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Economy HL > Microeconomics (2.1 to 2.7) > Flashcards

Microeconomics (2.1 to 2.7) Flashcards

1
Q

What is demand?

A

Demand is the behaviour of consumers and refers to quantity of a product that consumers are able to buy at at fixed price over a given period of time.

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2
Q

What is the relationship between demand and quantity

A

Demand is direclty proportional to quantity, as demand increases, quantity increases. Movement of demand curve occurs due to price changes.

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3
Q

How is demand displayed?

A

Demand is displayed by noting data from a demand schedule on a graph with price on vertical axis and quantity on horizonal axis, this is a demand curve

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4
Q

What are assumptions of law of demand

A

Disposable income: Lower quantity demand, lower prices
Substitution effect: Price of competitors is lower, thus consumers choose competitors products and demand quantity decreases
Diminishing marginal utility: As consumers consume more products, satisfaction starts to decrease thus demand starts to decrease

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5
Q

What is microeconomics?

A

Microeconomics is concerned with the behaviour of consumers and producers. Together, they form a market where goods and services are bought and sold.

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6
Q

What are non price determinants of demand?

A

Factors that influence the ability of consumers to produce a good/service

Income -> Taste/Preference -> Future price expectations -> Price of related goods -> Number of consumers ->

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7
Q

What is income?

A

Changes in consumer income can affect demand for products depending on the type of good

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8
Q

What is inferior goods?

A

Inferior goods are those goods and services for which demand tends to fall when income rises.

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9
Q

What is normal goods?

A

Increase in demand as consumer income rises, such as regular food items, luxury products such as sports cars or designer brand products.

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10
Q

What are changes in consumer tastes and preferences?

A

Caused by social and culture changes over time.

EX: Increasing sustainability, could increase sales of electric car and decrease in sales in petrol cars

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11
Q

What are future price expectations?

A

If consumers expect price of a good to raise in future, price of goods at current time might be lower at a later date due to introduction of new products.

EX:
- Reduced price of phone after launch of new model
- Anticipated seasonal sales such as black Friday
- Tax on petrol due to government announcements

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12
Q

What is supply?

A

Supply is behavior of firms and refers to quantities of goods and services willing and able to produce at various prices over a period of time

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13
Q

What does higher price in supply graph mean?

A

Higher price means that produce profits increase and so existing firms face incentive to increase output while new firms are attracted to enter the market increasing competitiveness.

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14
Q

What does lower price in supply graph mean?

A

Lower price means lower profitability so firms have less incentive to produce thus output decreases and competitiveness decreases.

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15
Q

What is market supply?

A

Market supply shows total quantity of a good or service

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16
Q

What is law of diminishing returns?

A

law of diminishing returns states that when additional variable factors of production employed to fixed factors, marginal returns will eventually decrease. In short run, one factor fixed, usually capital.

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17
Q

What are examples of the diminishing returns?

A

Additional workers are employed at first in a firm:
- Better division of labour
- Machines fully utilized
- Improved efficiency and production
- Marginal return for each additional worker increased.

However:
- Resources stay the same
- Output from land stays the same

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18
Q

What is marginal costs?

A

Cost of producing additional unit of output. This increases output as diminishing marginal utility returns. Firms only willing to increase output when price increased to cover for higher marginal costs.

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19
Q

What is STORES?

A

S: Subsidies and taxes
T: Technology
O: Other related price goods (competitive joint supply)
R: Resources costs (CELL)
E: Expectations of producers
S: Size of the market

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20
Q

What is consumer surplus?

A

Amount over and above market price that a consumer is willing and able to purchase a good or service for

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21
Q

What is producer surplus?

A

Amount below the market price that a produce is willing and able to produce a good or service for

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22
Q

Community surplus

A

The consumer surplus plus producer surplus

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23
Q

Marginal cost

A

Cost of a firm of producing one additional good or service

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24
Q

Marginal benefit

A

Additional utility a consumer enjoys from consuming additional unit of a good or service

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25
Q

What is dead weight loss?

