microeconomics theme 1 Flashcards
1
Q
What is Microeconomics?
A
the study of economics at the level of the individual firm industry.
2
Q
What is ceteries paribus?
A
All things being equal
3
Q
What is a positive statement?
Give example
A
When a statement can be tested and can be proven to be either true or false.
Example: If the price of bananas goes up, the demand for bananas will fall
4
Q
What is a normative statement?
Give example?
A
A statement that is opinionated and can’t be tested.
Example: Scotland should be independent.
5
Q
what is the difference between renewable and non-renewable resources?
A
renewable resources can be replaced (e.g: solar power) while non-renewable resources is irreplicable (e.g: gas)
6
Q
What is opportunity cost?
A
the cost of the next best alternative
7
Q
what is the calculation to work out the index number?
A
raw number/base year raw number x 100
8
Q
what is the basic economic problem?
A
When resources have to be shared between competing uses because human wants are infinite whilst resources are scare.
9
Q
What are the four factors of production?
A
Land, labour, capital and Enterprise
10
Q
how is productive efficiency shown on PPF curve?
A
any point on the curve is productively efficient
11
Q
How is opportunity cost illustrated on PPF curve? (draw diagram)
A
refer to 1.1.4 notion
12
Q
how is productive inefficiency shown on PPF curve
A
point inside the PPF curve is productive inefficient
13
Q
what does a point outside PPF curve show?
A
unobtainable production
14
Q
how do you show relocating factors of production on PPF diagram? (draw diagram)
A
refer to 1.1.4 notion
15
Q
how is allocatively efficiency shown on PPF curve?
A
cannot be shown because PPF doesn’t show consumer demand
16
Q
how do you show increase quality or quantity of F of P on PPF diagram? (draw diagram)
A
refer to 1.1.4 notion
17
Q
how do you show increase in F of P for only one good on PPF diagram? (draw diagram)
A
refer to 1.1.4 notion
18
Q
How do you show increase in economic growth using PPF diagram (consumer and capital good)?
A
PPF curve shift right (consumer goods and capital good)
19
Q
What does production possibility frontier (PPF) mean?
A
shows the maximum possible output combination of two goods or services an economy can achieve when all resources are fully and efficiently employed.
20
Q
what is specialisation?
A
Production of a limited range of goods by an individual, firm or country in co-operation with others so they can together complete a range of goods and services.
21
Q
What is division of labour?
A
Each worker is given one specific task to do in the production of goods/services. specialisation in the workforce.
22
Q
What are the advantages and disadvantages of division of labour?
A
Advantages: quality of production improves, individuals get really good at the one task and it is more cost effective because you only need to buy the specialist tools for an individual.
Disadvantage: workers do the same task so it might can boring (fall in productivity) and workers are only good at a specific task so it could be hard for them to find another job.
23
Q
why is Adam smith linked with specialisation?
A
He stated that the concept of specialisation and the division of labour can increase labour productivity, increase firm efficiency and lower costs of production
24
Q
What are the different sectors of the economy?
A
primary sector (agriculture), secondary sector (furniture manufacture) and tertiary sector (transport, health)
25
What is a free market economy and it's advantages and disadvantages? (also give a example)
Majority of the resources are allocated by the market mechanism rather than through the government.
Advantages: responds to customer demands quickly, high variety and quality of goods and services and high competition. Example: Hong Kong
disadvantage: role of gov low so inequality may be high
26
What is a command economy and it's disadvantages? (also give a example)
Resources are allocated by the government/state.
Disadvantages: no competition because government controls all the factors of production. This leads to low variety and quality of goods and services. Slow respond to demand (not profit incentive) Example: North Korea
27
What is a mixed economy? (give examples)
Resources are allocated through the free market and government planning. Example: U.K- the health care system is administrated and funded by the gov but there are also private health care systems.
28
what type of economist was Adam Smith?
Free market economist
29
What type of economist was Friedrich Hayek?
free market economist
30
What type of economist was Karl Marx?
Command economist
31
What is Demand?
The amount consumers are willing and able to buy.
32
What factors effect demand?
Population, advertising, substitute prices, income, trends, interest rate and complement prices
33
How would a increase in a complement prices effect demand?
Increase in complement price (e.g: printer) would increase demand for the good (e.g: printer ink) demand curve shift to the right.
34
What is marginal utility?
change in total utility derived from consuming an extra unit of a good/ service.
35
What is the law of diminishing marginal utility?
As quantity consumed increases the marginal utility derived from each extra unit decreases (The more you consume, the more your utility diminishes.)
36
what is a example of diminishing marginal utility?
As you are very hungry, the satisfaction of having the first slice of pizza will be greater than having your 4th slice of pizza.
37
What is the paradox of value?
consumers pay high prices for goods such as diamonds that are unnecessary to human survival whilst pay a lower price for necessities such as water.
