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economics hl > microeconomics > Flashcards

microeconomics Flashcards

1
Q

consumer def

A

= people and organizations who buy goods and services in a market

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2
Q

producer def

A

= people and organizations that make, grow and/or supply goods, services and resources in a market

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3
Q

market def

A

= a collection of firms, each of which is supplying products that have some degree of substitutability to the same potential customers

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4
Q

division of markets

A
  1. product market ⇒ goods and services are sold
  2. factor market ⇒ resources are sold
  3. labour market ⇒ people offer their services in exchange for a salary
  4. financial market ⇒ foreign currencies, company shares and other financial contracts are traded
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5
Q

competition

def, occurs when

A

= striving against others to reach an objective, involves one firm trying to take away market share from another
occurs when a large number of buyers and sellers act individually

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6
Q

degree of competition

A

perfect competition => monopolistic competition => oligopoly => monopoly => pure monopoly

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7
Q

degree of competition is classified by

A
  • number of sellers and buyers
  • nature of product
  • freedom of entry to industry
  • knowledge, information available on the produced good
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8
Q

characteristics of perfect competition

A
  • an individual seller has little market power to influence the price of the product
  • private individuals are free to decide what to buy and sell and at what price
  • encourage sellers to meet consumers’ needs and wants
  • encourage consumers to make choices among competing goods and services
  • supply and demand model is designed to explain prices in perfectly competitive markets
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9
Q

monopoly is

A

when a dominant firm has control over the price of the good it sells
greater market power ⇒ greater control a firm has over the price

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10
Q

demand def

A

= the quantity of a good or service a consumer is willing and able to purchase at various price

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11
Q

demand curve

A

= the relationship between the price of a good and the quantity demanded, holding all other variables constant
a downwards-sloping curve => price is inversely proportional to quantity
changes in price cause movement along the curve

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12
Q

why the demand curve is a curve

A
  • the law of diminishing marginal utility
  • real income effect
  • substitution effect
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13
Q

substitution effect

A

if the price of a good rises, consumers will buy less of that good, more of others

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14
Q

real income effect

A

if the price of a good rises, the real income of consumers fall and are able to buy less

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15
Q

the law of diminishing marginal utility

A

the marginal utility of each consecutively used good diminishes, as a result of the gradual satisfaction of a need
utility cannot be measured, however, this theory assumes that it is in fact quantifiable ⇒ utility = [util]

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16
Q

shifts of the demand curve

A
  • changes in non-price determinants of demand ⇒ shift
  • increase in demand ⇒ shift to the right
  • decrease in demand ⇒ shift to the left
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17
Q

non-price determinants of demand

A

consumer incomes
preferences (influenced by fashion, advertising, publicity, …)
price of other goods (substitutes, complements, unrelated goods)
future price expectations
number of customers
other changes in income distribution, government policies
changes of needs (weather, pandemics, …)

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18
Q

“demand” vs “quantity demanded”

A

“demand” ⇒ entire demand curve, the function
“quantity demanded” ⇒ a specific quantity, a number

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19
Q

normal and inferior goods

A

normal goods ⇒ demand increases as people’s incomes increase
inferior goods ⇒ demand decreases as people’s incomes increase

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20
Q

substitute and complementary goods

A

substitute goods ⇒ goods with similar characteristics and uses for consumers
complementary goods ⇒ goods that are consumed together

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21
Q

supply def

A

= the amount a firm is willing and able to sell over a certain period of time at a certain price
price is directly proportional to quantity supplied

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22
Q

why the supply curve is a curve

A

law of diminishing marginal returns
increasing marginal costs of production

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23
Q

increasing marginal costs of production

A

costs of production increase as output increases → producers are ready to increase quantity supplied if they can receive higher price in the market for it that would cover the additional costs

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24
Q

law of diminishing marginal returns

A

an additional factor of production produces a lower increase in output than the previous added factors of production

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25
Q

non-price determinants of supply

A
  • cost of factors of production
  • price of related goods, complements
  • government intervention
  • future price expectations
  • state of technology
  • weather (agriculture, infrastructure, …)
  • supply shocks
  • number of firms (more firms ⇒ higher supply in the market)
  • expected price
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26
Q

change in price ⇒
increased supply ⇒
decreased supply ⇒

to the supply curve

A

change in price ⇒ movement along the supply curve
increased supply ⇒ shift to the right
decreased supply ⇒ shift to the left

