Microeconomics Flashcards
What does ceteris paribus mean?
All other factors remain the same
What are positive statements?
They’re statements that are objective and factually based that aren’t influenced by an opinion or prejudice
What are normative statements?
They’re statements that are subjective and questionable that are influenced by an opinion or prejudice
Which three questions does the economic problem try to solve?
- What to produce?
- How to produce?
- Who to produce for?
What will provide economic agents with the information required to tell them what goods and services to produce?
Economic Insentives
What are the 4 factors of production?
1.Land
2.Labour
3.Capital
4.Enterprise
What will firms do in order to produce a good product or service?
Combine the 4 factors of production
What is a free market economy?
A market that isn’t controlled by the government
What do firms supply according to and why?
They look at supply and demand as there might be a chance to make a profit in a certain sector
What is a finite resource?
A natural resource which cannot be readily replaced by natural means at a pace quick enough to keep up consumption
What does infinite wants mean?
People never get enough, there’s always something else they’d like to have
What does wants mean?
To have a desire to possess or do something
What does needs mean?
A thing someone must have
What is the economic problem?
The problem of making choices that occurs due to the scarcity of resources
What does scarcity mean?
The state of being in short/limited supply
What is economic activity?
When resources such as capital goods and labour are combined to produce specific goods or services
What does economic welfare mean?
The level of prosperity and standard of living of either an individual or a group of people
What is an economic agent?
The key groups of people involved in the economic problem
What is an economic insentive?
Financial rewards provided to people to alter consumption and production patterns in an economy
What is consumption?
The use of goods and services by households
What is production?
The process of making or manufacturing goods and products from raw materials or components
What are factors of production also known as?
Factor Inputs
Why are the factors of production known as economic resources?
They earn reward for their use in the form of rent, wages, interest and profit
What is labour?
It includes all of the workforce in an economy. Every worker is unique due to the different skills, qualifications and experience we have
What is the value of a worker called?
Human capital. They can be valued with the income they earn
What is likely to increase human capital?
Education and training
What is land?
It encompasses all of the natural resources that come from the earth and that are used in the production of goods or services. This includes resources below, on and above the earth and in the sea
What is capital?
It has a number of meanings such as money. In the terms of factor of production it refers to man-made aids that are used in the production process like machinery, tools, factories or offices.
What will capital goods do in the future instead of today?
Bring in a stream of income
What is enterprise?
The entrepreneur takes all the factors of production and organises them in order to produce products or services that are profitable.
What is crucially important to the health of the UK economy?
The skills of an entrepreneur
What does the entrepreneur create by taking risks and what is their reward?
The entrepreneur creates wealth and employment in the economy. Profit is the reward
What does natural resource economics do?
It looks at the demand, supply and allocation of the world’s natural resources.
What is the market mechanism?
It is used to price resources obtained from the government
What is opportunity cost?
It can be defined as the benefit lost of the next best alternative when making a choice. There are always competing alternatives when making choices
What is a trade-off?
The goods or services you could have picked but didn’t, giving up their advantages
What is a PPC?
It can be used to show different combinations of output for two products. Anything below the curve isn’t maximised and anything over the curve is impossible at that moment in time
What could cause an increase in economic growth?
For example immigration will cause an increase in labour and therefore we can produce more
What is allocative efficiency?
Occurs when social welfare is maximised. At this point on the PPC a trade-off will make at least some members of society worse off. It’s ultimately reliant on consumer preference
What does the demand curve show?
It shows the relationship between price and quantity demanded for a good, at any given price, over a period of time
What are some determinants of demand?
1.Price
2.Consumer Income
3.Other prices
4.Consumer Taste
What do the things in qd = f(py) stand for?
qd = quantity demanded
f = function of
p = price
y = consumer income
What is the function for quantity demanded?
qd = f(py)
What did Thorstein Veblen identify?
A ‘snob effect’ where people paid more for certain products as their price increased. He believed that this was due to the increase in status associated in buying an expensive product or service
What did Sir Robert Griffin identify?
There are certain items known as Griffin goods or inferior goods where their demand increased the higher the people’s wage was
What factors cause a shift in the demand curve?
Changes of price or availability of substitutes
Changes in price or availability of complements
Changes in consumer income
Changes in taste
What is the Elasticity Theory?
It looks at the sensitivity of one variable in relationship to another
How do you work out the percentage change for elasticity?
(Change in Value ÷ Original Value) x 100
What is an elasticity coefficient?
It’s the measure of the response of one variable to changes in another variable
What does Price Elasticity of Demand measure?
The responsiveness of demand to a change in price
How do you calculate PED?
% change in quantity demanded ÷ % change in price
What are the characteristics of being perfectly inelastic?
