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Economics A level Edexcel A > Microeconomics year 1 > Flashcards

Microeconomics year 1 Flashcards

1
Q

what is the basic economic problem

A

how to allocate scarce resources when there are unlimited wants but finite needs

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2
Q

another word for resources

A

factors of production

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3
Q

what are the four factors of production

A
  • land - areas where goods can be produced
  • labour - human resources which can produce goods and services
  • capital - man made aids to production like machinery, schools
  • enterprise - risk takers who are innovative in order to make profit
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4
Q

what choices are made in order to scarce resources

A

manufacturers choose:
- what to produce
- how to produce
- for whom to produce for

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5
Q

what is opportunity cost

A

the cost of the next best alternative forgone when a choice is made

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6
Q

what does a PPF tell you

A

the maximum possible production of all goods and services that can be produced with the level of the factors of production in the economy

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7
Q

labels on a macro ppf

A
  • Goods, services
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8
Q

what does the shape of ppf show

A

the law of increasing opportunity cost,as we move further along the curve, factors of production are more suitable towards one thing than they are towards another thing

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9
Q

what does a linear PPF show

A

a constant oppurtunity cost

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10
Q

what is demand

A

the quantity of a good/service consumers are willing and able to buy at a given price in a given time period

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11
Q

what is the law of demand and what does it mean

A

there is an inverse relationship between price and quantity demanded, meaning that as price increases, Qd decreases

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12
Q

what do we assume when looking at a demand curve

A

ceteris paribus - meaning all other factors remain unchanged
- meaning when we increase price, we MOVE along the curve

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13
Q

whats it called when we MOVE along the curve

A

a contraction of demand, as price increases

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14
Q

whats it called when we decrease price

A

there is an extension of demand

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15
Q

what explains the inverse relationship between price and demand

A

the income effect - as prices go up, income cant stretch as far, therefore we are less able to buy, maybe our income doesn’t allow us to purchase the quantity of goods and services we couldve before

substitution effect - as prices go up, other goods and services become more price competitive, so we switch consumption to buy those goods and services instead, which is why demand contracts

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16
Q

what do non price factors do to the demand curve

A

they SHIFT it

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17
Q

examples of non price factors which will shift demand to the right

A
  • population - higher population = higher demand for a particular good or service
  • good advertising
  • price of substitutes - eg if the price of pepsi goes up, more ppl are gonna be willing and able to buy coke
  • income(normal and inferior goods)
  • fashion/taste - if fashion moves towards a particular good/service, demand for it will be higher
  • interest rates - if consumers need to borrow before buying it, lower IR make it cheaper for consumers to borrow, increasing demand for these items
  • complements price - if the price of one of the complementary goods increase, the demand for both the goods shift left and vice versa
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18
Q

what is a substitute

A

a good that is a rival good to something else

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19
Q

what are normal goods

A

goods where, as incomes rise, demand for them will increase, eg fine dining and vice versa

20
Q

what are inferior goods

A

goods where, as incomes rise, demand for them decrease and vice versa, eg fast food, public transport

21
Q

what is a complementary good

A

a good which is often bought with another

22
Q

what is supply

A

the quantity of a good or service producers are willing and able to produce at a given price in a given time period

23
Q

what is the law of supply

A

there is a direct relationship between price and quantity supplied. as price increases, Q increases and vice versa, ceteris paribus

24
Q

explain the law of supply

A

private producers have a profit motive
- as price increases for a good/service, there is more profit to be made if they can produce and sell more, so there’s a stronger need incentive to produce more when prices go up

  • when quantity goes up, cost of production goes up. therefore suppliers want a higher price to cover the cop to allow them to maintain their profit margin
25
Q

non price factors that may shift supply

A

productivity (output per worker) - if workers become more productive, they produce more, this will reduce cost of production and shift supply to the right

indirect tax - increased tax like corporation tax may increase cost of production and shift supply left

number of firms - the more firms that enter the market, the more supply in a market, supply shifts left

technology - improvements in technology may reduce cop, eg robotics ai , increasing supply
subsidy - reduced cop and shifts supply right

  • weather - good weather shifts supply, for example if it’s sunny, more crop
  • cost of production - oil, transport, regulation
26
Q

how would cost of production impact supply

A

lower cost of production = high willingness to supply more at the same price
higher = less willing to supply at the same price when it’s more expensive to produce

27
Q

what is a subsidy

A

a money grant given by the government to producers to lower cost of production and to encourage an increase in output

28
Q

what is a free market

A

an economy where the market mechanism allocates resources so consumers and producers make decisions abt what is produced, how to produce and for whom

29
Q

what is equilibrium

A

Where demand is equal to supply - represents allocative efficiency, because the resources that firms are using to make goods and services, are perfectly following consumer demand

30
Q

What is disequilibrium?

