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Economics > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

Benefits of free market

A

Efficient
Entrepreneurship
Choice

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2
Q

Cons of a free market

A

Inequalities
Non profitable goods not produced
Monopolies - successful businesses can become the only supplier of a product

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3
Q

Pros of a command economy

A

Maximise welfare
Low unemployment
Prevent monopolies

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4
Q

Cons of a command economy

A

Poor decision making - lack of info means poor or slow decisions on what needs to be produced
Restricted choice - firms told what to make
Lack of risk taking and efficiency - no incentives to create efficiency or take risks as they don’t need to make profit

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5
Q

What is a mixed economy

A

Public and private sector
Government - public
Privately owned businesses - private

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6
Q

What is marginal utility

A

The benefit gained from consuming one additional unit of good

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7
Q

What is total utility

A

Overall benefit gained from consuming a good

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8
Q

What is the law of diminishing marginal utility

A

For each additional unit of a good thats consumed, the marginal utility gained decreases

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9
Q

What does Adam smith believe in

A

Believer in free market
Invisible hand will allocate resources
consumers and producers motivated by self intrest leading to price levels set at a point which benefits them both.
Couldnt be any monopolies and low barriers of entry to maximise competition
specialisation and division labour

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10
Q

What does Karl Marx believe in

A

critical of the free market
creates a situation where a small ruling class of producers exploited the larger working class
Eventually, the working class will rise up in revolution then lead to workers controlling production and everyone having a share in the ownership of resources.
led to rise in communism

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11
Q

What did Hayek believe in

A

A supporter of free market
Critical of command economy
Government shouldnt intervene because of lack of information
Indivisual consumers and producers have the best knowledge of what they want or need so they can allocate resources.
Price mechanism

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12
Q

Why do firms want to maximise profit

A

profit means firms can survive
Greater profits allow fims to offer better rewards to the owners pr shareholders or staff
Can be reinvested to make more profit later eg to expand

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13
Q

why do firms want to maximise market shares

A

lead to monopoly power

firms can charge higher prices as a lack to competition

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14
Q

why do the government want to maximise public interest

A

economic growth
full employment
equilibrium in the balance of payments - balance between payments into the country and the payments out
low inflation

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15
Q

Characteristics of economic agents

A

Utility maximisers

Rational

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16
Q

How do economic agents maximise utility

A

Comparing the costs and benefits of alternatives, then choosing the option that maximises their net utility.

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17
Q

What are the problems with assuming economic agents are rational and utility maximisers based on the information given

A

May have imperfect information - can lead to market failure

Asymmetric information - one party has more information than the other in a transaction

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18
Q

Why don’t economic agents act rationally

A

Time available to make a decision is limited
Not all information is available or correct
Might not be able to process and evalute vast amount of data involved in making a decision
May not be good at calculating the goods of alternatives (computation weakness)

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19
Q

How are individuals influenced by biases (5)

A 
Rules of thumb
Anchoring
Availability bias - Judgements made about the probability of events occurring based on how easy it is to remember such events occurring
Social norms
Habitual behaviour
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20
Q

What are normal goods

A

good where, if price rises, demand will

fall.

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21
Q

What does a more equal distribution of income mean for demand

A

Fewer rich people means fewer luxury goods sold

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22
Q

What is derived demand

A

Demand for a good or a factor of production used in making another good or service.

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23
Q

Factors influencing price elasticity of demand

A

Substitutes - the more substitutes the more price elastic
Type of good - essential, habit forming, several uses
Percentage income spent on tax
Time - long run becomes more price elasticity

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24
Q

Why is YED useful for firms and government

A

Can be used in sales forecasting if YED and changes in income are known.
Can be used in pricing policy - reduction in price for a normal good if there’s an expected fall in income

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25
Q

Why is XED useful for firms and governments

A

Tell them how to react to changes in the price of related products to ensure they maximise demand

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26
Q

Factors causing shift in supply curve

A 
Changes to cost of production
Technology 
Productivity 
Indirect taxes and subsidies
Changes to the price of other goods
Number of suppliers
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27
Q

Why is a high PES important to firms

A

Aim to respond quickly to changes in price and demand to make their supply as elastic as possible

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28
Q

How to firms make their supply as elastic as possible

A

Flexible working patterns
Latest technology
Spare production capacity

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29
Q

Why is supply price inelastic in the short run

A

Firms capacity may be fixed and at least one factor of production is fixed
Firm can recruit more workers and buy more materials but it takes time to build additional production facilities.
Can be difficult to increase production

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30
Q

Why is supply more price elastic in the long run

A

In the long run all factors of production are variable so is able to increase its capacity in the long run

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31
Q

Price mechanism

A

Allocated goods/services in an impersonal way.
Prices will change until equilibrium is achieved and supply equals demand.
Free from biases and opinions

32
Q

3 functions of price mechanism

A

Acts as an incentives to firms - higher prices allow firms to produce more and increase production
Signalling device- changes in price show changes in supply/demand and act as a signal
Ration- high demand and supply is limited price will be high

33
Q

Price mechanism advantages

A

Resources allocated efficiently to satisfy wants and needs
Can operate without cost of employing ppl to regulate it
Prices kept to the minimum as resources are used as efficiently as possible

34
Q

Price mechanism disadvantage

A

Inequality in wealth and income
Under provision of merit goods and an over provision of demerit gods
Unemployment
Public goods not produced

35
Q

Consumer surplus

A

Difference between price that a consumer is willing to pay and the price they actually pay

36
Q

Producer surplus

A

Difference between the price that a producer is willing to supply and a good or service at and the price they actually receive

37
Q

Subsidies meaning

A

Money paid by government to the producer of a good to make it cheaper than it would be otherwise

38
Q

What is division of labour

A

Type of specialisation where production is split into different parts and specific people are allocated to each task.