It has a PED between -1 and 0
If the price is changed, qd wouldn’t change at all
In theory the firm could charge as much as possible
What characteristics come with being price inelastic?
It will have a PED between 0 and 1
If the price was changed, qd would drop
A firm should raise their price to maximise profit
What characteristics come with being price elastic?
It has a PED between -1 and infinity
If the price was changed, qd would change more
A firm should lower the price to increase profit
What characteristics come with being perfectly elastic?
It has a PED of infinity
If the price changed, the qd would be infinite
A firm couldn’t increase price as there would be no demand
What are the determinants of PED?
Substitutes
Time
Definition of the market
What is Income Elasticity of Demand or YED?
A measure of the responsiveness of demand to change in income.
How do you calculate YED?
% change in qd ÷ % change in income
What are the ranges for elastic and inelastic goods and services?
Anything between 1 and -1 is inelastic. Anything outside of those values is elastic
What is a normal good?
A product that when income increases, so does the demand
What is an inferior good?
A product that when income increases, the demand decreases
What are the determinants of YED?
Whether it’s a necessity or a luxury
Level of income of the consumer
Normal goods that are necessities will have lower positive YED coefficients
What is the relevance between YED and the standard of living?
Wealthier countries are likely to have consumers with higher disposable incomes. This means that they have greater spending power and are likely to use some of this greater income to buy luxury goods and services. Therefore, firms will produce superior products that meet the needs of these consumers
What is the relevance of YED to the economic cycle?
When the economy is in recovery mode and leading into a boom, disposable incomes increase and consumers spend a greater proportion of this increase of income firstly on necessities and then on luxury goods. When the economy is in decline and leading into a slump, disposable incomes decrease and consumers spend a lesser proportion of their incomes on luxury goods, moving to necessities and then inferior goods
What is cross-elasticity of demand
XED is a measure of the responsiveness of demand for one good, x to a change in price of another good, y
How do you calculate XED?
% change in quantity demanded of good x÷ % change in price of good y
What is cross-price inelasticity?
It is when demand for good x changes at a lesser proportion than the change in price of good y
What is cross-price elasticity?
It’s when demand for good x changes at a greater proportion then the change in price of good y
What are the determinants of cross elasticity of demand (XED)?
Substitute: Positive XED
Complement: Negative XED
Has no relationship: No impact at all
What is the relevance between substitutes and XED in business?
Firms will attempt to differentiate their products from the competition through advertising,branding etc. A firm with loads of close substitutes won’t be as able to increase price
What is the relevance between complements and XED in business?
Arms will produce a range of complements to accompany their core products. A firm that sells a range of complements is likely to increase total revenue
What does a supply curve show?
The relationship between price and quantity demanded
What is the definition of supply?
The amount of a good or service that produces are willing and able to sell at any given price
What are the determinants of supply?
Price of goods
Impact of changing cost of production
Technological progress
Prices of other goods and services
Government policy e.g. taxes and subsidies
Other factors e.g. expectations
What is the formula for quantity supplied?
qs = f(p, production costs, technology, price of other goods, government policy)
What is the impact of changing production? (Costs of Production)
Costs of production are created by the price of factor inputs. If the cost of producing a good or service increases, it will become more expensive to supply the product. The price of Factor inputs can also be reduced making it cheaper to supply a product. Improvements in technology can help to reduce the costs of production.
What is the impact of changing production? (Technological Progress)
It has meant that firms can produce in a more efficient and cost effective manner. Improved large scale machinery allows them to spread fixed costs per unit produced cheaper. As technology improves, firms find it profitable to supply more products
What is the impact of changing production? (Prices of other Products)
It means that a firm can use its factors of production to produce a range of products. If the price of good a increases, this might make it more profitable to switch from supplying good b in order to supply good a. New firms will enter markets with rising prices as there is a greater incentive to make profit
What is the impact of changing production? (Government policies)
Indirect taxes make it more expensive to produce a product. Therefore, the quantity supplied will decrease.
Subsidies make it cheaper to produce a product. Therefore, the quantity supplied will increase.
What is the impact of changing production? (Other factors)
Expectations of future events, degree of competition in the market and the power of firms within a market will all impact on the quantity supplied of goods and services
What is price elasticity of supply (PES)?
It’s the measure of the responsiveness of supply to a change in price
How do you calculate PES?
% change in quantity supplied ÷ % change in price
What are the determinants of PES?
Price
Substitute
Time
What is productive efficiency?
It occurs where no additional output can be produced from the factor inputs available at the lowest possible average or unit cost
How do you calculate the average total cost?
Total cost/output
How does specialisation occur?
