Microeconomics Year 1 Flashcards
What is the definition of demand
The quantity of goods/services consumers are willing and able to purchase over a given time period at any given price
What are the non-price factors affecting DEMAND
P - Population
A - Advertising
S - Substitutes
I - Interest Rates
F - Fashion Trends
I - Income
C - Complementary goods
What is the definition of supply
The amount of goods/services that sellers are willing and able to sell at any given price over a period of time
What are the non-price factors affecting SUPPLY
P - Productivity
I - Indirect Tax
N - No. of firms
T - Technology
S - Subsidies
W - Weather
C - Cost of production
What is the definition of PED and equation
PED measures the responsiveness of demand after a change in a product’s own price (always negative)
PED = %change in Quantity demanded / %change in Price
What are the factors affecting elasticity
S - Substitutes
P - Percentage of income
L - Luxury/ Necessity
A - Addictive ?
T - Time
What’s the difference between a product being price elastic and price inelastic
Elastic - demand changes by a large extent to small change in price (price sensitive)
In elastic - demand changes by a small extent to a small change in price (price insensitive)
Larger than 1 = elastic
Smaller than 1 = inelastic
What does a PED of 1 mean?
Unit price elastic
What a PED of 0 mean?
Perfectly priced inelastic
What does a PED of infinity mean?
Perfectly price elastic
What is the definition of consumer surplus
The difference between the highest price consumers were willing to pay & the amount they actually pay
What is the definition of producer surplus
The difference between the lowest price the firm would have been willing to supply at and the actual amount that is paid
Give 3 types of tax in UK
(Fiscal dividends = gov tax rev)
• income tax
• National insurance
• VAT
• corporation tax
• excise duties
What is an indirect tax
A tax on expenditure (spending)
What is an Ad Valorem tax
A tax that increased relative to the price / amount (e.g. VAT)
What is a specific/ unit tax
The amount of tax taken does not change no matter how much the amount is (e.g. excise duties)
Why does adding tax to goods cause a net welfare loss to society?
Because both consumer & producer surplus has been eroded (use diagram)
What is a regressive tax
A tax that takes more of income as income falls
What is a progressive tax
A tax that takes more income as income rises
What is a proportional tax
A tax that takes the same amount of income regardless of level of income
Give 4 considerations when setting taxes
• setting the “right” tax rate is impossible
• cost of collection
• PED
• unintended consequences
What is a subsidy
A grant given by the government to encourage the production or consumption of a particular good/service
Give 2 reasons why a subsidy is put into a market
• encourage consumption
• encourage production (costs of production semi covered incentive)
• avoid unemployment (cover labour costs)
• increase international competitiveness
What is the definition of a private good
A good that, if consumed by one person, cannot be consumed by another
What is the definition of a public good
A good that, even if consumed by one person, can still be consumed by other people
What is a non-rivalry characteristic
Consumption of the good by one individual does not reduce the amount available to others (public good)
What a non-excludability characteristic
It is impossible (or at least very costly) to exclude other form benefiting from their use (public good)
What is a free rider
Someone who receives the benefit but allows others to pay for it
This is why the gov tends to provide public goods - little incentive to pay for consumption so unprovided (issue is how many to provide?)
What is a merit good
A good that society believes everyone ought to have regardless of whether they are wanted by the individual (eg vaccines)
What is a demerit good
A good that society believes people ought NOT to have (eg tobacco, drugs)
[controlled by laws, taxes & education]
What happens to merit goods in a free market mechanism
Under-provided as there is no incentive for businesses as it’s free of charge
When is there market failure
When markets do not function effectively or equitably (when free market mechanism doesn’t lead to perfect allocation) (divergence between MSB and MSC)
What are the 3 sources of market failure
- Externalities
- Under provision of public goods
- Information gaps
What are the 2 ways markets fail
- Over/ underproduction of goods (partial market failure)
- Markets not existing, missing markets (complete market failure)
What is maximum price and when is it used
Line UNDER equilibrium
Used if gov believes price is too high
What is minimum price and when is it used
Line ABOVE equilibrium
Used to help producers increase incomes
What are the 3 methods of gov intervention
- Indirect Taxation
- Subsidies
- Information provision
What is a tradable pollution permit
A limit on the amount of co2 emissions companies can emit each year
(If price of co2 rises then companies will invest in reducing emissions - incentive)
What is an unintended consequence
When an intervention out in place by the government causes further issues in other markets as a response to the intervention
What is the equation for Average Costs
Total costs (TC) / output
What is the equation for Average Variable Costs
Total variable costs (TVC) / output
What is the equation for Average Fixed Costs
Total fixed costs (TFC) / output
What is the equation for Marginal cost and definition
The additional cost of producing one extra unit of output
Change in TC / change in total output
Where does the MC curve pass through the AC curve ?