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27
Q

supply shock

A

= cuts in major input supplies ⇒ decrease in supply ⇒ supply curve shifts to the left

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28
Q

joint supply

A

two or more goods are derived from the same product
impossible to produce more of one without producing more of the other ⇒ increase in quantity supplied of one product causes the increase in quantity supplied of the other
f.i. animal products

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29
Q

competitive supply

A

the production of two goods use similar resources and processes
increase in production of one good ⇒ decrease in production of the other (ceteris paribus)

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30
Q

market equilibrium

def, achieved how, tendency of prices

A

supply = demand (QS = QD)
in a free market is achieved with the regulation of prices
prices have no tendency to change

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31
Q

in a free market, prices act as:

A
  1. a signal ⇒ what and how much should be produced
  2. an incentive to reallocate resources ⇒ motivation for consumers to bring a market to equilibrium
  3. a rationing device ⇒ for who are products produced for
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32
Q

price as a signal in a free market

A
  • signals what and how much should be produced
  • rising prices signal to consumers that they should consume less, or to producers that they should make more
  • declining prices signal to consumers that they should consume more of a product, to producers that they should make less
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33
Q

price as an incentive in a free market

A
  • an incentive to reallocate resources ⇒ motivation for consumers to bring a market to equilibrium
  • rising price ⇒ consumers will buy less and reallocate their resources to other products, producers will reallocate their resources to create more of the product
  • falling price ⇒ consumers will buy more and reallocate their resources to the product, producers will reallocate their resources to create more of other product
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34
Q

price as a rationing device

A

a rationing device for who products are produced for in shortages, when resources are scarce
price as a rationing device isn’t necessary equitable

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35
Q

states of disequilibrium

A
  1. surplus = excess of supply (QS > QD) ⇒ fall of price
  2. shortage = excess of demand (QD > QS) ⇒ rise in price
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36
Q

how does a graph look when supply is limited? demand?

A

Supply is limited ⇒ supply is a vertical line
Demand is limited ⇒ demand is a vertical line

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37
Q

productive vs allocative efficiency

A

Productive efficiency ⇒ producing goods using the fewest possible resources, lowest possible cost → resources aren’t wasted and average production cost is low
Allocative efficiency ⇒ producing optimal combination of goods, benefits of consuming these goods are maximised for the whole society

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38
Q

consumer, producer and social/community surplus

A
  • Consumer surplus ⇒ highest price customers are willing and able to purchase a good for – actual price
  • Producer surplus ⇒ lowest price producers are willing and able to offer the good – actual price
  • Community/social surplus ⇒ consumer + producer surplus
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39
Q

coefficients of elasticity of demand and supply

A

PED (price elasticity of demand)
PES (price elasticity of supply)
YED (income elasticity of demand)
XED (cross elasticity of demand)

40
Q

PED

A

PED = a measure that indicates the degree of consumer response to a change in price
always negative
PED = ∆Q(demanded)/∆P
steeper demand curve ⇒ less elastic demand

41
Q

|PED| > 1

A

price-elastic demand (change in price causes a proportionally greater change in quantity demanded)

42
Q

|PED| < 1

A

⇒ price-inelastic demand (change in price causes a proportionally smaller change in quantity demanded)

43
Q

|PED| = 1

A

good is unitarily price-elastic (change in price causes a proportionally equal change in quantity demanded)

44
Q

PED = 0

A

perfectly inelastic demand (a change in price causes no change in quantity demanded)
a straight vertical line

45
Q

PED = ∞

A

perfectly elastic demand (quantity demanded is infinite, a slight raise in price will cause a fall in demand to zero)
straight horizontal line

46
Q

determinants of PED

A
  • availability of substitutes → more available substitutes ⇒ price is more elastic
  • narrowness of market → more narrowly defined good ⇒ easier to find substitutes ⇒ price is more elastic
  • necessity vs luxury → the more “necessary” ⇒ harder to find substitutes ⇒ price is more inelastic
  • time horizon (demand is more elastic in the long run)
  • proportion of income spent on the good (small proportion of income is spent on the good ⇒ more inelastic)
47
Q

demand elasticity and total revenue

A
  • inelastic ⇒ optimal to raise prices for greater TR
  • elastic ⇒ optimal to lower prices for greater TR
48
Q

PES

formula, pos/neg, steepness,

A
  • price elasticity of supply
  • PES = ∆Q(supplied)/∆P
  • always positive
  • steeper curve ⇒ less elastic supply
  • primary commodities generally have relatively lower PES than manufactured goods as it takes longer for them to increase production
49
Q

