Microeconomics Flashcards
1
Q
What is Economics?
A
Economics is a social science (studies society and relationships of individuals within that society), studies the economic behaviour between groups and individuals
2
Q
Draw the flowchart of scientific methodology?
A
-Observing consumer behaviour in the market place
-Forming a hypothesis to explain how consumers spend their money
-Developing predictions from the hypothesis
-Using evidence to test predictions
+Further tests>Concluding that the evidence supports the hypothesis, which now becomes the theory of demand
-New/Revised hypothesis>Evidence doesn’t support predictions, hypothesis is amended/rejected
3
Q
What is a theory?
A
A hypothesis which has been tested and passed
4
Q
What is a normative statement?
A
A statement that includes a value judgement and cannot be refuted just by looking at the evidence
5
Q
What is a positive statement?
A
A statement of fact that can be scientifically tested to see if it is correct or incorrect
6
Q
What is a value Judgement?
A
Whether something is desirable or not
7
Q
What is a need?
A
Something that is necessary for human survival e.g. food, clothing, warmth, shelter
8
Q
What is a want?
A
Something that is desirable, such as fashionable clothing, but is not necessary for human survival
9
Q
What is the purpose of economic activity?
A
The production of goods and services to satisfy needs and wants
10
Q
What is economic Welfare?
A
The economic well being of an individual or group within society, or an economy
Satisfying peoples needs and wants means improving economic welfare
11
Q
What is Production?
A
A process, or set of processes, that converts inputs into output of goods
12
Q
What is a capital good?
A
A good which is used in the production of other goods or services. Also known as a producer good.
13
Q
What is a consumer good?
A
A good which is consumed by individuals or households to satisfy their needs/wants
14
Q
What are the factors of production? and explain them
A
Inputs into the production process, such as land (Goods like minerals, the land itself and all the resources taken from the world. e.g. Oil and fish), labour (Potential Workforce, Not just physical people but skills, abilities and intelligence), capital (Goods used to make other goods and services that can be sold e.g. machinery, premises, equipment etc) and enterprise (risk takers, brings together factors of production)
15
Q
What is a finite resource?
A
A resource, such as oil, which is scarce and runs out as it’s used. Also known as a non-renewable source
16
Q
What is a renewable resource?
A
A resource such as timber, that with careful management can be renewed as it’s used
17
Q
What is the fundamental economic problem?
A
How best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare
18
Q
What is Scarcity?
A
Results from the fact that people have unlimited wants but resources to meet those wants are limited. People would like to consume more goods and services than the economy is able to produce with its limited resources
19
Q
What is opportunity cost?
A
The cost of giving up the best alternative
20
Q
What is a production possibility frontier?
A
A curve depicting the various combinations of two products (or types of products) that can be produced when all the available resources are fully and efficiently employed
21
Q
What causes the PPF to shift outwards?
A
Increase in available resources/ Increase in factors of production
Increase in GDP
Rise in efficiency (productivity), meaning more output can be produced from given resources
Technology
Education and training
Increased labour supply
22
Q
What causes the PPF to have an inward shift?
A
Decrease in factors of production e.g. Natural disasters, economic recession
23
Q
What is meant by choice?
A
Choosing between alternatives when making a decision on how to use scarce resources
24
Q
What is resource allocation?
A
The process through which the available factors of production are assigned to produce different goods and services, e.g. how many of the societies economic resources are devoted to supplying direness products such as food, cars, healthcare and defence
25
What is Productive efficiency?
Occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised
26
What does it mean when a point is inside the PPF curve?
The point is productively inefficient- output is not maximised from available inputs.
27
What is allocative efficiency?
Occurs when the available economic resources are used to produce a combination of goods and services that best matches peoples tastes and preferences
28
What is a market economy?
An economic system in which goods and services are purchased through the price mechanism in a system of markets
29
What is privatisation?
Involves the sale of state-owned assets such as industrialised industries to private owners
30
What is Marketisation?
Prices charged for goods and services the state previously provided free of charge
31
What is Demand?
The quantity of a good or service that consumers are willing and able to buy at a given period of time
32
What is Market Demand?
The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices (different from individual demand)
33
What is it called when there is an increase in price along the demand curve?