38
How can the law of diminishing marginal utility explain the paradox of value?
if their are fewer goods available to buy such as the diamond, consumers are prepared to pay high prices for them because their marginal utility is high. If the good is plentiful such as water, then consumers are prepared to pay low prices because the last one consumer has low marginal utility.
39
What is price elasticity of demand?
Measures the responsiveness of change in quantity demand given a change in price.
40
What is the equation for price elasticity of demand?
percentage change in quantity demand/ percentage change in price = price elasticity of demand.
41
What does it mean if price elasticity of demand is greater than 1?
demand is price elastic: When price changes, change in quantity demand is proportional greater than change in price.
42
What does it mean if price elasticity of demand is less than 1?
demand is price inelastic: when price changes, change in quantity demand is proportionally less than change in price.
43
when is demand perfectly price inelastic?
figure is 0- regardless of price changing quantity demand will stay the same
44
when is demand perfectly price elastic? (figure)
infinite- only one price consumers are willing to pay
45
Diagram of perfectly inelastic, elastic and unitary demand curve?
refer to notion 1.2.3
46
what factors influence elasticity of demand?
necessity of good, substitutes, addictiveness or habitual behaviour, peak and off peak demand, time period
47
what is the PED when there is high level of substitutes available?
demand is price elastic
48
what is cross elasticity of demand?
the measure of responsiveness of quantity demand of good A given a change in price of good B
49
what is the equation for cross elasticity of demand
percentage change in quantity demand of good A / percentage change in quantity demand of good B
50
when is a cross elasticity demand good a substitute?
When its a positive (+) number
51
when is a cross elasticity demand good a complement?
when it’s a negative (-) number
52
what does it mean when cross elasticity of demand is less than one?
demand between the goods is price inelastic- when there is a change in price of one good the QD of the other good is proportional less (weakly related goods).
53
what does it mean when cross elasticity of demand is zero?
perfectly price inelastic no change- unrelated good
54
what is income elasticity of demand?
measures the responsiveness of quantity demand given a change in income
55
what relationship does a normal good have with income and demand?
positive relationship (+ figure) if income goes up demand will also go up
56
what relationship does a inferior good have with income and demand?
invest relationship (- figure) income goes up demand goes down
57
what type of demand income elasticity are normal luxury goods, explain why?
demand is income elastic because if we have a increase in income, we demand greater amount for the luxury we couldn’t afford before
58
what elasticities of demand is ideal when government imposes indirect taxes on firms? (draw diagram to support)
If firm sells a good with a inelastic demand, they are likely to put most of the tax burden on consumers as they know demand will still be high regardless of price rise. This will also raise government revenue (refer to notion 1.2.3)
59
what elasticities of demand is ideal when government imposes subsidies on firms? (draw diagram to support)
if firm sells a good that is price elastic, they are able to make more revenue as QD will increase proportionally greater than fall in price. Therefore firm can keep more revenue. (refer to notion 1.2.3)
60
What does supply mean?
the quantity of goods that suppliers are willing to sell at any given price over a period of time.
61
What factors impact supply?
cost of production, profit, introducing new technology, government legislation, uncertainty, natural disasters and weather.
62
How would a increase in cost of production effect supply?
If cost of production increases > firm has to spend more money on production> fall in profit> to maintain profit the firm will have to produce less goods> decrease in supply> supply curve shifts to the left
63
What is price elasticity of supply?
Measures the responsiveness of quantity supplied given a change in price
64
What is the equation of price elasticity of supply?
percentage change in quantity supply/ percentage change in price= Price elasticity supply.
65
what does it mean if price elasticity supply figure is greater than 1?
price is elastic- given a change in price, quantity supply with change proportionally greater
66
what are the factors that influence price elasticity of supply? (5 factors)
Production lag, Stock, Spare capacity, Substitutability of F of P, Time
67
what is the PES in the short run and why?
supply is price inelastic because there is at least 1 fixed F of P (land and capital) so it’s difficult to increase production and vary F of P
68
what is the PES when there is large amount of spare capacity (why)?
Elastic because if price goes up, there is lots of spare supply for firm to use to increase QS and respond quickly.
69
What is price mechanism?
decision of consumer and businesses interact to determine the allocation of resources.
70
What does SIRA stand for?
