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AS Level Edexcel Economics A > Micro > Flashcards

Micro Flashcards

1
Q

Opportunity cost

A

The next best alternative foregone

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2
Q

Production Possibility Frontier (PPF)

A

The maximum potential output combinations of two goods an economy can achieve when all its resources are fully & efficiently employed

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3
Q

Shifts in the PPF are caused by changes in what 4 things?

A
  1. Changes in the quantity & quality of the FoPs (land, labour, capital, & enterprise)
  2. Changes in resources
  3. Education or training
  4. Changes in the labour force
  5. Level of capital investment
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4
Q

What is the value on the x-axis of the PPF?

A

Capital goods

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5
Q

What is the value on the y-axis of the PPF?

A

Consumer goods

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6
Q

Capital goods

A

Assets that help a firm or nation to produce output

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7
Q

Consumer goods

A

End products bought by consumers for their own enjoyment, having no future productive use

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8
Q

What are the 4 assumptions behind PPFs?

A
  1. Curves refer to the output over a specified time period
  2. Resources used in production are fixed in this time period
  3. Technology is fixed in this time period
  4. Curve shows the most efficient use of resources available
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9
Q

Specialisation

A

The process of labour allocating all their time in producing just one good or service

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10
Q

Advantages of the division of labour

A
  • Less training needed
  • Faster production process
  • Greater output; low costs per unit
  • Increased skill within specific role
  • Increased efficiency
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11
Q

Division of labour

A

Where a task is broken down into its component parts

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12
Q

Disadvantages of the division of labour

A
  • Task repetition > low worker motivation > poor quality products > less productivity
  • High staff turnover > High recruitment & training costs
  • Structural unemployment as a result of de-skilling from completing the same repetitive task for a long period of time
  • High rate of resource depletion
  • Over-dependency on other countries’ resources
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13
Q

When is there a movement along the PPF?

A

When there is a change in the allocation of existing resources

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14
Q

What book was written by Adam Smith, & when?

A

‘The Wealth of Nations’ in March 1776, outlining how to increase productivity & wealth

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15
Q

What are the 4 functions of money?

A
  1. Medium of exchange; eliminates the need for barter & the double coincidence of wants
  2. Measure of value; allows for agreeable exchange
  3. Store of value
  4. Method of deferred payment; allows for loans & credit schemes
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16
Q

What are the 2 types of money?

A
  1. M0 (narrow money); notes, & coins
  2. M4 (broad money); money existing in bank accounts; bank/building society deposits
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17
Q

Fiat money

A

Notes issued by governments/central banks, that are not convertible to any other asset

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18
Q

Commodity money

A

Metals (coins) holding value

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19
Q

Positive statement

A

The assertion of a fact; can be tested as true or false

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20
Q

Normative statement

A

A statement based on a value judgement; cannot be tested as true or false

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21
Q

Free market economy

A

An economic system where the prices of goods & services are set freely by the forces of demand & supply, without government intervention

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22
Q

Who advocated for free market economies & why?

A

Adam Smith - believed economies ran best when private individuals worked in their own self-interest

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23
Q

Mixed economy

A

An economic system where resources are partly allocated by the price mechanism, & partly by the government

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24
Q

Who advocated for mixed economies & why?

A

Freidrich Hayek - believed government intervention threatened efficiency & economic growth, & found gaps in command economies that led to surpluses & deficits of goods & services

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25
Q

What are the 3 roles of the government in mixed economies?

A
  1. Income redistribution via taxation (e.g. for social welfare)
  2. Spending on public services
  3. Maintaining infrastructure; merit goods (e.g. schools) & public goods (e.g. defence)
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26
Q

Market failure

A

When the price mechanism fails to allocate resources efficiently

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27
Q

Command economy

A

An economic system where all resources are owned & allocated by the government

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28
Q

Who advocated for command economies & why?

A

Karl Marx - believed free market economies led to capitalism, worker exploitation, & inequality

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29
Q

What are the 4 potential disadvantages of free market economies?

A
  1. Worker exploitation
  2. Decreased product quality as firms try to increase profits
  3. Wealth inequality
  4. Development of monopolies as firms try to increase their market power
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30
Q

What are the 4 potential advantages of free market economies?

A
  1. Efficient allocation of resources
  2. Better living standards due to unlimited potential of profits, income, & wealth
  3. More variety of goods & services
  4. Competition, resulting in better quality goods & services, & encouraging innovation & low prices
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31
Q

What are the 3 potential advantages of command economies?

A
  1. Low inequality
  2. Low unemployment
  3. National resources can be put towards urgent priorities quickly
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32
Q

What are the 5 potential disadvantages of command economies?

