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Economics > Revision Test Corrections > Flashcards

Revision Test Corrections Flashcards

1
Q

Define the term ‘economic growth’

A

-An increase in real GDP

OR

-An increase in an economy’s productive capacity/potential

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2
Q

Define the term ‘marginal propensity to consume’

A

The proportion of one additional unit of income that is spent

Change in total consumption over change in income

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3
Q

Explain some limitations of using the CPI to measure the rate of inflation

A

CPI is not fully representative as it is a figure for the ‘average’ household.

CPI does not include mortgage interest payments/it also excludes council tax, TV licences etc, which may be a considerable expense to some households

May suffer from sampling bias, either in Living Costs and Food (LCF) Survey, or price survey

Difficult to account for the changing quality of goods and services so inflation may be overestimated

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4
Q

Define the term ‘productivity’

A

Output per unit of input

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5
Q

True or false:

The Keynesian LRAS curve implies that an economy may have a negative output gap in the long run

A

True

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6
Q

True or false:

The Keynesian LRAS curve is perfectly inelastic at all levels of real national output.

A

False

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7
Q

True or false:

The classic LRAS curve implies that an economy may have spare capacity in the long run.

A

False

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8
Q

True or false:

The classical LRAS curve is perfectly elastic at all levels of real national output

A

False

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9
Q

Gini coefficient

A

Measures how equally income is distributed in a society, where 0 = perfectly equal, 1 = all income goes to 1 person.

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10
Q

Palma ratio

A

Ratio of the income of the richest 10% of households to the income of the poorest 40% of people

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11
Q

P90/10 ratio

A

Calculated as the ration of incomes of the person at the 90th percentile and the person at the 10th percentile

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12
Q

Asymmetric information

A

Where one party has more information than the other, leading to market failure

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13
Q

Ceteris Paribus

A

All other things remaining the same

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14
Q

Complementary goods

A

Negative XED; if good B becomes more expensive, demand for good A falls

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15
Q

Consumer surplus

A

The difference between the price the consumer is willing to pay and the price they actually pay

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16
Q

Cross elasticity of demand

A

The responsiveness of demand for one good (A) to a change in price of another good (B)

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17
Q

Diminishing marginal utility

A

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping.

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18
Q

Division of labour

A

When labour becomes specialised during the production process to do a specific task in cooperation with other workers

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19
Q

Enterprise

A

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.

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20
Q

Externalities

A

The cost or benefit a third party receives from an economic transaction outside of the market mechanism.

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21
Q

External cost/benefit

A

The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit

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22
Q

Free market

A

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

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23
Q

Command economy

A

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods

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24
Q

Free rider principle

A

People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit

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25
Q

Government failure

A

When govt intervention leads to a net welfare loss in society

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26
Q

Habitual behaviour

A

A cause of irrational behaviour; when consumers are in the habit of making certain decisions

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27
Q

Incidence of tax

A

The tax burden on the taxpayer

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28
Q

Income elasticity of demand (YED)

A

The responsiveness of demand to a change in income

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29
Q

Inferior goods

A

YED<0; goods which see a fall in demand as income increases

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30
Q

Information gap

A

When an economic agent lacks the information needed to make a rational, informed decision

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31
Q

Information provision

A

When the government intervenes to provide information to correct market failure

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32
Q

Luxury goods

A

YED>1; an increase in incomes causes an even bigger increase in demand

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33
Q

Market failure

A

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

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34
Q

Mixed economy

A

Both the free market mechanism and the government allocate resources

35
Q

Model

A

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words

36
Q

Negative externalities of production

A

Where the social costs of producing a good are greater than the private costs of producing the good

37
Q

Normal goods

A

YED>0; demand increases as income increases

38
Q

Normative statement

A

Subjective statements based on value judgements and opinions; cannot be proven or disproven

39
Q

Opportunity cost

A

The cost associated with the next best alternative

40
Q

Perfectly price elastic good

A

PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes

41
Q

Perfectly price inelastic good

A

PED/PES=0; quantity demanded/supplied does not change when price changes

42
Q

Examples of perfectly elastic products

A

Luxury products, such as jewels, gold and high-end cars.

43
Q

Positive externalities of consumption

A

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

44
Q

Positive statement

A

Objective statements which can be tested with factual evidence to be proven or disproven

45
Q

Price elasticity of demand (PED)

A

The responsiveness of demand to a change in price

46
Q

Price elasticity of supply (PES)

A

The responsiveness of supply to a change in price

47
Q

Private cost/benefit

A

The cost/benefit to the individual participating in the economic activity

48
Q

Producer surplus

A

The difference between the price the producer is willing to charge and the price they actually charge

49
Q

Rationality

A

Decision-making that leads to economic agents maximising their utility

50
Q

Regulation

A

Laws to address market failure and promote competition between firms

51
Q

Relatively price elastic good

A

When PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied

52
Q

Relatively price inelastic good

A

When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied

53
Q

Social cost/benefit

A

The cost/benefit to society as a whole due to the economic activity

54
Q

Social optimum position

A

Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare

55
Q

Social science

A

The study of societies and human behaviour

56
Q

Specialisation

A

The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others

57
Q

Specific tax

A

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

58
Q

State provision of goods

A

Through taxation, the government provides public goods or merit goods which are underprovided in the free market