A

Where is demand is not equal to supply

31
Q

adam smiths views

A
  1. Specialisation & Division of Labour
    - Smith argued that dividing production into specialized tasks increases efficiency, as workers can focus on specific activities they excel in. This specialization allows for greater skill development and faster production.
    - Higher productivity from specialization leads to economic growth and lower costs of goods, making products more accessible to a broader population.
  2. Free Market & Invisible Hand
    - Smith believed in the “invisible hand” of the free market, where individuals pursuing their self-interest inadvertently contribute to society’s economic well-being. He felt that competition and self-interest would naturally regulate markets.
    - Without government interference, resources are allocated efficiently, leading to innovation, competitive prices, and choices, thus benefiting consumers and fostering economic growth.
  3. Critique of Command Economies
    - Smith argued that command economies, where governments control resources and production, are inefficient, as central planners lack the information and flexibility to meet consumer needs effectively.
    - This misallocation leads to resource waste, scarcity of goods, and a lack of incentive for innovation, ultimately stalling economic progress and reducing individual freedom.
32
Q

what do prices do

A
  • allocate scarce resources efficiently
  • ration scarce resources by encouraging / discouraging consumption
  • signal excess demand or supply
  • incentivise producers to increase or decrease output to increase profit
33
Q

When will excess demand occur? and what’s the impacts

A

If prices are below equilibrium
- long queues of ppl desperate to buy a certain good or service, eg toilet paper during covid
- huge waiting lists, eg NHS
- competition between buyers
- naturally, prices will rise because of high demand
- new firms may be attracted by the increase in price and join the market, increases supply

34
Q

When will excess supply occur? and what’s the impacts

A
  • when the price level is higher than equilibrium
    • Warehouses and shelves would be over stocked, restaurants empty
    • prices fall
    • less need for resources in a market
    • incentivises firms to decrease their output, sell their stocks, shown by a contraction along the supply curve, firms may leave market
    • rationing of scarce resources eg by encouraging consumption
35
Q

what do price mechanisms do when there is excess demand

A
  • higher prices signal the fact that there has been excess demand for both consumers and producers. they also signal the need for more resources in the market
  • incentivise firms to increase their output to make more profit(shown by an expansion along the supply curve, firms could be using spare capacity etc)
  • higher prices ration scarce resources by discouraging consumption (shown by a contraction along the demand curve)
    • consumers bid up prices
  • contraction on demand curve and expansion on the supply curve achieves allocative efficiency and brings economy back to equilibrium
36
Q

what do price mechanisms do when there is excess supply

A
  • signals excess supply and need for less resources
  • incentivises firms to reduce output and do things like liquidate stocks to increase profit(shown by contraction along supply curve
  • ration scarce resources by encouraging consumption/ demand ( expansion alond demand curve)
  • move to q2, equilibrium
37
Q

what is consumer surplus

A

the difference between the price consumers are willing and able to pay and the price they actually pay. usually a triangle found BELOW DEMAND CURVE and ABOVE PRICE LINE

38
Q

What is producer surplus

A

the difference between the price producers are willing and able to supply a good/service for and the price they actually receive
- usually a triangle found ABOVE THE SUPPLY CURVE and BELOW THE PRICE LINE

39
Q

how to find society surplus

A

consumer surplus + producer surplus

40
Q

how to find surplus when there are shifts

A

take the original surplus away from the new one

41
Q

complement goods are

A

goods that are in joint demand, goods that are bought together. if the price of one of the goods go up, the demand for both the goods decrease

42
Q

substitutes are

A
  • goods that are in competitive demand, eg coke and pepsi. as the price of one substitute increases, demand for the other substitute shifts left
43
Q

what is derived demand

A

when demand for a good or service comes from the demand for something else
eg - cars and aluminium, labour and goods and services

44
Q

what is composite demand

A

the idea that two goods require the same input to make them. therefor, if there is an increase in the production of one good, there will be a decrease in the supply of another, because there is less of the input available to make the other

eg bread and livestock, cheese and butter (milk needed to make these)

45
Q
A
46
Q

karl marx views

A
  1. specialisation and division of labour
    - Marx argued that these alienate workers from their work and their own potential
    - workers perform repetitive and fragmented tasks under capitalism, limiting their skills and making their work feel monotonous and disconnected from the end product
    - this could lead to resentment and dissatisfaction and high employee turnover
  2. Marx viewed free markets as exploitative , profit over ppls wellbeing
    - in a free market, competition drives down wages and increase worker exploitation, as businesses aim to maximise profits
    - this relentless drive for profit caused class divisions, incomes inequality due to overproduction and underconsumption
  3. Marx advocated for a command economy
    - with centralised planning, the state could allocate resources based on societal needs rather than profit, promoting fairness and equity
    - Marx believed this would reduce inequality and alienation, ultimately leading to a classless society where workers have control over their labour and its outcomes
  4. Marx labour theory of value argues that value is derived from the labour invested in goods, not from market dynamics
    - under capitalism, capitalists exploit workers by paying them less than the value of their work, pocketing the surplus as profit
    - this “surplus values is inherently exploitative and unsustainable as it widens the gap between capitalists and workers, leading to economic instability
47
Q

john Maynard Keynes beliefs

A

Economics A level Edexcel A (39 decks)

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