A

Units of goods or services that either consumers are willing to buy or producers are willing to sell that are outside of the community surplus area on a supply demand graph.

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26
Q

What is consumer rationality?

A

Rational choice theory that consumers are self driven by self interests and choices based on personal preference.

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27
Q

What is utility maximisation?

A

Refers to satisfaction consumers drive from consuming goods or services. This assumes consumers have perfect information when making decisions to maximise utility

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28
Q

What is perfect information?

A

When buyers and sellers have complete knowledge on all products available on market. This includes product price, product quality and alternative products.

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29
Q

What is behavioural economics?

A

Study of how psychological factors influence human decision making as they are not always rational as economic models assume.

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30
Q

What is rule of thumb?

A

General price of advice based on experiences that simplifies decision making. Can usually help consumers make good decisions but may be inaccurate and lead to irrational decisions

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31
Q

What is anchoring?

A

Anchoring bias is a reference point in an individual’s mind based on the first piece of information an individual experiences and it strongly influences a decision they make.

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32
Q

What is framing?

A

When info or choices presented in ways which influences behaviour of consumers. Can be position or negative connotations which affects attractiveness of options presented.

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33
Q

What are availability bins?

A

Refers to human tendency of overestimating likelihood of events occuring. This can affect decision making and result in irrational choices made. EX:
- Plane crash
- Lottery wins
- Terrorism

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34
Q

What is bounded rationality?

A

Idea that consumer rationality is limited due to constraints such as cognitive ability, time and imperfect info. Thus degree of utility sacrificed with satisfactory results achieved instead of optimal results

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35
Q

What is bounded self control?

A

Inability of consumers to restrain emotions, desires or impulses. Can lead to irrational decisions

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36
Q

What is bounded selfishness

A

Assumes consumers driven by self interests and aims to maximise personal welfare. However, people display altruism and willing to lose degree of personal benefits to help others.

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37
Q

What is imperfect information?

A

Buyers and sellers often don’t have complete or instantaneous knowledge of relevant info. They must use limited information in real world. Economic aspects use limited info that they have to make best possible decisions.

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38
Q

What is choice architecture

A

Refers to way in which choices presented to influence consumer behaviour. 3 categories in default, restricted and mandated choices.

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39
Q

What is default choices?

A

Preset courses of actions that will take effect if consumers do not specify or pursue other options.

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40
Q

What is restricted choices?

A

Restricted choices are limited number of choices where consumers are forced to make more rational choices

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41
Q

What is mandated choices?

A

Mandated choices is when consumers, required by law, decide whether they wish to participate in particular action.

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42
Q

What is profit maximisation?

A

MC = MR
MR = Marginal Returns
MC = Marginal Costs

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43
Q

What is Corporate social responsibilty?

A

Business activities involving ethical and environmental factors which can benefit internal and external stakeholders

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44
Q

What is market share?

A

Firm’s percentage of industry’s total sales revenue

Market Share = individual sales revenue / Industry’s sales revenue

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45
Q

What is satisfices

A

Refers to achieving satisfactory results to aim to be successful in multiple areas instead of optimal results in 1 particular area

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46
Q

What is growth?

A

Growth of firm to expand business such as increase in brand image, revenue, market share etc.

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47
Q

What is Elasticity?

A

Refers to responsiveness of consumers following a change in price of product due to another variable.

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48
Q

What is elasticity of demand?

A

Measures responsiveness in quantity demanded in market as a result of change in price.
Elastic = Lots of change
Inelastic = No change in response (Product is necessity)

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49
Q

What is PED (Percentage Change of Elasticity of Demand) formula?

A

Change in percentage in Quantity of Demanded / Change in price percentage in price.

  • Value of PED is always negative.
50
Q

How does PED timeline work?