A
  1. Restricted personal freedom
  2. No competition, hence low innovation
  3. Limited access to higher living standards
  4. People disincentivised from learning difficult skills due to equal wages
  5. Inefficiency, due to central planning resulting in the surplus or deficit of goods & services
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33
Q

Demand

A

The amount of a good or service consumers are willing & able to buy at a particular price & period of time

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34
Q

Equilibrium price

A

A price where the quantity demand equals the quantity supply

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35
Q

Total revenue

A

The total amount of money received by firms from selling their respective product(s)

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36
Q

What is the formula for total revenue?

A

Average price x Quantity

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37
Q

What are the 3 functions of the price mechanism?

A
  1. Rationing
  2. Incentivising consumers to buy a higher or lower quantity of goods & services
  3. Signalling
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38
Q

Effective demand

A

When one is willing & able to purchase a product

39
Q

Derived demand

A

Goods demanded only as they’re needed for the production of other goods (e.g. the demand for flour is the derived demand for the demand for cakes)

40
Q

Law of demand

A

Price is indirectly proportional to quantity

41
Q

Utility

A

Satisfaction of a good or service

42
Q

Marginal utility

A

Satisfaction of consuming 1 extra unit of a good or service

43
Q

Paradox of values

A

When consumers are prepared to pay a high price for goods with a high marginal utility (e.g. diamonds), which are unnecessary to survival

44
Q

Normal goods

A

Goods that experience less demand as their price rises

45
Q

Inferior goods

A

Goods that experience less demand as consumer incomes rise, & vice versa

46
Q

Giffen goods

A

Low income, non-luxury products that defy standard economic & consumer demand theory; demand for these goods rises when their price rises, & vice versa

47
Q

Veblen goods

A

A good that’s demand increases as its price increases due to its exclusive nature & appeal as a status symbol

48
Q

What acronym refers to the factors that cause a shift in the demand curve?

A

P… opulation
A… dvertising
S… ubstitutes
I… ncome (disposable)
F… ashion
I… ncome (in terms of tax)
C… omplements
S… peculation

49
Q

Supply

A

The amount of a good or service that suppliers are willing to put on the market at a given price & period of time

50
Q

What happens to supply when prices increase?

A

Supply increases as firms aim to maximise profits

51
Q

Law of supply

A

Price is directly proportional to the quantity supplied

52
Q

Law of diminishing marginal utility

A

As a particular good is consumed more & more, its utility to its consumer diminishes

53
Q

How does the law of diminishing marginal utility influence the shape of the demand curve?

A
  • Consumers are only willing to buy additional units of a good if the price falls to reflect the lower utility they get from consuming more
  • As a result, the demand curve slopes downwards from left to right, showing the inversely proportional relationship between price & quantity demanded
54
Q

What does a shift of the demand curve signify?

A

A change in a non-price determinant of demand, which changes demand at all price levels, either shifting demand to the left or the right

55
Q

What does a movement along the demand curve signify?

A

When the price of the good itself changes, leading to a change in quantity demanded

56
Q

What does a movement along the supply curve signify?

A

When the price of the good changes, leading to a change in quantity supplied

57
Q

What does a shift of the supply curve signify?

A

A change in a non-price determinant of supply, which shifts supply to either the left or the right

58
Q

What acronym refers to the factors that cause a shift in the supply curve?

A

P… roductivity (high productivity would lower average costs of production)
I… ndirect taxes
N… umber of firms (the more firms there are, the larger the supply)
T… echnology
S… ubsidies
W… eather
D… epreciation (depreciation in the exchange rate will increase the cost of imports)
C… osts of production

59
Q

Producer surplus

A

The difference between the price producers are willing to supply to the market & the actual market price

60
Q

Consumer surplus

A

The difference between the price one is prepared to pay for a good & the actual market price paid

61
Q

What is the formula for revenue?

A

Price x Quantity

62
Q

What is the formula for % change?

A

((New - Original) / Original) x 100

63
Q

What is the formula for Price Elasticity of Demand (PED)?

A

% Change in QD / % Change in Price

64
Q

What is the formula for Price Elasticity of Supply (PES)?

A

% Change in QS / % Change in Price

65
Q

What is the formula for Cross-Elasticity of Demand (XED)?

A

% Change in QD of Good B / % Change in Price of Good A

66
Q

What is the formula for Income Elasticity of Demand (YED)?

A

% Change in QD / % Change in Income

67
Q

Income Elasticity of Demand (YED)

A

The responsiveness of demand for a good due to a change in income

68
Q

Price Elasticity of Demand (PED)

A

The responsiveness of demand for a good due to a change in its price

69
Q

Cross-Elasticity of Demand (XED)

A

The responsiveness in demand for good B due to a change in the price of good A

70
Q

Price Elasticity of Supply (PES)

A

The responsiveness of supply of a good due to a change in its price

71
Q

What does it mean when a good or service is price elastic?

A
  • It has a PED less than -1
  • Any change in the price of that good will result in a larger change in quantity demanded
  • It has a PES greater than 1
  • Any change in the price of that good will result in a larger change in quantity supplied
72
Q

What does it mean when a good or service is price inelastic?