Contraction
34
What is it called when there is an decrease in price along the demand curve?
Extension
35
What is specialisation?
Concentration on a particular part of the production process, or the production of a particular good or service that is likely to lead to an increase in productivity
36
Why do we specialise?
- Highly skilled workforce
- Climate
- Access to resources
- Natural Ability
- Concentration
- No time wasted swapping in-between tasks
37
What is the division of labour?
Breaking the production process down into a sequence of tasks , with workers assigned a particular task
38
What was Adam Smith's statement about the division of labour?
1 Worker could make 20 pins if all processes were completed by himself, whilst 10 workers specialising in various tasks could make 48,000 pins
39
What are the benefits for the division of labour?
-Increased Aptitude
Repetition of tasks leads them to be done more expertly
-Time saving
Less time spent switching between tasks, less training
-Working to strengths
Allows workers to do what they are best at
-Use of capital equipment
As tasks are sub-divided it becomes worthwhile to use machinery
40
What is development of trade?
Effective ways of trade (buying and selling of goods and services) and exchange (give something in return for something else- money is a medium of exchange) is necessary if firms are to benefit from greater specialisation and the division of labour.
41
What does successful trading require?
- Markets to enable buyers and sellers to meet
- Stability and the development of institutions to resolve differences that might arise
- Effective communications between buyers and sellers
- Efficient and relatively cheap transport
42
What is productivity?
Output for a given factor of production over a period of time?
43
What is labour productivity?
Output per worker
44
What is capital productivity?
Output per unit of capital
45
How is productivity calculated?
Total output per time period
------------------------------------------
Number of units of labour
46
How is productivity improved?
- Financial Incentives
- Organisational changes
- Technological improvements
47
What is the productivity Gap?
The difference between labour productivity in the UK and in other developed economies
48
What factors cause an average of high productivity?
-Lower average costs
lower cost is passed onto consumers, causing the expansion of demand, leading to a higher output and an increase in employment
-Improved competitiveness in international market
Develop a competitive advantage in markets where there is strong price competition from overseas suppliers
-Higher profits
Greater profits can be reinvested into the company in order for the business to grow
-Higher real wages
Firms able to offer higher wages when labour force becomes more efficient
49
What is supply?
The quantity of a good or service that a producer is willing and able to suppliant the market at a given price in a given time period
50
What is equilibrium?
A state of rest or balance between opposing forces
51
What is disequilibrium?
A situation in a market when this is excess supply or excess demand
52
Why are house prices rising in terms of demand? (4 Factors)
- Rising Incomes
- Increased Population
- Low Interest Rates
- More Buying than Renting
53
Why are house prices rising in terms of supply? (5 Factors)
- Less land
- Government regulations
- Decline in house building
- Skills shortages
- Stamp Duty (tax)
54
What is price mechanism?
Interaction between demand and supply to reach an equilibrium price and quantity in a market so that all demand is satisfied and all supply is sold- the best allocation of limited resources is achieved
Price mechanism alerts the demanders and suppliers of whats changed- leads the market to the best allocation of resources
55
What is a free market?
A market with no government intervention
| Prices are determined by unrestricted competition by privately owned businesses
56
What are the arguments against government intervention?
- Dont have to follow government education curriculum
- Money can be spent elsewhere
- Better employment (trade)
57
What are the arguments for government intervention?
- Expense
- A range of different options
- Better facilities
- School can be selective with students
- Unequal opportunities
- Increased crime rate
- Population increase
- Increase in the gap between rich and poor
58
What are the 3 functions of price mechanism?
The signalling function
The Rationing function
The incentive function
59
What is the signalling function?
Market prices adjust to demonstrate were resources are required, If prices rise due to high demand, it is a signal to suppliers to expand their production to meet demand
60
What is the rationing function?
Ration scarce resources when demand in a market outstrips supply
The prices increase so there are less willing and able to buy- so the demand is equalled
61
What is a transmission of preference?
Consumers are able through their expression of preferences to send important information to producers about the changing nature of our needs/wants
62
What is the incentive function?
Profit incentives, maximise utility
63
What is price elasticity of demand?
