Micro-economics Flashcards
Production possibility frontier
The maximum potential output of an exonomy if all resources are fully utilised (PPF)
What could cause ACTUAL economic growth
- Fall in unemployment
- Less capital laying idle
- Less lad laying idle
- Better management of resources
What could cause POTENTIAL economic growth?
- Increase in retirement age
- Mass immigration
- Improvement in the health of workers
- Improvements in workers skills/knowledge
- More roads/railways tracks built
- Wuicker internet speeds
- More factories / office spaces built
- Tehcnological breakthrou
- Introduction of fertilisers, pesticides and insecticided
- Irrigation introduce in arid areas
- Introduction of genetically-modified seeds
- Drainage introduced in wetland areas
Captial goods e.g.
Factories, tractors, roads, cranes, diggers, wind turbines
Consumer goods e.g.
TVs, playstations, paintings, wine, handbags, smart speakers
Resources
The 4 factors of production
Missallocation of resources
Not all resources are being fully utilised
Advantages of specialisation
- World output increases
2. Can lead to economies of scale being better exploited
Disadvantages of specialisation
- Can lead to large economic decline if there are production problems in that industry
- Can lead to large economic decline if the demand for the good falls
- Countries may be over-dependent on other countries selling goods and services to them if they are specialied in just one or two goods
Advantages of division of labour
- worker become more skilled and quicker at doing one task
- fewer mistakes and better consistency
- only have to be trained in 1 or 2 tasks, so training costs fall
- workers can be allocated to roles which suit their strengths
- less duplication of tools and equipment
- less time is wasted moving between tasks
Disadvantages of division of labour
- workers only develop a narrow range of skills, leading to long term structural unemployment if demand for that skill falls
- monotonous, lose interest in their job, morale can fall and mistakes happen, may reduce productivity
- quit their jobs more frequently than before, higher hiring costs and training costs
- no other worker has the skills to do that job if one worker is ill or leaves, each stage of production is inter-dependent
- if demand is low division of labour may not be possible
Consumers keep buying up to the point where
The marginal benefit from the final unit consumed is equal to the price charged
Unit Tax
A fixed amount of tax per unit is added to the value of the good
Ad Valorem Tax
A percentage tax is added to the value of the good
Subsidy
A grant given to the producers, from the government, to lower firms’ cost of production
Indirect tax
A tax expenditure. This tax only occurs when a transaction takes place
Direct Tax
Taxes on Income, and taxes on wealth
Consumer incidence of tax
The part of the tax borne by consumers
Producer incidence of tax
The part of the tax borne by producers
Consumer incidence of subsidy
The part of the subsidy that benefits consumers
Producer incidence of subsidy
The part of the subsidy that benefits producers
Consumer incidence of subsidy
The part of the subsidy that benefits producers
Government tax revenue =
Ttax per unit x Quantity of taxed units bought
Government spending on Subsidies =
Subsidy per unit x quintity of subsidised unit produced
the supply of labour curve
The supply of labour curve shows the quantity of qualified workers offering their labour at any given wage
The demand for labour curve
It shows the quantity of worlers that firms would hire at any given wage
Price elasticity of supply of labour value
measures the responsiveness of the quanty supplied of labour, to a change in wage
Elastic supply of labour
Supply of labour is elastic when a change in wage leads to a more than proportional change in quantity supplied of labour
Inelastic supply of labour
Supply of labour is inelastic when a change in waher leads to a less than proportional change in quantity supplied of labour
Price elasticity of demand or labour value
The price elasticity of demand for labour value measures the responsiveness of the quantity demanded of labour, to a change in wage
Elastic demand for labour
Demand for labour is elastic when a change in wage leads to a more than proportional change in the quantity demanded of labour
Inelastic demand for labour
Demand for labour is inelastic when a change in wage leads to a less than proportional change in the quantity demanded of labour
The national minimum wage
The lowest a worker can legally be paid for an hour’s labour. The minimum wage is a floor price
Trade union
A trade union is an organisation representing workers, with the aim of increasing wages, and improving the working conditions for its members
Prive Elasticity of supply of labour Value =
% change in quantity supplied of labour / % change in wage
Price Elasticity of demand for labour Value =
% change in Quanity demanded of labour / % change in wage
The basic economic problem