A

0 = Perfectly Inelastic
0.5 = Relatively Inelastic
1 = Unitary (Proportional (1$ increase = 1 Unit quantity decrease))
2= Relatively Elastic
Infinity = Perfectly Elastic.

51
Q

What are determinants of PED?

A

T- Time: Time to look for a substitute good or service
I - Income: Class of person affected (Working, Medium, Wealthy)
N- Necessity: Whether the product is needed in order for one to survive.
S- Substitutes: Availability of the substitutes, other competitors

52
Q

What is the impact of inelasticity?

A

If product inelastic, by increasing price they can increase total revenue. If product faces tax on product, they can increase price to consumer as it’s inelastic.

53
Q

What is price discrimination?

A
  • Firms have different market segments with differing PED. Students have lower income compared to adults. Thus firms can higher prices for price inelastic segments and lower price for price elastic segments to try maximise revenue.
54
Q

What is dynamic pricing?

A

Changing prices of products or service during different periods of time like seasonal times (Airlines during holiday periods)

55
Q

What are taxation policies for price elasticity?

A

When demand is price elastic, increase in price leads to proportionally greater fall in quantity demanded. Government can tax products with price elastic demand to discourage its consumption without significant tax burden on consumers.

56
Q

What are taxation policies for price inelasticity?

A

When demand inelastic, proportionally less fall in demand hence when government tax price inelastic products like cigs or alcohol, government can use as source of government revenue/finance.

57
Q

What is income elasticity of demand?

A

Measures responsiveness to quantity demanded to change in real income of consumers

58
Q

What is income elasticity of demand formula ?

A

YED = Change in percentage in quantity demanded / Change in percentage in income levels

59
Q

what are necessities?

A

Goods / services used to satisfy basic needs where consumer demand doesn’t increase or decrease significantly with change in income

60
Q

What are luxury goods?

A

Goods / services to satisfy wants / indulgences where change in demand proportionally greater to change in income

61
Q

What are inferior goods?

A

Goods / services with more expensive and higher quality substitutes. As income rises, demand for inferior goods falls as consumers willing to purchase higher quality goods

62
Q

What is engel curve?

A

Visual representation of relationship between income and quantity demanded

63
Q

Pricing / output decisions on goods following recession?

A

Inferior:
Recession leads to increase in output

Necessities:
Recession leads to decrease in output and reduced price

64
Q

YED in primary sector?

A
  • Low YED
  • Necessity for production and consumption
  • Demand is stable
65
Q

YED in secondary sector?

A
  • Higher YED value
  • Demand more sensitive to change in income
  • Grows more rapidly than primary sector
66
Q

Developed vs less developed?

A

less developed = Increase in primary sector jobs, decrease in tertiary
More developed = Decrease in primary sector | Increase in tertiary jobs

67
Q

What is PES?

A

Measures responsiveness of producer percentage change in quantity supplied due to change in price

68
Q

Formula for PES?

A

Change in quantity supplied / Change in price

69
Q

Determinants of PES?

A

Time
Rate and which cost increases
Inventory
Capacity
Substitute factors of production

70
Q

Explanation of PES determinant time?

A

Supply usually inelastic in short run as there are several types of time lags between increase of price and increase quantity supplied
- Time required to produce product
-Time required to obtain factors of production
- Time needed to distribute goods to consumers

71
Q

What are primary commodities?

A

Time taken for the production of raw materials.
EX: Extraction of metals and crude oil dependent on rate of discovery

72
Q

What are manufactured goods?

A

Time taken for the production of a good or service from raw materials to the finalized product. Mast moving goods made with flow production thus easy to increase.

73
Q

Explanation of PES determinant rate at which cost increases?

A

This is marginal costs increasing as production increases hence firms only produce when average return higher than marginal cost to make profit.

74
Q

Effects on supply for changes in marginal cost

A
  • If marginal costs rises slowly, supply more elastic as small increase in price production
  • If marginal costs rises quickly, supply less elastic as larger increase in price needed
75
Q

Explanation of PES determinant capacity?