Midpoint
What is the definition for Marginal returns of labour
The addition to total output brought about by adding one more worker to the labour force
What is the equation for Average returns of labour
Total output / total no. Of workers
What is the definition of Increasing returns to scale
An increase in the scale of all FofP causes a more than proportionate increase in output (a faster rate)
Constant = same proportion
Decrease = less than proportionate
What is the definition of Economies of Scale
When a company grows in size and increases their output and their long run average costs of production fall (increasing returns to scale)
What is a monopoly
A market with only one firm (eg national grid, Royal Mail)
What are the 6 conditions needed for a market to be consider at Perfect Competition
- 2 of the most important
- Large no. of buyers & sellers *
- Perfect market information
- Ability to buy or sell as much as desired at ruling market price
- Inability of a single buyer/seller to influence market price
- Homogeneous product *
- No barriers to entry/ exit in long run
What is a price maker (monopoly)
When a firm faces a downward sloping demand curve for its product, it posses the market power to set the price at which it sells the product
What is a quantity setter (monopoly)
When a firm faces a downward sloping demand curve for its product, it possesses the market power to set the quantity of the good it wishes to sell
What is a price taker (perfect competition)
A firm which is so small that is has to accept the ruling market clearing price
If firm raises price, no sales
If firm cuts it price, gains no advantage
What’s the difference between monopoly and perfect competition
• no competition - highly competitive
• 1 firm - many firms
• unique - homogenous
• high share concentration - low share concentration
What is the equation for average revenue (AR)
AR = Total revenue / Quantity sold
What is the equation and definition for Marginal Revenue (MR)
The amount received from selling an extra unit of output
MR = change in TR / change in Q
What happens to AR and MR in Perfect Competition
AR & MR = price
Because there is only a change in output not price
What is the AR always equal to?
Price
What happens to MR in a Monopoly (when price falls as output increases )
MR decreased at twice the rate that AR (price) decreases by
Because it’s taking double the changes in price
What does the pi symbol mean in economics
Profit
What are implicit costs
Opportunity costs
What are explicit costs
Actual fixed and variable costs of the business
What is the equation for economic profit
economic profit = accounting profit - implicit costs
What is the equation for accounting profit
TR - TC (just explicit)
When is profit called normal
When AR = AC - there is £0 economic profit
When is profit called supernormal/abnormal
When AR is greater than AC - more than £0 economic profit
When is profit called subnormal
When AR is less than AC - less than £0 economic profit
Where is profit maximisation on profit graphs
Where MC = MR
Where is Revenue maximisation on profit graph
Where MR = 0
Where is sales maximisation on profit graph
Where AC = AR
What is income
A flow of money going to factors of production (eg wages, salaries, interest from savings)
What is wealth
The current value of a stock of assets owned by someone or society as a whole (eg savings, shares, property)
What are positive statements
Objective & factual comments that can be tested & accepted/ rejected using evidence
What are normative statements
Subjective statements which carry value judgements (cannot be factually verified)
What is the economic problem
That resources are scarce and not allocated efficiently
What 3 things can expand a frontier
Changes in law
Land expansion
Increase in population
(Quality and/or quantity of FofP)
What is the definition of specialisation
When production concentrated in a particular product or process