Resources are finite, but our wants are infinite. Therefore we have to choose how to allocate our scarce resources in order to best maximuse utility in society
Market success
When resources are allocated in a way thay utility in society is maximised
Market failure
Ther is a misalllocation of resources in a free market. Welfare is not maximise
Government failure
When government intervention leads to an even worse allocation of resources. Welfare is lower because of the government intervention
External cost
- cost to the 3rd part
- cost outside of the economic transaction
- cost ignored by the free market system
External benefit
- benefit to the 3rd party
- benefit outside of the economic transaction
- benefit ignored by the free market system
Welfare loss
Welfare loss occurs on units were the marginal social cost of production is greater than the marginal socail benefit from consumption
Tradeable pollution permits
A market approach for pricing pollution. The government austions off a limited amount of pollution permits. Firms have to compete against each other to buy a pollution permit
This encourages those firms which can most easily and cheaply make changes to recuce their emissions, to alte their pollition production process
Total economic surplus =
Producer surplus + consumer surplus + any 3rd part welfare gaines from positive externalities - any 3rd party welfare losses from negative externalities
Social marginal cost of production =
Private marginal cost of production + any production externality
Social marginal benefit from consumption =
Private marginal benefit from consumption + any consumption externality
Advantages of a buffer stock agency
- producer will be more likely to invest in worthhile capital projects, and hire additional labour
- maximum price protects consumers from high prices in bad harvest
- minimum price precent bankruptcies in bumper harvest
- food security
Disadvantages of a buffer stock agency
- there are initial costs of buying stock and building storage silos
- ongoing costs of running a buffer stock agency
- government may run out of stock in back-to-back bad harvests
- government may run out of storage space in back-to-back bumper harvests
- only possible if the good is non-perishable and storage costs are low
- no incentive to improve quality of product
Market success
When resources are allocated in such a way that utility in society is maximised
Market failure
There is a missallocation of resources in a free market. Welfare is not maximised
Government failure
When government intervention leads to an even worse allocation of resources. Welfare is lower because of the government intervention
Asymmetric information
When one party has more information than the other party in an economic transaction
Merit goods
Goods that are under-consumed in a free market
Reasons why merit goods are under consumed
- Consumers under-estimate the true benefits of the good
2. The good has positive externalitites
Demerit goods
Goods that are over-consumed in a free market
Reasons why demerit goods are over consumed
- Consumer under-estimat the true costs of consuming the good
- The good has negative externalities
Economic inertia
Consumer continue to pruchase the good in the same quantity as before, despite new evidence emerging regarding the benefits of consuming the good
Herd behaviour
Individuals, rather than carfully researching the benefits and costs of consuming a good, base their consumption decisions on what other people are buying
Moral hazard
When an individual, knowing that they are insured against any possible loss, choose to undertake more risky transactions
Private sector goods
Goods produced by private firms - not by the government
Public sector goods
Goods produced by the government
Private goods
Goods that rival and excludable
Public goods
Goods that are non-rival and non-excludable
Quasi-public goods
A good that has characteristics of both a public good and a private good.
Non rival , excludable Quasi-public good example
Watching a film on netflix
Rival, non-excludable quasi public goods example
Blackberries growing on a road-side hedge
Public goods examples
Lighthouses, street lights, flood defence systems
Private goods examples
Bread, clothes, tennis racket
Rival
Once bought or consumed by someone, it cannot be bought or consumed by another person
Excludable
When the producer can easily prevent any non-paying individuals from enjoying the benefits of that good
Free-rider problme
Once the good is provided for one person, it is impossible for the firm to prevent those who have not paid from enjoyinh the benefits of that good
Bumper harvest
The weather has been favourable to producers. A high-yeiling harvest has occurred
Minimum price
The legally lowest price a good can be sold for
Maximum price
The legally highest price a good can be sold for
Buffer stock agency
A government-run firm that buys left-over stock during bumer harvest, and sells these stockpiles in times of bad harvests to alleviate shortage
What is the purpose of a buffer stock agency
To stabilise prices
