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A Level Economics > Micro LS10- LS23 > Flashcards

Micro LS10- LS23 Flashcards

1
Q

Excess demand

A

When price is below equilibrium price. More consumers want to buy good than suppliers are willing to sell.

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2
Q

Excess supply

A

Quantity of good or service supplied is greater than quantity of good or service demanded.

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3
Q

Direct tax

A

Levied on an individual or organisation

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4
Q

Indirect tax

A

Levied on a good or service

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5
Q

Specific tax

A

Same fixed amount at all prices. e.g. fuel duty, beer duty
Causes a parallel shift in the supply curve

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6
Q

Ad valorem tax

A

Increases as amount sold rises, e.g. VAT, import tariffs
Causes a non-parallel shift in the supply curve

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7
Q

Why are there taxes?

A

In order to raise government revenue and/or discourage certain economic activities.

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8
Q

Subsidies

A

Grants given by the government to firms in order to encourage production

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9
Q

PED

A

Measures the responsiveness of demand given a change in price.

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10
Q

Price elastic

A

When a change in price causes a proportionally larger change in demand/supply

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11
Q

Price inelastic

A

When a change in price causes a proportionally smaller change in demand/supply

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12
Q

Determinants of PED

A
  1. Number of substitutes (more=more elastic)
  2. Necessity/luxury (necessity is inelastic)
  3. Addictiveness (more=more inelastic)
  4. Time (more= more opportunities to find alternatives)
  5. Proportion of income spent on product (More= less able to afford price increase= more elastic)
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13
Q

PED Formula

A

%change in QD/ %change £

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14
Q

PED values

A

> 1 - elastic
<1 - inelastic
=1 - unitary
0 - perfectly inelastic

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15
Q

PES

A

Measures the responsiveness of supply given a change in price.

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16
Q

Determinants of PES

A
  1. Time required to produce the product (more=less elastic)
  2. Level of spare capacity (more available FOP=more elastic)
  3. Number of stock/finished goods available (more=more elastic)
  4. Time (more= more opportunity to alter production= more elastic)
  5. Perishability of the product (more=more inelastic)
    +Obsolete stock (quicker = more elastic)
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17
Q

Consumer Surplus

A

Extra amount of money consumers are prepared to pay for a good or service above what they actually pay.
It is the utility or satisfaction gained from a good or service in excess of the amount paid for it.

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18
Q

Indirect tax on surplus

A

Incidence of an indirect tax refers to the distribution of the tax between consumers and producers.
Depends on the elasticity of both demand and supply.
If demand is price elastic- burden of tax will mostly fall on producers.
If demand is price inelastic- burden of tax will fall mostly on consumers.

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19
Q

Producer surplus

A

The extra amount of money paid to producers above what they are willing to accept to supply a good or service. It is the extra earning obtained by a producer above the minimum required for them to supply the good or service.

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20
Q

Subsidy on surplus

A

The incidence of a subsidy refers to how the gains of the subsidy are distributed between consumers and producers. Depends on PED and PES.
When demand is elastic, most of the gains go to producers.
When demand is inelastic, most of the gains go to consumers.

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21
Q

Consumer and producer surplus

A

The difference between willing and actual

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22
Q

Tax revenue

A

Tax rate x quantity sold

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23
Q

Income effect

A

Assuming a fixed level of income, the income effect means that as price falls the amount that consumers can afford increases, and so demand increases.

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24
Q

Marginal utility

A

The utility or satisfaction obtained from consuming one extra unit of a good or service.