39
Q

What is wrong with the barter system

A

Very inefficient, takes lots of time and effort

40
Q

Three functions of money

A

Measure of value
Store of value
Method of deferred payment - money paid later

41
Q

When does market failure occur

A

Allocates resources efficiently

Price mechanism fails to allocate scarce resources effeciently

42
Q

Externalities meaning

A

third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid

43
Q

Factors influencing demand

A 
The price of the good
Consumer income
Prices of other goods and services - substitutes,complimets
Consumer tastes and fashion
Other factors e.g. advertising
44
Q

Which factors cause a shift in the demand curve

A

Changes in the price or availability of substitutes
Changes in the price or availability of complements
Changes in consumer income
Changes in taste

45
Q

What does the government do in a command economy

A

Reduce negative externalities
Provide public goods
Control demerit goods
Supply merit goods

46
Q

Factors affecting supply

A

The price of the good
The impact of changing costs of production
Technological progress
Prices of other goods and services
Government policy e.g. taxes and subsidies

47
Q

Price elasticity of supply is determined by:

A

Price - an increase in price of a good, more supplied
Substitutes - easier it is to switch production
Time - at least one fix factor of production

48
Q

Allocative efficiency meaning

A

consumer satisfaction is maximised in the production of goods and services

49
Q

What are private costs

A

costs of consuming or producing goods or services that have to be paid for by third parties e.g. the individual or a firm

50
Q

What are social costs

A

costs of consuming or producing goods or services that are paid for by society

51
Q

When do we have negative externalities

A

When social costs are greater than private costs

52
Q

Why may markets be inefficient

A

Externalities
Missing Markets
Under-provision of public goods
Information gaps

53
Q

2 characteristics of a public good

A

Non-rival

Non-excludable

54
Q

What is a public good

A

one where its use by an individual does not stop

others from using it whilst its consumption does not reduce the amount available for consumption by others

55
Q

When does market failure occur with public goods

A

A free-rider is someone who benefits from a good or service without paying for it
With little incentive for firms to supply public goods, the government is likely to intervene

56
Q

What is a private good

A

one where its use by an individual stops others

from using it whilst its consumption reduces the amount available for consumption by others

57
Q

What is a quasi-public good

A

a private good that is similar to a pure public good but there is an ability to stop non-paying consumers from
using it.

58
Q

What is the intellectual property rights

A

By granting patents, copyright etc. the good becomes protected and therefore excludable

59
Q

How can monitoring and control systems stop public goods

A

Restricting the use of a good by monitoring usage e.g. congestion charging or digital television

60
Q

What is government failure

A

Costs of an intervention outweigh the benefits of intervention causes allocative inefficiency

61
Q

Causes of government failure

A

Information failure
Administrative costs too high
Unintended consequences
Regulatory capture

62
Q

How subsidies may lead to government failure

A

If firms become used to receiving a government subsidy, they may have fewer incentives to cut costs and transform the business – they become reliant on subsidies and the government ends up wasting public funds on supporting inefficient firms. In the long-run, consumers end up paying higher taxes and higher prices

63
Q

Tax meaning

A

compulsory contribution to state revenue, levied by the government

64
Q

Benefits of indirect tax

A

Creates revenue which was be used of offset externalities

it will change the price immediately and allows the one functions of price to work ( eg consumers may ration)

65
Q

Disadvantage of indirect tax

A

May have inelastic demand - eg price of fuel

Monetary value of negative externality can be hard to measure.

66
Q

Advantage of subsidies

A
  • In the long term, subsidies for a good will help change preferences. It will encourage firms to develop more products with positive externalities.
  • Enables greater social efficiency. Consumers end up paying the socially efficient price which includes the external benefit.
67
Q

Disadvantage of subsidies

A

Difficult to estimate the extent of the positive externality. Therefore the government may have poor information about the service and how much to subsidise.

68
Q

Why is there a dead weight loss of taxation

A

Reduces standard of living

prevent ppl from buying more

69
Q

Tax incidence meaning

A

how the burden of a tax is distributed between firms and consumers

70
Q

What are the reasons for government intervention

A

correct market failure
achieve a more equitable distribution of income and wealth
To improve the performance of the economy
Stabilise prices
Avoid excessive prices for goods with PE

71
Q

How does factor immobility cause market failure and what do the government do

A

Structural unemployment, state investment in education and training

72
Q

How does demerit goods cause market failure and what do the government do

A

overconsumption of products with NE

Information campaigns, minimum age from consumption

73
Q

How does imperfect information cause market failure and what do the government do

A

Damaging consequences for consumers from poor choices

Statutory information / labeling

74
Q

How does relative high poverty cause market failure and what do the government do

A

Low-income families suffer social exclusion, negative externalities
Taxation and welfare to redistribute income and wealth

75
Q

How does monopoly power in a market cause market failure and what do the government do

A

Higher prices for consumers causes loss of allocative efficiency
Competition policy measures to encourage new firms into a market

76
Q

Forms of government intervention in markets

A

Minimum prices
Maximum prices
Nudges/Behavioural unit

77
Q

Assumptions of rational choice model

A

Consumers choose independently (not influenced)
The consumer has fixed and consistent preferences
They gather full information on alternatives
Always make an optimal choice given prefrences

Economics (6 decks)

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