A
  • It has a PED between 0 & -1
  • Any change in the price of that good will result in a smaller change in quantity demanded; the lower the value, the higher the inelasticity
  • It has a PES between 0 & 1
  • Any change in the price of that good will result in a smaller change in quantity supplied
73
Q

What does it mean when a good or service is unitary price elastic?

A
  • It has a PED equal to -1
  • A change in price is met with a proportionate change in demand
  • It has a PES equal to 1
  • The change in price results in the same change in quantity supplied
74
Q

What does it mean when a good or service is perfectly price elastic?

A
  • It has a PED equal to infinity
  • A change in market supply will not lead to any change in the equilibrium price
75
Q

What does it mean when a good or service is perfectly price inelastic?

A
  • It has a PED equal to 0
  • The quantity demanded does not change at all when the price changes
  • It has a PES equal to 0
  • The quantity supplied does not change at all when the price changes
76
Q

What does it mean when a good or service is income elastic?

A
  • It has a YED greater than 1
  • Demand is highly responsive to changes in income
  • Typically applies to luxury goods
77
Q

What does it mean when a good or service is income inelastic?

A
  • It has a YED between 0 & 1
  • Demand is less responsive to changes in income
  • Typically applies to necessities
78
Q

What does it mean when a good or service is perfectly income inelastic?

A
  • It has a YED equal to 0
  • Demand is not responsive to changes in income (e.g. for life-saving medicine)
79
Q

What is the general value/range of values of the YED for normal goods, & why?

A

Greater than 0, as these goods are desired more as consumers’ incomes rise

80
Q

What is the value/range of values of the YED of normal goods, specifically necessities, & why?

A

Between 0 & 1, due to the fact that as income increases, people buy more necessities, but not as much as their income increases (e.g. if someone’s income doubles, they won’t necessarily buy twice as much of basic goods like food or clothing)

81
Q

What is the value/range of values of the YED of normal goods, specifically luxuries, & why?

A

Greater than 1, due to the fact that as income increases, people buy more luxury goods at a faster rate than their income increases (e.g. if someone’s income doubles, they may buy more than twice as much of luxury items like designer clothes or high-end cars)

82
Q

What is the value/range of values of the YED of inferior goods, & why?

A

Less than 0, due to the fact that as income increases, people buy less of inferior goods because they can afford better alternatives (e.g., if someone’s income increases, they may switch from buying generic brands to more expensive, branded products)

83
Q

What is the value/range of values of the XED of substitutes, & why?

A

Greater than 0, due to the fact that as the price of one good increases, the demand for its substitute also increases (e.g., if the price of coffee rises, people may buy more tea instead); the larger the positive value, the closer the substitutes are, meaning even a small price change leads to a large change in demand for the other good

84
Q

What is the value/range of values of the XED of complements, & why?

A

Less than 0, due to the fact that as the price of one good increases, the demand for its complement decreases (e.g., if the price of printers rises, the demand for ink cartridges may fall); the larger the negative value, the stronger the relationship, meaning a small price change in one good leads to a large change in demand for the complement

85
Q

What is the value/range of values of the XED of unrelated goods, & why?

A

0; because changes in the price of one good have no effect on the demand for the other good, as they are not related in any way (e.g. a change in the price of shoes has no impact on the demand for books)

86
Q

What is the acronym used to refer to the factors influencing PES?

A

B… arriers to entry (e.g. high costs of advertising)
R… aw materials (e.g. if raw materials are already available, it will be easy to expand production)
I… nventory (e.g. firms with high stock can increase supply quickly)
T… ime (e.g. agriculture)
S… pare capacity (e.g. if firms aren’t running at full capacity they’re more likely to be able to increase supply when required)

87
Q

What is the acronym used to refer to the factors influencing PED?

A

I… ncome
C… omplements
E… lectricity (example of an inelastic good, as well as water, petrol, housing, food, etc.)
L… uxuries (consumers demand more when their incomes rise)
A… lternative uses
N… ecessities
D… urability
S… ubstitutes

88
Q

What are the 5 factors influencing XED?

A
  1. Closeness of substitutes
  2. Number of rival products on the market
  3. Media influence
  4. Quality of substitutes
  5. Strength of relationship between complements
89
Q

Indirect tax

A

A compulsory charge or levy on the expenditure of a good

90
Q

What are the 2 types of indirect tax?

A
  1. Specific tax
  2. Ad valorem tax
91
Q

Ad valorem tax

A

A tax set as a % of the price of a good

92
Q

Specific tax

A

A fixed charge imposed per a unit of good

93
Q

Ceteris paribus

A

All other things remaining equal

94
Q

Disposable income

A

The income remaining after taxes & other mandatory deductions have been taken out, which individuals can spend or save

AS Level Edexcel Economics A (2 decks)

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