When economic units such as individuals and firms concentrate on producing specific goods or services
What do you call the specialised use of workers within an organisation?
Division of labour
What is specialisation likely to lead to?
Increased output per worker, workers have a better understanding of their job
How do short run costs occur?
When at least some costs are fixed
How do long run costs occur?
When all costs can be variable
What are relevant costs?
Money that’s used to make investments
What is loss aversion?
When individuals base decisions on past costs rather than the latest information as they fear making a loss more then the benefits
What is economies of scale?
When companies produce more but it costs them less to make
What is diseconomies of scale?
When a company produces more but it costs them more to produce due to internal mistakes
What are sunk costs?
Money that has been used and you can’t ever get back
What is the lowest point on an economies of scale graph?
Minimum efficiency scale
What are the different types of economies?
Purchasing
Technical
Managerial
Financial
What do purchasing economies get?
Discounts when buying
What do technical economies get?
The use of specialist, often expensive machinery and capital
What do managerial economies get?
Specialist labour
What do financial economies get?
Better credit ratings as large firms are seen to be less likely to fail and can borrow more money at lower interest rates
What is total revenue?
Money received by a firm from the scale of goods or services
How do you calculate total revenue?
TR = Quantity x Price
What is average revenue?
Total revenue divided by output
How do you calculate average revenue?
AR = TR / Output
The average revenue curve is the same thing as what curve?
Demand curve
What is profit?
The difference between total revenue and total cost
How do you calculate profit?
P = TR - TC
What is normal profit?
The level of profit required for a firm to maintain operations
What is supernatural profit?
The level of profit over and above normal profit. It’s an important element of imperfect markets and occurs due to firms having a form of monopoly power
What does the concentration ratio (CR) tell us?
The number of firms that dominate the market on a scale of 1 - 100
What are the types of competition in the market?
- Monopoly
- Duopoly
- Oligopoly
- Monopolistic Competition
- Perfect Competition
What are the properties of a perfect competition?
Large number of producers
No barriers to enter the market
Each firm is small but sells loads of small buyers
They’re all price takers
What is a price taker?
A firm doesn’t have enough influence to increase the price of the product overall. They have to match the bigger firms prices to sell their product or service
What are the properties of an imperfect market?
Less firms in the market
There’s product differentiation
There are barriers to enter and exit the market
Firms can influence prices
What are monopolies and how do they operate?
They can charge high prices due to the lack of competition but are regulated by governments to stop them. They’ll promote themselves to attract customers.
What is the government’s definition of a monopolistic power?
A company controls at least 25% of the market share
What is the rationing function?
Excess demand for a good or service will lead to a rise in the price of that good or service. The price rise will lead to a reduction in demand. The more scarce the product, the higher the price.
What is the incentive function?
Higher prices act as a monitor for producers to increase supply of a good or service. This is due to greater contribution per unit. As prices rise, so do revenue and profit
What is the signalling function?
An increase in price will give an indication to producers to increase supply and an indication to consumers to reduce demand. And vice versa.
What is a public good?
A good which is non-rival and non-excludable such as a public park
What is a private good?
A good that is rival and excludable such as an item in a shop
What is a quasi-public good?
A private good that has some public characteristics like a park that’s public over weekends but only for locals during the week
What can technical change lead to?
(Rival Goods)
Markets efficiently providing goods previously regarded as non-excludable and non-rival. Therefore public goods can become private goods over time
What is intellectual property rights and what do they do?
By granting patents and copyright the good becomes protected and therefore excludable
What is monitoring and control systems and what do they do?
Restricting the use of a good by monitoring usage
What are externalities?
The costs and benefits to a third party created by economic agents when undertaking activities
What is a negative externality?
Those costs to a third party that aren’t included in the price of the activity
What is a positive externality?
Those benefits to a third party that aren’t included in the price of the activity
How do negative externalities arise?
The divergence between private and social costs
What is a private cost?
Costs of consuming or producing goods or services that must be paid for by those that use them
What is a social cost?
The costs of consuming or producing goods or services that are paid for by society
How do positive externalities arise?
As a result of the divergence between private benefits and social benefits
What are private benefits?
Those benefits that are received by an economic unit
What are social benefits?
Those benefits of consuming or producing goods or services that are received by society
What is the provision of information?
It ensures that economic units can maximise decisions when consuming and producing goods and services. The government will provide information where the private sector fails to do so
What is information failure?
It’s a type of market failure where consumers or producers don’t have symmetric or have asymmetric data
What is factor immobility?
It occurs because it’s difficult for factors of production to be put to alternative uses. The immobility of the factors can lead to a misallocation of resources. This leads to market failure
What is the immobility of labour?
