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A Level Economics > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

The Price Mechanism

A

Prices provide the main method through which scarce resources are allocated between competing use in virtually all modern economies.

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2
Q

The Signalling Function

A

Prices signal what is available, conveying information to producers and consumers.

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3
Q

The Incentive Function

A

Prices create incentives for agents to behave in ways consistent with their self-interest. For example, if the price of a good increases, then a firm will increase production to increase their profit.

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4
Q

The Rationing Function

A

Rising prices due to a shortage mean that less will be consumed (e.g. high price of diamonds).

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5
Q

Determinants of Demand

A 
Consumer tastes and preferences
Income available to the consumer
Prices of other goods and services (substitute goods and complementary goods)
Interest rates
Consumer population
Price of the good
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6
Q

Substitutes

A

Goods in competitive demand (they are replacements for another product, e.g. Coke and Pepsi). A rise in the price of one will cause an increase in demand for the other.

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7
Q

Complements

A

Goods which are in joint demand (e.g. fish and chips). A rise in the price of one will cause a decrease in demand for the other.

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8
Q

Derived demand

A

Goods that are demanded because they are needed for the production of other goods (e.g. steel for cars).

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9
Q

Composite demand

A

A good that is demanded for at least 2 distinctive purposes (e.g milk for cheese, yoghurt etc.).

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10
Q

Equilibrium

A

A state of equality between demand and supply, where there is no tendency to change.

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11
Q

Determinants of Supply

A 
Technology
Costs of Production (wages, raw materials, energy)
Taxation and subsidies
Prices of related goods
Number of suppliers and their objectives
Climatic conditions
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12
Q

Joint Supply

A

Two products are in joint supply when a rise in the output of one product leads to a rise in the supply of the other product.

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13
Q

Price Elasticity of Demand (PED)

A

The responsiveness of demand to a change in the price of the good.

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14
Q

PED Equation

A

% Change in Quantity Demanded / % Change in Price

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15
Q

Factors that determine PED

A

Number of close substitutes of a good and the uniqueness of the product in the market
The time period allowed following a price change
The % of a consumer’s income allocated to consumer’s spending on the good
Degree of necessity of consumption
Whether demand causes habitual consumption
The breadth of definition of a good or service

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16
Q

Income Elasticity of Demand (YED)

A

A measure of the sensitivity of quantity demanded, to changes in real income.

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17
Q

YED equation

A

% Change in Quantity Demanded / % Change in Income

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18
Q

Inferior Goods

A

Income Elasticity is negative, so demand falls as real income rises (e.g. own brand food, Aldi or Lidl).

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19
Q

Normal Goods

A

Income Elasticity is positive, so demand increases as real income rises (e.g. most goods and services).

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20
Q

Cross Elasticity of Demand (XED)

A

A measure of the sensitivity of the demand of one product to changes in the price of another.

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21
Q

XED equation

A

% Change in Quantity Demanded of Good X / % Change in Price of Good Y

22
Q

If XED is negative then the two goods are?

A

Complementary goods

23
Q

Is XED positive of negative if two goods are substitutes?

A

Positive

24
Q

Subsidy

A

A payment made to producers to encourage increased production of a good or service (e.g. solar panels, healthy food, electric cars).

25
Q

Advantages and Disadvantages of Subsidies

A

Advantages: Can increase consumption of merit goods
Lower prices so more affordable for low income earners

Disadvantages: Difficult to judge size of externality
Opportunity Cost
Firms become reliant
Seen as an artificial trade protection
If inelastic, may not increase consumption

26
Q

Minimum Prices

A

A price floor above the free market equilibrium price (e.g. National Minimum Wage, EU Common Agricultural Policy (CAP)).

27
Q

Advantages and Disadvantages of Minimum Prices

A

Advantages: Producers get a minimum price
Encouraged production of essential goods
Excess supplies can be stored

Disadvantages: Consumer may pay a higher price
Can encourage over-production
Opportunity cost of government expenditure
Reduced international competitiveness
May encourage consumers to seek cheaper, more harmful alternatives

28
Q

Maximum Prices

A

A price ceiling above which prices are not permitted to rise (e.g. rent controls in New York, limits on price rises by utility companies).

