

A

XED = % change quantity of good x / % change price of good y

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53
Q

Substitute goods and XED

A

Products in competitive demand
Increase in price of one leads to increase in demand for other
XED positive
Inelastic means weak substitutes
Elastic means strong substitutes

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54
Q

Complementary goods and XED

A

Products in joint demand
Fall in price of one leads to increase in demand for other
XED negative
Inelastic means weak complements
Elastic means strong complements

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55
Q

Uses of XED

A

Shows impact of rivals pricing strategies on demand for own products
Pricing strategies for complementary goods

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56
Q

Supply

A

The quantity of goods and services a firm is willing to produce at a given price in a given time period

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57
Q

Why does the supply curve slope upwards?

A

Profit motives
Production costs
New entrances to the market

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58
Q

Causes of a shift in the supply curve

A

Subsidies
Taxes
Technology
Production costs

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59
Q

Joint supply

A

When an increase or decrease in the supply of one good leads to an increase or decrease in supply of another good

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60
Q

Price elasticity of supply (PES)

A

Measures the responsiveness of supply to a change in price

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61
Q

PES equation

A

PES = % change quantity supplied / % change price

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62
Q

Factors affecting PES

A

Spare production capacity
Stocks of finished products
Perishability
Ease and cost of factor mobility
Time period
Production speed

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63
Q

Market equilibrium

A

When the supply and demand for a good or service is equal

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64
Q

Excess supply

A

When supply is greater than demand

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65
Q

Excess demand

A

When demand is greater than supply

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66
Q

Market

A

Place or platform where buyers and sellers meet to exchange a product

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67
Q

Adam Smith and the invisible hand

A

Concept where without intervention in a free market an equilibrium will be determined in the supply and demand for goods

68
Q

Functions of the price mechanism

A

Allocate
Ration
Incentivise
Signal

69
Q

Allocative function

A

The market mechanism allocates scarce resources by raising the price of scarce ones and decreasing the price of plentiful resources meaning only those who can afford them can have them

70
Q

Rationing function

A

When there is a shortage of a product price will rise and deter customers from buying it

71
Q

Signalling function

A

Changes in price provide information to both producers and consumers about changes in market conditions

72
Q

Incentivising function

A

The price mechanism creates incentives to satisfy demand
When the price of a good increases there is a greater profit motive and a greater opportunity costs for business not producing the good

73
Q

Consumer surplus

A

Difference between the total amount that consumers are willing to pay for a good or service and the amount they actually do

74
Q

Value

A

What we get from consuming a good or service

75
Q

Price

A

What we pay for the right to consume something

76
Q

Producer surplus

A

measure of producer welfare
Difference between the price producers are willing and able to supply a good or service and the price they actually sell it for

77
Q

Market failure

A

Occurs when a freely functioning market operating without government intervention fail to deliver and efficient or optimal allocation of resources

78
Q

Economic efficiency

A

Society making optimal use of scarce resources to satisfy wants and needs

79
Q

Allocative efficiency

A

Level of output that maximises total welfare

80
Q

Productive efficiency

A

When firm is operating on the lowest point of their cost curve

81
Q

Social efficiency

A

Socially efficient level of output and or consumption that occurs when marginal social benefit = marginal social cost

82
Q

Dynamic efficiency

A

Occurs over time and is linked to the pace of innovation within a market and improvements in a range of choice for consumers as well as the reliability, quality and performance of the product

83
Q

Product innovation

A

Small scale and frequent changes to the characteristics and performance of a good or service

84
Q

Process innovation

A

Changes to the way the production process takes place

85
Q

Negative externalities

A

Externalities refer to the unintended side effects or consequences of an economic activity or transaction that affects third parties who are not directly involved

(overproduction, overconsumption)

86
Q

Negative production externalities (example)

A

Fossil fuels
Noise pollution
Pollution from fertilisers
Industrial waste
Methane emissions
Overfishing

87
Q

Negative consumption externalities (example)

A

Vehicle pollution
Household waste
Noise pollution
Traffic congestion
Gambling addictions
Obesity costs
Air pollution from smokers

88
Q

Marginal private costs (MPC)

A

Internal costs to producer or consumer from suppling or consuming one extra unitM

89
Q

Marginal private benefit (MPB)

A

Satisfaction gained by the individual through producing or consuming 1 extra unit

90
Q

Marginal external cost (MEC)

A

Cost to third parties

91
Q

Marginal social costs (MSC)

