Micro-Economics Flashcards
Help remember micro-economic concepts and how markets are impacted by particular circumstances within the economy.
What is the economic problem?
The economic problem is that consumers have unlimited wants and needs but resources are scarce.
What is scarcity?
When a recourse is ‘scarce’ it means the demand for said resource is greater than the available supply, giving it a monetary value based on said demand.
What is a positive statement?
A positive statement is a statement which can be proven by fact and is therefore objective.
For example:
“A reduction in income will increase the amount of people shopping in pound shops”
With data collected over a period this statement can be proven true or false making it a positive statement.
What is a normative statement?
A normative statement is a statement which is purely based on opinion and is therefore subjective.
For example:
“We should make the national fuel allowance more accessible for pensioners.”
It is not possible to prove this statement true or false, therefore making it a normative statement based on opinion.
What are the four factors of production? what do they mean? what are their rewards?
The four factors of production are:
Land- any land used in the production of goods and resource’s stored within said land are considered factors of production. The reward for land is rent.
Labour- any one working in the production of goods and services is considered labour. The reward for labour is a wage.
Enterprise- any risk associated with beginning a business in which an person decides to take with no guaranteed monetary gain to become an entrepreneur. The reward for enterprise is profit.
Capital- any equipment (also known as capital goods) associated with creating goods or services. The reward for capital is interest.
What is opportunity cost?
Opportunity cost is the cost of the next best forgone option and the result of choosing one alternative over another.
For example you spend time and money going to a movie and therefore cannot spend time at home reading a book and you cant spend that money on something else.
What is a good?
A good is anything which is physically tangible, such as clothing.
What is a service?
A service is anything intangible, medical check-up.
What are the economic agents?
Producers- Firms or people whom provide goods or services.
Consumers- Firms or people who buy the goods and services.
Government- The collective who set rules for which the other agents within the economy will follow, typically made to correct market failure.
What is an economic incentive?
An economic incentive is any motivation an economic agent would have to pursue a specific action.
For example an incentive for a firm to create a specific product would be in having a high demand and low supply meaning they can obtain very high profits from it.
What are the economics agents motivations?
Producers- To gain as much profit as possible.
Consumers- To gain the most utility from their purchases possible.
Governments- To maintain a stable economy and correct market failures.
What is market failure?
Market failure is a situation in which there is an inefficient allocation of resources within a market.
What are the causes of market failure?
Negative externalities- caused by the overconsumption of demerit goods.
Information failure- caused by sellers withholding information about products.
Monopolies- caused by one firm having a large amount of control over a market having a very high market share.
Inequality- caused by huge disparities in income between classes within society
Free rider problem- caused by people benefiting from resources, goods or services that they didn’t pay for which may be over provided.
What is a demerit good? What do they lead to?
A demerit good is a good with more negative externalities than positive externalities. It can lead to stresses on public services as they often cause illness. An example of a demerit good would be alcohol or cigarettes.
What is information failure? What does it lead to?
Information failure is when information is withheld by producers and not given to consumers leading to consumers receiving products they did not want, creating an inefficient allocation of resources.
What are monopolies? What can they lead to?
A monopoly is when one business occupies too much of a market giving them an advantage. In its purest form, a monopoly is when one company has 100% concentration of the market. However in the UK the CMA (competition and market authority) defines a monopoly as a company with more than 25% of an industries sales.
They can lead to unfair wages for workers within said industry and high price, low quality products for consumers as they have no other company to buy from as their is a lack of competition in the market.
What is inequality? What can it lead to?
Inequality is the unequal distribution of income and opportunities between different groups within society.
These groups include: Races, sexes and classes. Inequalities can lead to a reduction of healthcare, education, water and sanitation within society and can affect a societies overall life expectancy.
What is the free rider problem? What can it lead to?
The free rider problem is when people benefit from resources, goods or services without paying for said service. This is as these are public services which would otherwise be underprovided within society without government intervention and therefore are required to be payed for with taxes. The free rider problem can cause pressure on public services as they can be consumed by people who do not pay their taxes.
What is a oligopoly? What can they lead to?
A oligopoly is when a small number of firms all of which cannot stop each other having influence occupy the majority of a market share. Oligopolies can lead to high barriers to enter the market, price driving sales in a markets, product differentiation.
example: The automobile industry is dominated by a few large companies such as Ford and GM.
What is the PPF curve?
PPF stands for the “production possibility frontier” it is used to show at which point a country’s economy is most efficiently allocating resources to produce as many units as possible.
What does a PPF curve look like?
A PPF curve is characterised by one large sloping curve at which any point of said curve is the most efficient allocation of resources. It than has two axis both being different products. Any movement along the curve shows an opportunity cost as what you gain in one product you lose in the other.
What does a point inside a PPF curve mean?
Inefficient allocation of resources.
What does a point outside a PPF curve mean?
Not currently possible with the currently available factors of production.