A
  • Spare available resources a firm not utilized. Firms choose to have spare capacity so can increase production when increase in price or decrease production following fall in price.
  • Firms operating at new full capacity less price elastic as factors of production unable to change in short run
76
Q

What is factor mobility?

A

-Firms ability to substitute factors of production in production process. When easier to substitute factors of production, producers able to adjust a change in price. Firms with mobile factors of production have elastic supply whilst firms unable to substitute factors of production and hence inelastic supply

77
Q

What is price mechancism?

A

Interaction of demand and supply in free market determining price of goods / services

78
Q

What is resource allocation?

A
  1. Signalling: Provides info to producers / consumers on where resources are wanted and where they aren’t
  2. Incentive: When price rises, incentivises to reallocate resources from less to more profitable market
79
Q

What is rationing?

A
  • When resources scarce, price rises, those that can pay will receive
  • If in surplus, price falls, more consumers able to afford
80
Q

What is availability bias?

A

Availability bias considers how individual decision-making is affected by information that comes easily into our minds. This information is often based on our experience of recent events and how the outcomes of these recent events affect our decision-making.

81
Q

What is market mechanism?

A

The market mechanism may result in socially undesirable outcomes that do not achieve efficiency, environmental sustainability and/or equity
Governments have policy tools which can affect market outcomes

82
Q

What are reasons for government intervention?

A

To support firms
To promote equity
To increase tax revenue
To influence the level of consumption
To support households on low incomes
To influence the level of production
To correct market failure

83
Q

What is government revenue separated by?

A

Direct tax (levies on income and wealth)
Indirect tax a variety of goods and services (levies imposed on spending)
goods and services tax (GST) / value added tax (VAT) to most goods & services.
Examples:
provide public goods and services
invest in infrastructure
improve education
provide healthcare for the community

84
Q

What are sources of government revenue?

A

Sale of goods and services from state-owned enterprises
Privatization processes (short-term policy)
Sovereign wealth funds: state-owned investment funds, bonds of other governments, investment in property and gold reserves
Public sector borrowing: when other sources of revenue do not meet its spending needs

85
Q

How do government subsidies help?

A

support jobs
growth
modernise industry
improve sustainability

86
Q

How do governments control levels of production?

A

Discourage demerit good even though it will impact businesses and employees because they can have negative effects on society
Regulation
Taxation policies

87
Q

How do governments control levels of consumption?

A

Discourage demerit goods -> indirect taxes, bans on the advertisement/good, age restrictions, support programs

88
Q

What is market failure?

A

Market fail to allocate resources efficiently and community surplus is not maximised

89
Q

What is promoting equity?

A

Improve the equity of the income distribution in the economy.

90
Q

What are prices controls?

A

Price controls are a form of government intervention that sets a maximum or minimum price that producers can charge for certain goods or services.

91
Q

What is price ceiling?

A

A price ceiling is the legal maximum price set by the government for a particular good or service to make goods (such as food and rent) more affordable, especially for low-income consumers.

92
Q

Aims of price ceilings?

A

increase consumption of the good or service
make certain G&S affordable (low-income consumers / generally to protect consumers)
Usually in markets of necessity / merit goods

93
Q

Consequences of price ceiling?

A

Shortages
Non-price rationing (waiting in line, distributing coupons, favouritism)
Underground (parallel) markets
Underallocation of resources to the good and allocative inefficiency → society is worse off
Negative welfare impacts / deadweight loss

94
Q

effects of price ceiling for consumers?

A

Able to buy the good at the lower price are better off
Some consumers remain unsatisfied since they don’t get to buy the good at all

95
Q

effects of price ceiling for producers and workers?

A

worse off - Fall in output = some may be fired

96
Q

effects of price ceiling for government?

A

MAY gain political popularity among the consumers who are better off due to price ceiling
Aim to supply goods and services that are in shortage

97
Q

What is price floor?