It can occur as a result of:
Geographical immobility = workers in an economy find it difficult to move regions
Occupational immobility = workers aren’t equipped for different types of work
What is the immobility of capital?
The inability or difficulty to change the use of acquired capital
What does the distribution of income and wealth look at?
The differences for individuals and households like geography, occupation and gender
What is someone’s ability to consume dependant on?
Their income and wealth
What may an unequal distribution of income and wealth result in?
An unsatisfactory allocation of resources
What is wealth?
A stock concept like assets (buildings, land, savings and shares) and human wealth (skills and education)
What is income?
A flow concept such as money generated from wealth (wages, rent, interest)
How does the government redistribute income?
From the rich to the poorer members of society
What is progressive tax?
The tax proportion increases as workers earn more
What is regressive tax?
The tax proportion decreases as workers earn more
Examples of the accumulation of assets provide a stream of income
Shares - capital and income growth
Properties - capital and income growth
Capital ownership - profit and savings provide interest
What is human capital?
The skills, qualifications and experience of a worker based on their value to a firm
Why do skilled workers tend to have more wage inelastic incomes?
They’re specialised and are difficult to replace
How can you increase your human capital?
More qualifications
Training
Gaining experience in a workplace
What does high demand and low supply lead to in wages and workers?
They find jobs quickly and can easily increase their wage
What does low demand and high supply lead to for wages and workers?
People struggle to find work and their wage is bid down as someone is always willing to work for less
What is government failure?
When government intervention in the economy leads to a misallocation of resources.
What are potential sources for government failure?
Inadequate information, conflicting objectives and administrative costs
What is Maximisation?
When an economic agent tries to obtain the most that they can from the economic activity that they undertake
What is Profit Maximisation?
Firms will seek to obtain the highest level of profit available in their production of goods and services
What is Profit Satisficing?
A level of profit below profit maximisation that satisfies the needs of the owners or managers of an organisation
What is Sales Maximisation?
Some firms will seek to maximise sales, possibly to gain market share
What is Growth?
Some firms seek to maximise their growth potential
What does Bounded Rationality suggest?
When people make decisions they are limited by:
Available Information
Intellectual Information
Time to make decisions
What does Bounded Self-Control suggest?
Individuals have limited control over their decision-making and therefore make decisions that are not in their best interests
What are Social Norms?
The rules of behaviour that are considered acceptable within a social group
What do Social Norms do to the consumption of a good or service?
Can lead to marginal disutility
What is Nudge Theory?
An attempt to manipulate social norms through positive reinforcement in a non-coercive manner
What is a Heuristic?
A simple rule of thumb that individuals use to make a judgement when undertaking decision-making that only looks at one part of the problem
What do Heuristics do to Decision-Making?
It creates biases and therefore flaws the decision-making
What is Availability?
Making judgements based on events we can remember
What is Representativeness?
Categorising based on past information
What is Anchoring and Adjustment?
Using an arbitrary starting number to estimate a different number
What is Altriusm?
Occurs when economic agents help others at their own expense
Why is it difficult to be completely Altruistic?
People will always get the sense of doing well, satisfying themselves
When does complete Altruism exist?
In drastic situations like jumping in front of a bullet etc.
What is Choice Architecture?
The design of ways in which choices are presented to economic agents
What are the advantages of Choice Architecture?
Can improve public and private benefits, compensating for irrational behaviour
What is Framing?
The actual way in which choices are presented
What is Libertarian Paternalism?
The idea that economic agents can try to affect decisions made by other economic agents
What is Default Choice?
Suggests that consumers display habitual behaviour by following the same routines
What is Restricted Choice?
Solves the paradox of choice, giving less scope but allowing more informed decisions
What is the Paradox of Choice
Suggests that sometimes individuals simply have too much choice, leaving them overwhelmed
What is Mandated Choice?
Occurs when individuals are forced to make a decision
What is Mandated Choice?
Occurs when individuals are forced to make a decision
What is the Law of Diminishing Returns?
It states that if one factor of production is increased whilst another factor is fixed, the productivity of the variable factor will eventually decrease
What is Total (Physical) Product?
The total output by a firm given the factor inputs
What is Marginal (Physical) Product?
The difference between total output when an extra unit of variable factor is added
What is Average (Physical) Product?
The total output produced by a firm divided by the amount of variable inputs
What is Increasing Returns to Scale?
Occurs when output increases proportionally more than input
What is Constant Returns to Scale?
Occurs when output increases by the same amount than output
What is Decreasing Returns to Scale?
Occurs when output increases proportionally lower than input
What is the Optimal Resource Mix?
The best way of combining the factor inputs in order to meet the requirements within financial constraints