59
Q

Subsidy

A

Government payments to a producer to lower their costs of production and encourage them to produce more

60
Q

Substitutes

A

Positive XED; if good B becomes more expensive, demand for good A rises

61
Q

Symmetric information

A

Where buyers and sellers both have access to the same information

62
Q

Trade pollution permits

A

Licenses which allow businesses to pollute up to a certain amount. The government controls the number of licenses and so can control the amount of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute

63
Q

Unitary price elastic good

A

When PED/PES=1; a change in price leads to a change in output by the same proportion

64
Q

Utility

A

The satisfaction derived from consuming a good

65
Q

Weakness at computation

A

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs

66
Q

Balance of payments

A

A financial document that measures a country’s economic activities with all other countries over a period of time.

67
Q

Current account

A

An account within the balance of payments that records the trade in goods and services over a period of time

68
Q

Financial account

A

An account within the balance of payments that records all the flows of capital into and out of a country

69
Q

3 elements recorded on the current account of the balance of payments

A

Trade of Goods and Services
Transfer of Investment Income
Foreign Aid Transfers

70
Q

Aim of austerity measures

A

Reduces state sector and encourages the private sector to expand. Lowers budget deficits.

71
Q

Advantages of specialisation and the division of labour in organising production

A

Labour productivity increases
Higher quality of goods and services (potentially)
More cost effective to develop specialist tools
Time is not wasted moving between jobs and getting out tools
Workers only need to be trained for one task (saving time and money)

72
Q

Disadvantages of specialisation and the division of labour in organising production

A

If someone is only doing one specific task, boring, lower quality of work. You can reduce this, maybe play music.
There is a reduction of craftsmanship and a much more standardised product because of mechanisation
If production in one process is delayed, every other task has to stop until that problem is solved.
The workforce do not have wide industrial training and could therefore suffer structural unemployment.

73
Q

Advantages of specialising in the production of goods and services to trade

A

The theory of comparative advantage: countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing.
Would lead to greater output.

74
Q

Disadvantages of specialising in the production of goods and services to trade

A

Countries may become over-dependent on one particular export and if this fails their economy may collapse. Manchester (ship building, structural unemployment) or developing countries (crops failing due to weather)

Other countries specialise in non-renewable resources and these could run out, which will result in a huge loss of income for that country.

There will be high interdependence, will cause problems if trade is prevented, through war, for example.

Some say that it will cause more competition to cut costs and wages therefore fall (however this isn’t necessarily true).

75
Q

Functions of money

A

A medium of exchange (is acceptable everywhere)

A measure of value (can compare value of two goods, and put value on labour)

A store of value (it can keep its value for a long time, while things like fruit as a form of exchange can expire)

A method for deferred payment (people can pay for things without having money in the present, loans)

76
Q

Advantages of free market economy

A

The system is automatic. Resources are moved out of production of a good when people stop wanting it or costs are too high.

Consumers have freedom of choice, called consumer sovereignty.

There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.

There is political freedom

Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency.

In general, freer market economies tend to have higher growth.

77
Q

What is allocative efficiency?

A

This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences.

78
Q

What is productive efficiency?

A

It’s concerned with producing goods and services with the optimal combination of inputs to produce the maximum output for the minimum cost.

On PPF

79
Q

Disadvantages of free market economy

A

High levels of inequality

Lack of merit goods and little control of demerit goods

Resources could be wasted on unproductive expenses such as advertising, switching the factors of production and providing competitive services.

If competition disappears then there may be monopolies, who charge high prices and offer low quality of service.

There is the problem of externalities

80
Q

Advantages of a command economy

A

The state provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality.

There is less wastage of resources as there is no need for competitive services nor advertising, which is very expensive.

Long term planning means that the industry doesn’t have to keep changing and shifting resources. This is important as some industries may take a number of years to get established and would fail if planning was short term.

Standardised products means that they are produced cost effectively.

The government are motivated by the well-being of the country, not profits.

81
Q

Disadvantages of a command economy

A

It is impossible for the state to make so many decisions correctly, which could lead to over/under supply and a waste of resources.

Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption.

As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living.

Consumers lose their freedom and it is often led by dictators.

82
Q

The government’s role in a mixed economy

A

Creating a framework of rules (prevent monopolies, protect customers through laws, ensuring property rights, ensuring safety standards)

Supplements and modifies the price system (public and merit goods)

Redistributes income (income tax, for example)

Stabilises the economy (the govt will attempt to manage the level of demand in the economy to prevent extremes, fiscal/monetary policy)

83
Q

Conditions affecting demand

A 
Population
Income
Related goods
Advertising
Taste/fashion
Expectations (future predictions, hard drives, chia?)
Seasons
Govt legislation (young children have to sit in car booster seats)
84
Q

Factors affecting PED

A 
Availability of substitutes
Time (more time, easier to find the substitutes)
Necessity
% of disposable income
Addictive

Economics (14 decks)

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