A

A price floor is the legal minimum price set by the government for a particular good or service, to protect the income of producers and workers, or to encourage supply of goods and services.

98
Q

aims of price floor?

A

increase supply of a certain good or service
protect producer (income) / workers (good standard of living)
Increase the income of producers of G&S that the government considers important (minimize large price fluctuations / threatening foreign competition)

99
Q

effects or price floor to producers?

A

ains (higher selling price)
BUT less cost conscious → inefficiency & waste of resources OR producing more of protected product than other products that could produce more efficiently

100
Q

effects or price floor to workers?

A

Increase in output = more could be employed
Increase minimum wage = better standard of living

101
Q

effects of price floor to consumers

A

worse off (higher prices & consume less)

102
Q

effects of price floor to government?

A

increase spending on solving the consequences
→ store, destroy or selling the surplus abroad (dumping
→ harm other domestic industries
→ angry reaction from foreign governments) OR increase demand by advertising or restricting supplies of imports through protectionist policies (thus increase demand for domestic products)

103
Q

What is a shortage?

A

When the market for a good or service is not in equilibrium because demand for the product is greater than supply.

104
Q

What are rent controls?

A

a price ceiling applied to the rental housing market.

105
Q

What is a surplus?

A

when the supply of a product exceeds demand at the market price.

106
Q

What is a quota?

A

a fixed limit on the amount of a good or service that can be produced. This policy will often run alongside a minimum price policy to prevent an excess of the good being produced

107
Q

What is indirect tax?

A

Government levy on the sale of goods and services, rather than on incomes or wealth.

108
Q

What is Excise tax?

A

type of indirect tax imposed on the expenditure of certain goods and services.

109
Q

Why do governments impose indirect tax?

A

The provision of certain goods leads to market failure and allocative inefficiency. Indirect taxes can be used to correct market failures.

110
Q

What is specific tax?

A

A fixed dollar amount is imposed on each unit of output.
Amount of tax paid is independent of the price of the good.

111
Q

What is ad valorem tax?

A

A fixed percentage amount is imposed on each unit of output.
As the price of the good increases, the amount of tax paid increases.

112
Q

What is tax incidence?

A

Tax incidence is the distribution of tax burden between consumers and producers.

113
Q

What is subsidy?

A

A subsidy is a form of financial aid given by the government, usually to producers in order to (i) reduce the costs of production, (ii) increase output, and (iii) reduce prices.

114
Q

Impact of subsidies on consumers?

A

Pay lower prices for greater quantities.
Hence, there is an increase in consumer surplus.

115
Q

Impact of subsidies on producers?

A

Receive a higher price per unit and sell a larger amount of output.
Total revenue increases.
Hence, there is also an increase in producer surplus.

116
Q

Impact of subsidies on workers?

A

Increased output leads to increased demand for labour.
Employment and wages increase, ceteris paribus.

117
Q

Impact of subsidies on government

A

Required to finance the subsidy expenditure.
Opportunity costs arise from government expenditure.

118
Q

What is direct provision?

A

Direct provision occurs when the government directly supplies goods or services in the best interest of society.

119
Q

What are public goods?

A

Public goods are provided by the government, as the free market fails to create incentives for firms to produce these goods. Private firms cannot prevent “free riders” using public goods without paying. Hence, the government provides these goods, funded by tax revenues.

120
Q

What are command control regulation and legislation?

A

Command and control regulation and legislation refer to the laws governing certain activities or industries. This aims to enforce or prevent certain behaviour that is seemed socially desirable.

121
Q

What are examples of command control regulation and legislation?

A

Laws requiring car manufacturers to install airbags and other safety measures
Laws requiring passengers to wear seat belts
Environmental protection laws that limit the quantities of pollutants
Laws banning smoking and drinking in public areas
Minimum age laws for the purchase of demerit goods
Laws prohibiting the advertising of demerit goods.

Economy HL (6 decks)

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