PES > 1

+ graph

A

elastic (a change in price leads to a proportionally greater change in quantity supplied, producers are sensitive to price changes)
graph passes through the y-axis (price)

50
Q

PES < 1

A

inelastic (a change in price leads to proportionally greater change in quantity supplied, producers are relatively insensitive to price changes)
graph passes through the x-axis (quantity)

51
Q

PES = 1

+graph

A

unitary elastic supply (a change in price leads to an equal change in quantity supplied, producers are proportionally sensitive to price changes)
graph passes through the origin

52
Q

PES = 0

A

perfectly inelastic supply (a change in price leads to no change in quantity supplied, supply is unresponsive to price and producers are not sensitive to price changes)
graph is a straight vertical line

53
Q

PES = ∞

A

perfectly elastic supply (a small change in price would lead to an infinite change in supply)

54
Q

determinants of PES

A
  • time horizon (more elastic in the long run)
  • flexibility and cost of factors of production (more flexible factors of production ⇒ more responsive a firm can be to changes in price ⇒ greater PES)
  • unused capacity (firm is using its maximum capacity ⇒ more difficult and costly to increase production ⇒ PES is smaller)
  • ability to store stock (a firm has the ability to store stock⇒ supply can be more responsive to change ⇒ greater PES)
55
Q

PES of perishable goods

A

only non-perishable goods can be stored ⇒ PES is usually lower for perishable goods

56
Q

income elasticity of demand

A

YED = ∆Q(demanded)/∆Y
Y … income

57
Q

YED of normal, inferior, luxury goods and necessities

A

normal goods ⇒ YED > 0
inferior goods ⇒ YED < 0
luxury goods ⇒ YED»0
necessity ⇒ 0 < YED < 1

58
Q

|YED| > 1

A

income elastic demand

59
Q

|YED| < 1

A

income inelastic demand

60
Q

cross elasticity of demand

A

⇒ percentage change in quantity demanded of one good caused by a 1% change in price of another good
XED = ∆Q(A)/∆P(B)

61
Q

when are two goods substitutes?

elasticity of demand

A

XED > 0

62
Q

when are two goods complements?

elasticity of demand

A

XED < 0

63
Q

purposes of government intervention

A
  • earn revenue for the government (taxes)
  • to support firms, households with low incomes
  • to influence levels of production
  • to help consumers make better choices
  • to correct market failure
  • to promote equity and redistribute income
  • to promote sustainability
64
Q

how do governments help consumers make better choices

A

indirect taxes to reduce quantity of a product
min prices to increase prices of demerit goods
subsidies on healthy products

65
Q

how do governments promote equity and redistribute income?

A

minimum wage and prices for fair pay
max prices on necessities

66
Q

how do governments promote sustainability?

A
  • indirect taxes to reduce quantity of products that threaten sustainability
  • subsidies to products that are favourable to the environment or consumer
67
Q

forms of government intervention

A
  • taxation
  • subsidies
  • price control (price ceilings, floors)
68
Q

aims of taxation

A
  • collect government revenue
  • discourage consumption of demerit goods
  • redistribution of income
  • correct inefficient allocation of resources
  • governments may use tax revenue to provide public goods, infrastructure, education, healthcare
69
Q

indirect vs direct tax

A

Indirect tax = a tax imposed on a good or service, typically paid to the government, considered a cost of production (VAT, excise, …)
Direct tax = a tax paid directly to the government (income tax)

70
Q

GST or VAT

A

GST (goods and services tax) = VAT (value added tax) = a tax on goods and services at every stage in the production process where value is added

71
Q

excise tax

A

= a tax imposed on certain goods and services (tobacco, nicotine, alcohol, …), imposed primarily on demerit goods

72
Q

demerit goods

A

= goods that have negative externalities of consumption

73
Q

specific tax

A

= a fixed amount of tax imposed on a good or service per unit sold

74
Q

percentage (ad valorem) tax

A

= a fixed percentage charged on the selling price of the good

75
Q

effect of taxes on different stakeholders

A
  • consumers ⇒ pay more and consume less
  • producers ⇒ sell less at a lower final price
  • government ⇒ gains revenue from tax, which can be spent on public goods and services
  • workers ⇒ market is smaller → less output → fewer workers are needed → higher unemployment
76
Q

effects of taxation

A
  • welfare effect (burden of tax on producer and consumer) = tax yield – cost of the tax
  • distortion of the market
  • influence on behaviour
  • creation of black markets
  • increased business costs
  • raises government revenue to pay for public goods and services
77
Q

elasticity of demand and supply after taxes

A
  • more inelastic demand and supply ⇒ larger tax burden
  • demand is more inelastic than supply ⇒ consumers pay more than producers
  • supply is more inelastic than demand ⇒ suppliers will pay the higher burden
78
Q

subsidies

A

= per-unit payments to producers to lower production costs and increase output, form of government intervention
given to the producer of a good, with no obligation to return it