29
Q

Advantages and Disadvantages of Maximum Prices

A

Advantages: Allow less well off people to afford necessities
Lessen monopoly power to exploit consumers

Disadvantages: May create an excess of demand, so some people will be unable to access product/service
Excess demand = queues, shortages and waiting lists
Black markets may appear

30
Q

Regulation

A

Rules or laws used to control or restrict the actions of economic agents in order reduce market failure (e.g. banning smoking in public places, a minimum age to drink alcohol, maximum emissions on new cars, noise thresholds on planes taking off in urban areas, establishing green belt land around major cities).

31
Q

Advantages and Disadvantages of Regulation

A

Advantages: Helps consumers to make better decisions
Targeted
Straight forward

Disadvantages: Interference from the “nanny state”
Suppliers may find way around legislation
Distort market
Government failure → Information incorrect

32
Q

Direct Provision

A

The government may decide to provide the good/service as the market is providing in insufficient/excess quantities. Government will usually pay a private firm to provide, from general taxation. (e.g. building a new school, NHS, vaccines)

33
Q

Advantages and Disadvantages of Direct Provision

A

Advantages: Individuals do not have to worry about paying at point of consumption
Could improve equality
Can match government objectives

Disadvantages: Opportunity cost
Government may not have sufficient information

34
Q

Correcting Information Failure

A

Governments intervene into markets where they feel consumers are under or over consuming goods/services due to a lack of information about the effects of production/ consumption (e.g. compulsory labelling on food, health warnings on cigarettes. TV advertising about the effects of excessive alcohol consumption, league tables for schools/hospitals/universities).

35
Q

Advantages and Disadvantages of Correcting Information Failure

A

Advantages: Less costly solution
Targeted at specific individuals/groups

Disadvantages: Does government know best?
Is there an ideal solution?

36
Q

Extending Property Rights

A

Property right confer legal control or ownership of a good. For markets to operate efficiently, property rights must be clearly defined and protected - perhaps through government legislation and regulation.

37
Q

Government Failure

A

Intervention to correct a market failure which leads to a net welfare loss in society (i.e. makes the market failure worse).

38
Q

Inadequate Information

A

Governments rarely possess complete information, they may therefore make a decision without knowing all of the points to consider (e.g. decision to change tax on petrol vs diesel cars).

39
Q

Conflicting Objectives

A

Governments face an opportunity cost with all of their decisions. They cannot please all of the people, all of the time (e.g. decision whether to allow fracking in the UK).

40
Q

Administrative Costs

A

The administrative cost of resolving a market failure may be more than the welfare benefit gained from correcting the failure (e.g. winter fuel allowance for all pensioners vs a means tested payment).

41
Q

Unintended Consequences

A

Even with lots of information, and careful analysis of a policy, the reality may create problems that could not be foreseen (e.g. the government levy to increase apprenticeships actually reducing the number).

42
Q

Politicians Maximising Own Welfare

A

Governments should aim to maximise the population’s welfare but due to political aims might choose a different approach (e.g. keeping open an NHS hospital in a marginal constituency rather than making nationwide decisions about care).

43
Q

Positive Statement

A

A statement that can be tested.

44
Q

Normative Statement

A

A statement that cannot be tested (a judgement or opinion).

45
Q

Free Good

A

A good that has no opportunity cost.

46
Q

Public Good

A

A good that is provided by the government as in a free market it would be underproduced and consumed as they normally have positive externalities, they are non-rivalrous and non-excludable.

47
Q

Private Good

A

A good that is both rivalrous and excludable.

48
Q

Merit Good

A

A good that has positive externalities in consumption and is normally underconsumed if left to the free market.

49
Q

Demerit Good

A

A good that has negative externalities in consumption and is normally overconsumed if left to the free market.

50
Q

Joint Demand

A

Two goods that are demanded together (complementary goods) (e.g. fish and chips).

51
Q

Free-rider Problem

A

Public goods can be consumed by people who did not help to pay for them, as they are non-excludable.

A Level Economics (12 decks)

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