Measures the extent to which the demand for a good changes in response to a change in the price of that good
64
How do you calculate PeD?
% change in Quantity demanded
-------------------------------------------------
% change in price
(ignore minus numbers)
65
What dies each value of PeD mean?
```
0 = Perfectly inelastic
0-1 = Inelastic
1 = Unitary PeD
+1 = Elastic
Infinity = Perfectly elastic
```
Elastic- Most Tax absorbed by the firm
Inelastic- Tax gets passed onto the consumer
66
What are the factors that determine PeD?
- Number of close substitutes for a good and the uniqueness of the product in the market
- Product /service is a luxury or necessity
- The of a consumers income allocated to consumers spending on the good
- The time period allowed following a price change
- Peak and off demand
67
Draw the 5 different graphs for PeD.
```
Perfectly Elastic
Elastic
Perfectly inelastic
Inelastic
Unitary Elastic
```
68
What is income elasticity of demand (YeD)?
Measures the relationship between a change in quantity demanded and a change in real income
+ Inferior good
- Normal good
>1 Luxury
69
How is YeD Calculated?
% change in quantity demanded
------------------------------------------------
% change in income
70
What an example of a normal luxury?
Air travel
Fine wines
Designer clothes
71
What an example of a normal Necessity?
Veg
Juice
Utilities
72
What an example of an inferior good?
Frozen Veg
| Tinned fruit
73
What dies it mean when there is a high Income elasticity?
- Demand is sensitive to changes in real incomes
- Demand is cyclical, economic expansion means demand will grow strongly but may fall in recession
- Can be difficult for businesses to accurately forecast demand and make capital investment decisions
74
What dies it mean when there is a low Income elasticity?
- Demand is more stable during fluctuations in the economic cycle
- Over time, the share of consumer spending on inferior goods and normal necessities tends to decline
- Long run, businesses need to invest in/ focus on products with a higher income elasticity of demand if they want to increase profits
75
What is cross price elasticity?
XPeD measures the responsiveness of demand for good X over the change in price for good Y
+ Substitute
- Complementary
76
How do you calculate XPeD?
% change in quantity demanded for good x
----------------------------------------------------------------
% change in the price of good Y
77
What is Price elasticity of supply?
Measures the extend to which quantity is supplied over a change in price
78
What do the values for PeS mean?
PeS1- Elastic
PeS=1- Unitary elastic
PeS=0- Perfectly inelastic
PeS=Infinity- Perfectly inelastic
79
What determines supply elasticity?
- Factor substitution possibilities, can labour or capital inputs be switched easily when there is a change in demand
- Spare production capacity available when there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs
- Stocks (inventories) able to meet demand
* a low level of stocks makes supply inelastic in the short term
* when stocks can be released onto the market, supply is elastic
- The time frame allowed
* Short run (inelastic supply)
* Long run (elastic supply)
- Artificial limits on Supply
80
How is PeS improved?
- Creating spare capacity
- Using the latest technology
- Keeping sufficient stocks
- Developing better storage systems
- Prolonging the shelf life of products
- Developing better distribution systems
- Providing training for workers
- Having flexible workers who can do a range of jobs
- Locating production near to the market
- Allowing inward migration of labour if there is a labour shortage
81
What has caused a high demand for houses?
A lack of supply
| Rough sleeping has increased by 55%
82
What are the consequences for high house prices?
- Homelessness
- Increase in rentals
- Increased debt
- Repossessions
- Wealth/Income inequality
- Social change
- Geographical immobility
83
What could the government do to reduce homelessness and solve the housing crisis?
- Subsidise
- Provide more affordable housing
- Simplify the planning system
- Allow more (greenfield) land to be used for development
- Recruit skilled staff
84
What are the arguments for public healthcare (NHS)?
- Healthcare is not profit maximising, don't need incentives to provide a good service
- Not a free market, patients trust doctor instead of looking for cheaper options
- Everyone has access
- Healthcare is a merit good, importance of check ups
- Private healthcare insurance firms make large profit, more expensive healthcare for countries such as the US who have private pension
- As healthcare is paid for by private insurance, there is less mechanism for evaluation the cost/benefit of different treatments, which may do little help as the bill is paid for by insurance companies.