A

total cost to society

92
Q

Solutions to reduce negative externalities

A

Pollution permits
Property rights
Taxation

93
Q

Advantages of pollution taxes

A

Internalises externality
Uses price mechanism to change incentives
Raises tax revenue for gov

94
Q

Disadvantages of pollution taxes

A

Low price elasticity of demand means may not change behaviour
Risk of tax evasion / avoidance
May hit lower income families more

95
Q

Positive externalities

A

Exist when third parties benefit from spill over side effects of production or consumption

(underproduction , underconsumption)

96
Q

Positive consumption externalities (examples)

A

Health care
Face masks
Vaccines
Cycle schemes
Public libraries
Free school meals
Museums

97
Q

Solutions to positive externalities

A

Subsidies
Regulation
State provision
Maximum price controls
Information provision

98
Q

Demerit goods

A

Goods that are considered to be bad for an individual or society
Cause negative externalities
Over consumed in a free market

99
Q

Examples of demerit goods

A

Fast food, drugs, alcohol, vapes, gambling, tobacco

100
Q

Solutions to demerit goods

A

Negative advertising
Minimum pricing above equilibrium
Banning products

101
Q

Merit goods

A

Goods that are considered to be good for an individual or society
Cause positive externalities
Under consumed in a free market

102
Q

Examples of merit goods

A

Health programs
Education
Bike schemes
Public libraries
Museums
Galleries
Free school meals
Vaccinations

103
Q

Solutions to the underconsumption of merit goods

A

Increase provision
State provision
Subsidies
Information
Campaigns
Advertisements

104
Q

Information failure

A

occurs when people have inaccurate or incomplete data and therefore make potentially ‘wrong’ decisions

105
Q

Examples of information failure

A

Tanning salons
Addiction to painkillers and drugs
Second hand markets

106
Q

Types of information failure

A

Asymetric
Moral Hazard and adverse selection

107
Q

Asymetric information failure

A

When somebody knows more than someone else in the market

108
Q

Moral hazard

A

Occurs when insured consumers are likely to take greater risks as they know that insurance will pay

109
Q

Adverse selection

A

High insurance prices create a missing market with low risk customers
e.g. health insurance

110
Q

Policies addressing information failure

A

Compulsory labelling on food products
Improved nutritional information
Anti speeding ads
Campaigns raising awareness of drunk driving
Campaigns on dangers of gambling
Consumer protection laws
Industry standards

111
Q

Heuristics

A

Mental shortcuts we use to make a decision

112
Q

Heuristics - price quality

A

Consumers assume high price items are better quality

113
Q

Heuristics - Familiarity

A

Consumers will choose brands thay are familiar with

114
Q

Heuristics - Brand loyalty

A

Consumers will stick with same brand if it has always delivered quality and satisfaction

115
Q

Heuristics - Availability

A

When consumers recall instances of seeing a product or brand frequently they will be more likely to buy it

116
Q

Public goods

A

Market failure occurs when the production or consumption of a good or service is neglected and there is a ‘missing market’

Non excludable, non rival, non rejectable

117
Q

Non excludable

A

Benefits of the good cannot be confined to only those who have paid

118
Q

Non rival

A

One individuals enjoyment doesn’t reduce or diminish anothers enjoyment

119
Q

Non rejectable

A

Collective supply means people cannot not use it and recieve its benefits

120
Q

Public good examples

A

Flood defences
Crime control
Reduced disease from vaccinations
Irrigation systems

121
Q

Private goods

A

Goods and services that are excludable, rival and rejectable and consumers pay for what they consume

122
Q

Excludable

A

Sellers can easily prevent individuals who haven’t payed for the good from consuming it

123
Q

Rival

A

When one person consumers a private good it reduces the quantity available for someone else

124
Q

Quasi public goods

A

A near - public good with come of the characteristics

125
Q

The Free rider problem

A

People who consume the good but don’t pay for it

126
Q

Examples of free rider problem

A

Open space
Fare dodging
Fly tipping
Open access wifi
Tax evasion

127
Q

Solutions to the free rider problem

A

Tax
Government provision
Appealing to altruism
Making public goods private
Legislation

128
Q

Global public goods

A

Goods that benefit every country irrespective of who provides them

129
Q

Examples of global public goods

A

Vaccines
Security from war
Eradication of disease
Measures to protect ozone layer
Measures to reduce climate change

130
Q

Public bads

A

Goods and services that have negative effects on people and communities leading to a loss in social welfare

