Randoms Flashcards
Substitutes
A substitute is a product or service that can be easily replaced with another by consumers.
In economics, products are often substitutes if the demand for one product increases when the price of the other goes up.
Substitutes provide choices and alternatives for consumers while creating competition and lower prices in the marketplace.
Diminishing marginal utility
Diminishing marginal utility is the decline of enjoyment from consuming or buying one additional good. For example, a consumer buys a bag of chocolate and after one or two pieces their utility rises, but after a few pieces, their utility will start to decline with each additional piece that’s consumed—and eventually, after enough pieces, will likely result in negative equity.
Value vs Volume
Value is linked to the benefit derived from consuming a good or service. I may pay £1 for a chocolate bar, but if I didn’t value the bar as greater or equal to £1 there would be no point in me buying it.
Volume is just simply the quantity.
Budget deficit
Spending more than earning
Producer Surplus
The difference between the price producers are willing to sell for and what they actually sell for
Elastic and Inelastic
Elastic = When price goes up people will refrain from buying the product or service
Inelastic = When price goes up people will continue to buy the product or service
Elasticity
How responsive something is to a change in a related factor
Consumer goods and Capital goods
Consumer goods are products used by consumers. Capital goods include items like buildings, machinery, and tools. Examples of consumer goods include food, appliances, clothing, and automobiles.
Factors that affect Elasticity of demand
- Availability ot substitutes
- How addictive a product is
- Necessity or luxury
- Proportion of incomes - higher income - more elastic
- Brand loyalty
- Peak and off peak
- Specificity
- Cost of switching
- Time available to switch to alternative
Consumer Surplus
The difference between the price consumers are willing to buy for and what they actually sell for
Real wage growth calculation
Nominal wage growth - Inflation rate = Real wage growth
Elasticity ranges
If PED is:
Between 0 and -1 = inelastic
Exactly -1 = unit elastic
Larger than 1 = elastic
Aggregate Demand
Sum of all expenditure in the economy over a period of time
Factors that affect PED, PES, PPF and Demand
PED
-Proportion of income
-Time period to respond
-Wether the good is a necessity
PES
-Complexity of production
-Laws and regulations
-Raw materials available
-Time period to respond
-Storage space available
-Development of new technology
PPF
-Increase in education spending
-Increase in population
-Development of new technology
Demand
-Price of complements
-Income levels
-Increase in unemployment
-Interest rates
-Increase in population
Causes of irrational behaviour
1) Consideration of the influence of other peoples behaviour
2) The importance of habitual behaviour
3) Consumer weakness at computation (mathmatecial thinking)
- People are bad at making calculations so often make incorrect decisions about complex products
Intertia
Inertia refers to consumer unwillingness to take the time to shop around for the best deal
Consumer incidence
How much of an indirect tax the consumer pays
Producer incidence
How much of an indirect tax the producer pays
Progressive taxes
The percentage rate of tax rises as income rises
Proportional taxes
The percentage rate of tax in constant compared to income
How do we define the short run and long run in economics
Capital is fixed = Short run
Short run - All factors of production are capital
Variable is fixed = Long run
Long run - All factors of production are variable
C E L L (factors of production)
Capital, enterprise, land, labour
What shifts SRAS
- Changes in cost of factors of production
- Exchange rates
- Labour - Wages
- Tax
Advantages of Tax
Advantages of Tax
• Reduces the consumption of demerit goods (goods which are harmful to the consumer)
• Increases government revenue
• Government revenue gained can be
spent on further correcting the
problem (revenue can be
hypothecated)
• Easy to understand and implement
• Can change the distribution of
income (
eg
taxing products which
are consumed by the rich)
Disadvantages of tax
The Arguments against Indirect Taxes
Most indirect taxes can have regressive effects on low- income consumers. If inelastic- consumer takes on most of the burden of the tax
The tax revenue may not be hypothecated back (used to correct the market failure).
Higher indirect taxes can cause inflation (I.e. suppliers decide to pass on a tax by raising prices)
The government revenue from indirect taxes can be uncertain particularly when there is a recession / downturn
If indirect taxes are set too high – this creates an incentive to avoid taxes through “boot-legging” – examples?
When demand is inelastic, indirect taxes have little effect on people’s spending behaviour (therefore an inefficient policy).
Loss of economic welfare because of higher prices and reduced output (shown by a loss of consumer and producer surplus)
Subsides
Payments made by the government to suppliers that reduces the costs of factors of production (Encourages to produce more / increase level of supply)
Subsidy effects
- To increase supply
- To lower price
- To protect employment in particular markets
- To increase revenue
- To increase demand
- To help stimulate long term economic development in a country
Negative of subsides
- Producers can become “Subsidy dependent”
- Subsides can distort resource allocation
- Subsides can lead to excess production
- Environmental risks from excessive production
- Government failure arising from political lobbying
- Subsides can be very expensive
- Risk of fraud when allocating subsidy payments
Market failure
Where the free market mechanism fails to allocate resources efficiently
Marginal costs
The additional costs of producing one more unit of a good or service
Marginal benefit
The extra benefit gained by producing / consuming one more unit of a good or service
Information failure
Refers to many instances surrounding the use of information in making economic decisions, and where this results in an inefficient allocation of resources.
Diminishing Marginal Returns
The more of a good that is produced the harder gets it is to produce it. This is because the producers use the best factprs of production first and will need to use less efficient factors of production as they make more.
Division of Labour
Division of labour is a system where by each worker concentratres on performing a few specific tasks in the production process
Unemployment
People who are not working but are actively seeking for a job
Unemployment rate
The percentage of the workforce that is registered as unemployed
How do we measure unemployment
Claimant count
Labour force survey
Negative externalities
The costs to a third party arising from production and consumption of goods and services for which no appropriate consumption is paid.
Price floor (Minimum Price Control)
Is a minimum legally allowable price for a good set by the government
Underproduction
When supply is too low
Overproduction
When supply is too high
Underconsumption
When there isnt enough demand
Positive externalities
Causing the social benefit of consumption to exceed the private benefit.
Firms may exploit their market power
Monopoly
Social benefit
Social benefits refer to the total benefit to a society from a good