85
What are the arguments for Private healthcare?
- Greater choice
- Not limited by the public budget
- Efficiency incentives to provide a better service
86
What has happened to the value/competition for oil in the last 6 years
The price of oil has been dropping very fast as the domestic production has almost doubled in the last 6 years for the USA, meaning there is less competition as supply increases and developing countries are becoming more energy efficient, therefore demand for fuel has seen a reduction-bad for oil producing countries e.g. Iran, Brazil finding themselves in debt and out of business.
87
What is OPEC's role in trying to control the price of oil?
-Their aim is to obtain price stability and ensure stable revenue for oil producers
-They have a major say in the value of oil
-They control the price through supply/demand
However OPEC stopped trying to control the supply, leading to excess supply
88
Draw a typical graph for MES.
y axis= Cost
x axis= Output
MES= the lowest point on the graph
89
What is MES?
The lowest point a firm can produce such that long run costs are minimised (minimum efficient scale)
It is the MES that determines the structure of an industry
90
What does the value of MES mean?
```
The bigger the MES, more likely to be a monopoly
1 firm= Monopoly
2 firms= Duopoly
few firms= Oligopoly
Many firms= Perfect competition
```
91
What are interrelated markets?
Consider increase and decrease in supply and demand and their likely effects in both the goods and associated markets.
92
What is Derived demand?
When the demand for one good or service comes from the demand for another good or service. For example an increase in demand for cars will lead to an increase in derived demand for steel
93
What is composite demand?
A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the available supply for the other purpose, typically leading to higher prices
For example, milk used in butter and cheese. Increases the demand for cheese and yoghurt might cause rises in the price of butter as the available supply of milk is used in other products
94
What is joint supply?
When one good is produced , another good is also produced from the same raw material
e.g. and increase in demand for refined crude oil has lead to an increased supply of asphalt
95
What is competing supply?
When raw materials are used to produce one good, they cannot produce another good
e.g. increased demand for biofuels has diverted crop growing away from food supply to the supply of fuel for motor vehicles
96
What is a complementary good?
A good in joint demand/ demanded at the same time as another good
e.g. PS4 - PS4 games
97
What is a substitute good?
A good in competing demand, a good which can be used in place of other goods
e.g. coke- pepsi
98
What is an economy of scale?
As output increases, long-run average cost falls
As a firm grows in size by investing in new plant or buildings, it can benefit from economies of scale, although, beyond a certain size, firms may suffer from economies of scale.
99
What is an diseconomy of scale?
Diseconomies of scale occur when an increase in output leads to to rising long-run average costs of production
100
What is a technical economy of scale?
| What are the 5 types?
A cost saving generated through changes to the production process as the scale of the procession and the level of output increases.
- Invisibilities- Many types of plant or machinery are indivisible in the sense that there is a certain minimum size below which they cannot efficiently operate
- The spreading of research and development costs-Research and development costs can be spread over a much larger period/production run, reducing the unit costs in the long run
- Volume economies- With many types of capital equipment , costs increase less rapidly than capacity
e. g. when a storage tank is doubled in dimension, its storage capacity increase 8 fold (theory of increased dimensions).
- Economies of mass resources- The operation of many identical machines in a large plant means that proportionally fewer spare parts are needed to be kept as opposed to when fewer machines are involved
- Economies of vertically linked processes-linking of processes in a single plant can save time, transport costs and energy.
101
What are managerial economies of scale?
The larger the scale of a firm, the more likely it will benefit from the specialisation and division of labour
The use of specialists, accountants, marketing and lawyers
102
What are marketing economies of scale?
Expensive advertising spending can be spread over huge volumes of scales- reduces the marketing costs per unit
103
What are financial economies of scale?
Large firms able to negotiate cheaper finance deals. Larger firms are considered less risk so receive better interest rates on loans
104
What are risk-bearing economies of scale?
Larger businesses can afford to produce a range of products and diversity
105
What are economies of scope?
Factors that make it cheaper to produce a range of products together than to produce each one of them on its own
e.g. finance and marketing
106
What are the reasons for diseconomies of scale?
Firms can suffer form many diseconomies in scale as they grow in size. Including managerial diseconomies of scale, communication failure, motivational diseconomies of scale.