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25
Diminishing marginal utility
As successive units of a good are consumed, the marginal utility gained from each extra unit will fall.
26
XED (Cross price elasticity of demand)
Measures the responsiveness of demand for one good to changes in the price of another good
27
XED values
Substitute goods have a positive XED Complement goods have a negative XED The XED of unrelated goods is 0.
28
YED
Measures the responsiveness of demand to changes in income. Inferior goods have a negative YED. (higher income= demand falls) Normal goods have a positive YED. (higher income = keep on buying it)
29
Normal goods YED
YED between 0 and 1 are classed as income inelastic. Tend to be necessities. YED larger than 1 are classed as income elastic. Often considered luxuries.
30
Price mechanism
How prices are allocated for goods and services in a market based on the levels of supply and demand.
31
Functions of the price mechanism
Signalling function Incentive function Rationing function
32
Signal
Right shift in demand signals to increase production to meet up with demand
33
Incentive
Producer switches production to product with higher demand
34
Rationing
Those who can't afford, can't buy it
35
Market failure (externalities )
Where too much or too little of a good is produced and/or consumed compared with the socially optimal level of output, or when the price mechanism leads to an inefficient allocation of resources.
36
External costs
A cost to a third party that is not involved in the making, buying/selling and consumption of a specific good/service.
37
External benefit
A cost to a third party that is not involved in the making, buying/selling and consumption of a specific good/service.
38
Types of market failure
- Externalities - Public goods - Information gaps
39
Non-rival
The consumption of a product does not prevent another person from also consuming that product.
40
Non-excludable
Once a good is provided, it is impossible to stop people from using it.
41
The free rider problem
A type of market failure that occurs because everybody is able to benefit from them. Free riders are a problem because while not paying for the good, they may continue to consume it. Thus, the good is likely to be under provided or not provided at all.
42
Social benefits
Private benefits + external benefits
43
Positive externality
Social benefits are not equal to private benefits, since external benefits are present.
44
Social optimal level of output
Where all external benefits and external costs are accounted for
45
If external benefits are present
there will be underproduction/ underconsumption in a free market
46
If external costs are present
there will be overproduction/ overconsumption in a free market
47
Perfect information
When a buyer and/or seller has a complete understanding of the quality and nature of a good or service.
48
Symmetric information
When buyers and sellers have equal amounts of knowledge about a good or service.
49
Imperfect information
When a buyer and/or seller lacks a complete understanding of the quality and nature of a good or service.
50
Asymmetric information
When buyer or seller has more information about a good or service than the other party.
51
Information gap
When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.
52
Maximum price
A price set below the market equilibrium price by the government.
53
Minimum price
A price set above the market equilibrium price by the government.
54
Guaranteed minimum pricing
A scheme in which excess supply from a minimum price is purchased by the government at the minimum price. The purpose is to protect producer's income.
55
Tradable pollution permits
1. A limit(cap) is set on the total amount of pollution firms are allowed to emit over a period. 2. The government allocates pollution permits to firms (either free or at a cost). The permits allow firms to pollute up to the limit set. These permits can be traded. 3. The government monitors the emissions of firms. If firms pollute below the levels set, permits aren't used so they can be sold. If a firm breaks the pollution limit, they will face fines unless they purchase pollution permits.
56
Advantages of maximum prices
Prices are lowered for consumers
57
Advantages of minimum prices
In agricultural markets, food stability is increased. Can reduce consumption of demerit goods such as alcohol. Producer incomes are protected in agricultural markets.
58
Emissions Trade Scheme Advantages
A market is created for buying and selling pollution permits - the price mechanism is used to internalise the external costs of carbon emissions. Incentive given to invest in pollution reducing technology. Cleaner firms are rewarded and less environmentally friendly firms are punished. Unused permits can be sold or banked - further incentive to reduce carbon emissions. Revenue could be raised by selling the permits rather than giving them away for free.
59
Regulation
A rule or law enacted by the government that must be followed by economic agents. It is used to encourage a change in behaviour.
60
Command (regulation)
Bans Limits Caps Compulsory actions
61
Control (regulation)
Enforcement Punishment
62
Disadvantages of maximum prices
Shortages created->goods and services may be distributed on a first come first serve basis or seller's preference-> often deemed unfair Black markets may emerge Costs of enforcement-> opportunity costs Difficult to set price at the right level. Information gap may lead to level being too high/low. Rental market->producer surplus falls->less money to invest and maintain their property-> ling term decline in quality of housing stock

A Level Economics (5 decks)

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