131
Q

Complete market failure

A

when the market doesn’t supply the good at all, there is a missing market

132
Q

Partial market failure

A

When the market functions but supplies the wrong quantity of a product or at the wrong price

133
Q

Monopolies

A

Ability of businesses to control the market and set price above a level that would exist in a highly competitiev market

134
Q

Pure monopoly

A

Single seller dominating the market
e.g. transport

135
Q

Working monopoly

A

any firm in with greater than 25% of sales in a market
e.g. tesco

136
Q

Oligopoly

A

A few dominant firms in the market
e.g. costa

137
Q

Duopoly

A

Two firms in a market who take the majority of demand
e.g. coke, pepsi

138
Q

Horizontal integration

A

Where 2 firms join at the same stage in the production process in the same industry
e.g. 2 car manufacturers merging

139
Q

Forward vertical integration

A

Occurs when a business merges with another business further forward in the supply chain
e.g. brewers owning pubs

140
Q

Backwards vertical integration

A

Occurs when a firm merges with another business at a previous stage in the supply chain
e.g. Bakery owning a wheat processor

141
Q

Conglomerate

A

When two firms in different industries merge

142
Q

How do firms keep monopoly power?

A

Barriers to entry
Economies of scale
Vertical integration
Brand loyalty
Patent protection

143
Q

Benefits of monopolies

A

Supernormal profits can be invested to provide better quality products
Gov spending increases as corporation tax is high
Set up businesses abroad
Research and development increases
Improves a country’s export competitiveness

144
Q

Concentration ratios

A

Used to determine oligopolies abd us the % of market share taken up by the largest firms

145
Q

Solutions to market failure of monopolies

A

Price controls
Prohibiting mergers
Breaking up monopolies
Nationalisation
De - regulation

146
Q

Immobility of factors of production

A

occurs when it is difficult for factors of production to move to different areas of the economy

147
Q

Occupational immobility

A

Occurs when there are barriers to factors of production between industries
e.g. have wrong skills

148
Q

Geographical immobility

A

The inability of labour to move from one are to another for work
e.g. jobs and or people in wrong place

149
Q

Why is immobility a problem?

A

Structural unemployment
Persistent poverty
Loss of efficiency
Loss of social welfare

150
Q

Solutions to immobility

A

Stimulate work incentives

151
Q

Inequality

A

An unequal distribution of income and wealth

152
Q

Income

A

Flow of money going to factors of production

153
Q

Wealth

A

The current value of a stock of assets owned by someone or society as a whole

154
Q

Gini coefficient

A

Measure of income inequality

155
Q

Causes of rising inequality

A

Tax system less progressive than 20 years ago
High company profits and executive pay
Regressive effects of high inflation
Widening rural urban divide
Market failures in education and housing

156
Q

Impacts of inequality

A

Social unrest
Civil disobediance
Poverty cycle becomes embedded
Merit goods underconsumed as not affordable to whole population
Loss of allocative efficiency

157
Q

Government correction of inequality

A

Welfare state transfers
State provided services
Higher minimum wage
Higher rates of income tax
Investment in training
Child care subsidies

158
Q

Government failure

A

When intervention in the market leads to a deeper market failure or a new failure occurring

159
Q

What may government failure lead to ?

A

An inefficient allocation of resources
Worsen the original market failure
Cause other market failures

160
Q

Regulatory failure

A

Government failure arising from the process of regulating markets to ensure markets run efficiently and fairly

161
Q

Disadvantages of regulation

A

May limit innovation
Capping prices may prevent new firms entering the market
Expensive
May be heavily influenced by businesses and become lenient

162
Q

Law of unintended consequences

A

Once legislation is put in place businesses that are affected may attempt to work around the policy and this leads to the development of shadow/black markets

163
Q

Dangers of quick fix solutions

A

Problems arise when governments look for short term quick solutions which then may have a greater impact on the economy or society in the long term

164
Q

Political self interest

A

Policies that are seen to benefit the consumer but actually are more beneficial to the government or policies that are not put in place to solve the market failure as this market failure benefits the government e.g. alcohol and revenue

165
Q

Poor value for money from government spending

A

Introduced the private finance initiative which is a controversial policy designed to get the private sector to fund and run public projects

166
Q

Incentives to bypass official markets

A

When policy and legislation leads to the creation of shadow/ black markets

167
Q

What does the success of a government policy depend on ?

A

State and success of economy at the time
What other policies are operating
Elasticity of demand
How consumers respond
Value judgements

Micro-economics (1 decks)

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