107
What is a managerial diseconomy of scale?
Administration of a firm becomes more difficult as it gets larger. Managerial functions are delegated to those who lack experience and therefore make bad decisions, increasing the average cost of production
108
What is the communication failure (diseconomies of scale)?
In a large organisation, there may be too many layers of management between the top managers and ordinary production workers, staff can feel remote and under-appriechated , therefore productivity begins to fall and unit costs begin to rise
109
What are motivation diseconomies of scale?
With large firms, it's difficult to satisfy and motivate workers, over specialisation may lead to de-skilling as workers repeat boring tasks and have little incentive to use personal initiative in ways which help the employer.
110
What are Internal economies of scale?
Cost saving resulting from the growth of the industry or market of which the firm is part
111
What are external economies of scale?
Cost saving resulting from the growth of the industry or market of which the firm is a part
e.g. better transport network, communications infrastructure
112
What are external diseconomies of scale?
Occur when too many firms are located in one area , local behaviour becomes scarce and firms have to bid higher wages to attract workers
Land and factories becomes scarce and rents begin to rise
The local traffic infrastructure becomes congested and so transport costs rise
113
How do you avoid diseconomies of scale?
Development in HRM
- Improving training, promotion, retention
- Performance related pay schemes- leads to an improvement in motivation
114
What is short run?
The time period in which at least one factor of production is fixed and cannot be changed, meaning the only way a form can produce more in the short run is by adding more variable factors to the fixed factors of production
115
What is long run?
The time periodic which no factors of production are fixed and which all the factors can be varied.
116
What are fixed costs?
Costs which in the short run do not vary with production rent, rates, insurance costs, admin costs, all change but not in relation to output
117
What are variable costs?
Costs that vary with output, even in the short run, raw materials primarily. More of those are needed to sell more units to customers
Long run- All costs are variable
118
What are total costs?
The sum of all costs incurred in production at a certain level of output
119
How do you calculate average cost?
Total cost of production
-----------------------------------
Output
120
A market requires an output of 100 units of a given product, MES =20, How many firms in the market?
Oligopoly, 5 firms
121
A market requires an output of 10000 units of a given product, MES =1, How many firms in the market?
10,000- perfect competition
122
What is an example of economies of scale?
Tap water
123
What is total revenue?
All money received by a firm from selling it's total output
124
How do you calculate total revenue?
Price (or average revenue) X Quantity
125
What is average revenue?
Total Revenue
---------------------
Total Output
Average revenue=Price
126
What is profit?
The difference between total sales revenue and total cost of production
127
What are the requirements for competitive markets and perfect competition?
- Large numbers of buyers/sellers
- Producing homogeneous goods
- There are no barriers to entry
- Both buyers and sellers are price takers
- Buyers(consumers) and sellers(firms) have complete information
128
What is a concentrated market?
A market containing very few firms in the extreme one firm (monopoly) has a high concentration ratio
129
What is Monopoly power?
The power of a firm to act as a price maker rather than as a price taker
130
What is imperfect competition?
Any market structure lying between the extremes of perfect competition and pure monopoly
131
What is a monopoly?
The firm is the industry - the whole output of the industry is in the hands of a single firm
There are barriers to entry, no other firm is able to enter the monopoly
132
What is a pure monopoly?
When there is only one firm in the market
133
What is a natural monopoly?
When a country or firm has complete control over a natural resource and when only one firm could benefit from full economies of scale (where there are very high fixed costs)
134
What is a legal monopoly?
Any firm which has more than 25% market share
135
What are barriers to entry?
Preventing new firms from entering the market
136
What is a natural barrier?
A barrier which is not man made (innocent barriers)
137
What is an artificial barrier?
Strategic barriers as a result of deliberate action by a firm
138
What are artificial barriers of entry created by a monopoly power?
Patent Laws- allows the designer of a product sole right to the exploitation of the invention for a number of years
e.g. the dyson ball
Incumbent(existing firms in the industry) firm has exploited economies of scale and can produce at a lower cost than any would-be entrant. The incumbent firm could lower their prices, limit pricing and threaten potential entrants with a price way that might bankrupt any possible competitor.