Signalling, incentive, rationing , allocation
71
Explain how excess demand could be eliminated using price mechanism. (draw graph)
Excess demand is a signal that prices are too low. This incentives firms to increases prices. As a result there is a contraction of quantity demand from QD to Qe and a extension of supply from QS to Qe. Therefore, excess demand has been rationed. Now there is a better allocation of resources at new equilibrium Pe Qe (diagram 1.2.7)
72
Explain how excess supply could be eliminated using price mechanism? (draw graph)
excess supply signals to producers that prices are too high. This incentives business to lower prices . As a result there is a contraction of quantity supply and a extension of quantity demand. Excess supply has been rationed. Now there is a better allocation of resources at new equilibrium Pe Qe
73
what was price mechanism used in global market?
rising of oil prices due to oil supply issue because of Russian- Ukraine war is a example of rationing function
74
when was price mechanism used in local market?
covid19 has disturbed the supply chain in the UK causing fewer goods on supermarket shelves. Excess demand exist so producers must rise the price of food to ration off excess demand, only the consumers who value the food most highly will buy. This is a example of rationing function
75
what is consumer surplus?
difference between the price consumer are willing and able to pay for a good/service and the price they actually pay
76
what is producer surplus?
difference between the price producers are willing and able to supply a good/service for and the price they actually receive
77
what are negative externalities of producers/ consumers?
costs to 3rd parties as a result of the action of producers or consumers.
78
Examples of negative externalities of producers?
air pollution, resource depletion, burning of greenhouse gases, and deforestation…
79
Explain how negative externalities from production can cause market failure (analysis of diagram).
- Negative externalities cause market failure because social costs is greater than private costs leading to a misallocation of resources (allocatively inefficient)
- Due to self interest firms produces at private cost MPC) and ignore social costs
- Therefore, market allocates resources at Q1- P1 instead of the socially optimum point of Q*- P* where we want to be
- costs to society greater than benefits to society leading to welfare loss as shown in shaded area
- price too low at P1 which leads to high demand> overconsumption and overproduction
80
Examples negative externalities of consumption?
smoking, excessive alcohol, unhealthy food.
81
negative externalities of production diagram? (with welfare loss triangle)
refer to notion 1.3.2
82
negative externalities of consumption diagram?
refer to notion 1.3.2
83
what are positive externalities of production/ consumption?
benefits to 3rd parties as a result of the actions of consumers/ producers
84
what are some examples of positive externalities of consumption?
healthcare, education, exercise, healthy eating
85
positive externalities in consumption diagram? (with welfare loss triangle)
refer to notion 1.3.2
86
Explain how positive externalities from consumption can cause market failure (analysis of diagram).
- positive externalities occurs when social benefits are greater than social costs
- in the free market due to self interest individual are only considering private benefits and ignoring external benefits/ benefits to society.
- As a result market produces at Q1- P1 instead of socially optimum point is Q*-P* where we want to be.
- failure of market to produce at Q*-P* leads to underconsumption between Q1-Q*. This causes a misallocation of resources (allocative inefficiently)
- underconsumption leads to losing out on net social benefits causing a welfare loss in shaded area.
87
how can the government intervene to ensure external costs and benefits are considered? (4 answers)
1) taxes on negative externalities
2) subsidies on positive externalities
3)Regulation on negative externalities (e.g: tax duty)
4)increase education- teach people more about the external effects on merit or demerit goods
88
what is indirect tax?
name the two types of indirect taxes
Tax on expenditures.
Ad valorem tax E.g: VAT
Specific tax (amount of tax imposed depends on the volume of goods purchased) E.g: excise duties
89
What is a subisidy?
grant given by the government to encourage the production or consumption of a particular good/service.
90
What is government intervention?
government intervenes to fix market failure
91
what is market failure?
misallocation of resources.
92
What are the characteristics of a Public good?
Non-excludable (people cannot be stopped from consuming the good even if they haven't paid for it) and Non-rivalrous (more than one person can benefit from it)
93
What is the free rider problem?
When a person or organisation receives benefits that others have paid for without making any cotribution.
94
What are the characteristics of a private good?
Excludable (only those who have paid for the good can consume the good) and Rivalrous ( quantity of good diminishes as more people consume or attempt to benefit from the private good).
95
what are the characteristics of a quasi good?
give example
Goods that inhibit many characteristics of a public good but not all characteristics. They are semi non-rival (quantity and/ or quality can diminish from 1st to the 100th person consuming the good) and semi non- excludable (restriction can be place to exclude people from benefit good without paying) E.g: parks
96
What is a example of a public good and how does it link to the characteristics of non- excludable and non-rivalrous?
street lamps—> non-excludable: once the street lamp has been paid for, everyone else can take advantage of it regardless of not paying. non-rivalrous: when one person consumes, the street lamp continues to stay on and benefit everyone in the same way.
97
What is a example of a quasi public good and how does it link to the characteristics?
roads—> semi non-excludable: a certain roads have tolls that you pay for online. Only go on the road if you pay. semi non-rival: less consumer satisfaction during peak conjugation.
98
what is minimum price?
draw the diagram
set above the equilibrium implying that current price is too low. Usually set on overconsumption/over production demerit goods.
99
What is maximum price?
set below the equilibrium implying that current price is too high. Usually set on underconsumption/underproduction merit goods.
100
what is the impact of indirect taxes on consumers
increase price of good, fall in quantity demand
101
what is habitual behaviour?
routine of behaviours by individual that reduces the amount of time it takes to do something