79
Q

purposes of subsidies

A
  • lower production costs in order to lower prices to make basic necessities and merit goods more affordable to low-income households
  • promotion of redistribution of income and competition between producers
  • encourage consumption of goods and services that are considered beneficial
  • encourage growth of certain industries
  • encourage exports
  • improve allocation of resources
80
Q

amount of subsidy

A

= vertical difference between both supply curves x quantity

81
Q

effects of subsidies

A
  • shifts the supply curve to the right
  • reduces price for consumers
  • increase of output (market failure is perceived as a lack of output)
  • distorts price signals in the long term
  • who a subsidy benefits depends on the subsidy and how it is used
  • welfare effect = cost of the subsidy to the taxpayer – value of the benefits received
82
Q

effect on different stakeholders of subsidies

A
  • consumers ⇒ lower price for a greater quantity of goods
  • producers ⇒ sell a greater quantity and receive a higher final price
  • government ⇒ cost of the subsidy (opportunity cost)
  • workers ⇒ bigger output → more workers needed → higher employment
83
Q

price controls

A

appear as max prices, min prices, buffer stock, commodity agreement

84
Q

price ceilings

A
  • the government sets a maximum price below equilibrium price
  • applied to necessity and/or merit goods
85
Q

aims of price ceilings

A
  • to protect consumers ⇒ reduce the price of certain goods for low-income consumers, prevent exploitation by monopolies
  • increase consumption of a good or service
  • ensure the availability of necessities for low-income households
86
Q

consequences of price ceilings

A
  • shortages
  • rationing problems as not all interested consumers are able to purchase the good
  • creation of black markets
  • elimination of allocative efficiency, welfare loss due to the under-allocation of resources to the production of the good
87
Q

black market

A

= market created by unintended consequences of government intervention, the selling of goods illegally at a price above max price

88
Q

consequences for market stakeholders of price ceilings

A
  • consumers ⇒ some (able to purchase at a lower price) are better off, some (unable to purchase at any price) are worse off
  • producers ⇒ sell less for less → smaller TR
  • workers ⇒ smaller market, fewer units of goods produced → some will be fired → unemployment increases
  • government ⇒ no revenue cost or revenue, may gain political popularity or dissatisfaction
89
Q

how to minimise consequences of price ceilings

A

increasing supply of the good until equilibrium is achieved at the max price by:
1. granting subsidies to producers
2. increasing production of the shortfall quantity of the good to meet total demand
3. store some of the product before setting of the price ceiling and increase supply when needed

90
Q

price floors

A

government sets a minimum price above equilibrium price

91
Q

aims of price floors

A
  • to protect producers (usually in the case of commodities and the labour market)
  • increase income producers of goods and services that the government considers important (agricultural products)
  • protect workers by setting minimum wages
92
Q

consequences of price floors

A
  • surpluses
  • promotes creation of black markets since they are unable to sell all of their goods
  • firm inefficiency
  • eliminates allocative efficiency, welfare loss
93
Q

how to get rid of surpluses caused by price floors

A

government may purchase excess supply ⇒ shifting demand outward, and then: store it, export, send as aid to developing countries, burn it

94
Q

how may price floors promote firm inefficiency

A

firms know they will receive a higher price no matter their inefficiency ⇒ unmotivated to reduce costs and use more efficient methods of production

95
Q

consequences of price floors on market stakeholders

A

consumers ⇒ worse off due to consuming a smaller amount of the good at a higher price
workers ⇒ size of market increases → more workers are hired → employment rises
government ⇒ government buys surplus, incurring a cost ⇒ less funds to spend on other public goods and services (opportunity cost)
producers ⇒
1. government purchases the surplus ⇒ sell more than previously and at a higher price ⇒ TR increases
2. government doesn’t purchase the surplus ⇒ less products at a higher price ⇒ depending on PED, TR rises or falls

economics hl (2 decks)

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