139
What are natural barriers of entry created by a monopoly power?
- Nationalisation- prohibits competition by law
| - High fixed costs
140
What is an example of a firm that has gone through privatisation from Gov to private?
The royal mail
141
What is an example of a firm that has gone through nationalisation from private to Gov?
Northern Rock
142
What is informative advertising?
Provides customers and producers with useful information about goods/services
Increases competition because it provides consumers and producers with useful information
143
What is persuasive advertising?
Attempts to persuade potential customers that a good/service has desirable characteristics that make it worth buying
- Makes the demand curve less elastic
- Reduces competition
- Less likely to go for substitutes
- Little information about the product is given
- Focuses on image and feelings
144
What is saturation advertising?
- Through flooding the market with information and persuasion about a firms product, this functions as a man-made barriers market entry by making it difficult for smaller firms to compete
- Used to prevent small forms from entering the market as they cannot afford to keep up with the level of advertising and promotion
- Supermarkets often unwilling to stock goods produced by new entrants because their products are not advertised enough
145
Draw a perfect competition graph.
```
Notes
Allocative efficiency
MC
ATC
AR=D=P=MR
```
146
Draw an imperfect competition graph
```
Notes
Super normal profits
Normal profit
Profit maximising
MC (S)
ATC
AR=D=P
MR
```
147
What are the 3 forms of advertising?
- Informative
- Persuasive
- Saturation
148
What is a price maker?
Choosing to set the price at which the product is sold. The demand curve will dictate how many can be sold at this price
149
What is a Quantity Setter?
Dictates the maximum price at which the chosen quantity could be sold. The demand curve will dictate the price at which the quantity could be sold for
150
What is a trade-off?
A monopoly cannot set price or quantity independent of each other. Firms try not to make this choice by advertising or other promotions shift the demand curve to the right through advertising etc.
151
What is a concentration ratio?
A ratio which indicates the total market share of a number of heading firms in a market , or the output of these firms as a percentage of total output
152
What does a perfectly competitive market provide?
```
Productive efficiency
"Survival of the fittest"
Normal profits- No dynamic efficiency
No innovation
Equal consumer and producer surplus
```
153
What does an imperfect market provide?
```
No incentive to reduce costs
Wastage
Isn't allocative efficient
Qty is lower
Benefit from supernormal profits
Dynamic efficiency
Reduces consumer surplus and increases producer surplus
Benefit from economies of scale
```
154
What is the basic assumption of the aim of a firm
-To maximise profits
-Maximise growth
to grow and expand so to benefit from economies of scale
to dominate an industry
out-compete on price/quantity
mergers and takeovers e.g. Vodaphone - 3rd largest UK firm after takeovers
willing to make lower level of profit in order to increase the size of the market share
155
What is satisficing?
Making a satisfactory level of profit to pursue other objectives e.g. growth and expansion
156
What is price competition?
Reducing the price of a good or service to gain sales by making it more attractive for consumers
157
What is limit pricing?
Reducing the price of a good to just above the average cost to deter the entry of new firms into the market. Prices are set as levels which are likely to make it unprofitable for potential entrants who might consider coming into the market
158
What is Predatory Pricing?
Temporarily reducing the price of a good below average cost to drive smaller firms or new market entrants out of the market
159
What are the 3 factors that make up public goods?
-Non rejectable
-Non excludable
-Non rivalrous
council tax funding, Not always provided by the government
160
Whats an example of a public good?
Street Lights
161
What is a quasi public good?
Contains features of private and public goods
| e.g. pay per view
162
What are the 3 factors that make up private goods?
- Excludable
- Rivalrous
- Rejectable
163
Whats an example of a private good?
e.g. jumper, Mc D's
164
Why does the state provide public goods?
- On grounds of equality- people on all levels of income can have access to them
- Provision on grounds of need rather than ability to pay
- Grounds of efficiency- easier to provide collectively
- To overcome free-rider problem
- To correct for market failure
- The failure of the market to provide sufficient public goods
165
What is market failure?
Market failure occurs when a free-flowing market, operating without government intervention fail to deliver an efficient or optimal allocation of resources
Economic and social welfare may not be maximised
