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A Level Economics > Steedsy Theme 1 > Flashcards

Steedsy Theme 1 Flashcards

1
Q

What does factors of production mean

A

the inputs used to produce a good or service in order to produce income.

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2
Q

What are the 4 factors of production

A

Land
Labour
Capital
Enterprise

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3
Q

Opportunity cost

A

the value of the next best thing you give up whenever you make a decision

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4
Q

Economic Sustainability

A

practices that support long-term economic growth without negatively impacting social, environmental, and cultural aspects of the community.

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5
Q

What is the basic economic problem

A

How to best use the limited resources to satisfy Unlimited wants of people

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6
Q

What is economic growth

A

an increase in the amount of goods and services produced per head of the population over a period of time.

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7
Q

A market definition

A

where buyers and sellers can meet to facilitate the exchange or transaction of goods and services

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8
Q

Factor market definition

A

all of the resources that businesses use to purchase, rent, or hire what they need in order to produce goods or services

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9
Q

product market definition

A

the marketplace where final goods or services are sold to businesses and the public sector

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10
Q

Specialisation definition

A

the process wherein a company or individual decides to focus their labor on a specific type of production

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11
Q

Division of labour definition

A

the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons

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12
Q

Exchange definition

A

a marketplace where securities, commodities, derivatives and other financial instruments are traded.

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13
Q

What are the 4 economic agents and what are the decisions they make

A

Governemnt - make decisions to try and maximise social welfare
Consumers - makes decisions to maximise social welfare
Firms - makes decisions to try and maximise profits
Workers - makes decisions to maximise their pay

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14
Q

What is an economic agent

A

A person, company, or organization that has an influence on the economy by producing, buying, or selling

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15
Q

What is the law of diminishing marginal utility

A

As the amount consumed of a commodity increases, the utility (satisfaction) derided by the customer from the additional units decreases

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16
Q

Total utility

A

The total satisfaction from a given level of consumption

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17
Q

Marginal utility

A

The change in satisfaction from consuming an extra unit

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18
Q

Demand definition

A

The amount of product people are willing to buy after a given price

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19
Q

What is the relationship between demand and price

A

As price goes down, demand goes up

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20
Q

If price decreases, what happens to the demand

A

There is an expansion of demand (increases)

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21
Q

If price increases, what happens to the demand

A

There is a contraction of demand (decreases)

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22
Q

What factors cause a SHIFT in demand

A

Income
population changes
fashion
changes in price of substitute goods
advertising
change in price of complimentary goods

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23
Q

Why would an increase in income cause a shift in demand and what happens to the shape of the graph

A

People can buy more of the product when the price of the product hasn’t actually changed. So the graph will shift to the right as price hasn’t changed but quantity has increases

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24
Q

What will happen to the demand of the product if a substitute product decreases its price

A

It will decrease for the product but increase for the substitute good

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25
Q

What is a substitute good

A

Does the same job

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26
Q

What does the supply curve show

A

A graph that shows the direct relationship between quantity supplied and prices
As price goes up, they will try and sell more

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27
Q

What are the factors affecting supply

A
  • changes in cost of production
  • natural factors e.g. effect of weather on crops
  • government taxes and subsidies
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28
Q

Definition of subsidies

A

The government pays firms money to produce more (so the supply curve would shift right as more would be supplied)

29
Q

Definition of equilibrium

A

Where the demand and supply curve meet : demand = supply

30
Q

What will happen when the price is higher than the equilibrium price and why

A

There will be a surplus because firms will want to sell more - supply will increase but demand will fall

31
Q

What will happen when the price is lower than the equilibrium price

A

When price drops demand increases, but suppliers supply less because the profit margin is lower so supply decreases. Therefore there will be a shortage of the good because firms will want to supply less on the market.

32
Q

What is derived demand

A

Demand that comes from (is derived) from the demand for something else.
For example an increase in demand for oil is caused by an increase in demand for cars

33
Q

What would happen to demand if interest rates decreased and why

A

Demand would increase because obtaining credit is cheaper so more people take out loans to buy the product

34
Q

What is price elasticity of demand

A

The responsiveness of demand to changes in price

35
Q

What is the price elasticity of demand formula

A

Ped = %change in demand / %change in price

36
Q

In price elasticity of demand, what values would be determined as inelastic and what values would be determined as elastic

A

Elastic - -1 and below (e.g -1.7)
Inelastic - anything angling from -1 to 0

37
Q

What are the determinants of elasticity of demand?

A
  • Time period - the longer the time under consideration, the more elastic a good is likely to be
  • Number and closeness of substitutes - the greater, the number of substitutes, the more elastic
  • The proportion of income taken up by the product - the smaller, the proportion, the more inelastic. Therefore, a big price change for an expensive product will cause a greater shift in demand
  • luxury or necessity (holidays are a luxury, but food is a necessity).
  • Habit forming (for example an addictive drug)
38
Q

Price elasticity of supply equation

A

PES = %Change in quantity supplied / %change in price

39
Q

What does price elasticity of supply measure?

A

The responsiveness of supply to changes in price
As price increases, supply will want to increase, but it may take time

40
Q

What values in price elasticity of supply will cause it to be elastic or inelastic?

A

> 1 = elastic
<1 = inelastic

41
Q

What are the determinants of elasticity of supply?

A
  • The availability of scarce resources - if an economy is using the majority of it, scarce resources, businesses will not be able to increase production and supply will remain stagnant (inelastic)
  • Time - e.g because you have to build the buildings so the longer the time the more inelastic as they can’t react in short run but in long run it becomes more elastic as the buildings are built so more can be supplied
  • Stock levels - The higher the stock levels, the more elastic, as it’s easier to increase the supply when prices increase
42
Q

What are the likely reasons for the difference in price elasticities of demand for tobacco cigarettes and e-cigarettes? Cigarettes are more inelastic than E cigarettes

A

Tobacco cigarettes are addictive so a change in price won’t affect supply very much as people will keep buying them
There are also a lack of substitutes for tobacco cigarettes, so even if the price is too high, there will be no substitute good the customer can go to

43
Q

What is the income elasticity of demand equation?

A

YED = %change in quantity demanded / % change in income

44
Q

What is income elasticity of demand?

A

The responsiveness of demand of one good to changes in income

45
Q

What values would determine the product as a normal good a luxury good or an inferior good

A

A positive sign denotes a normal good
A positive sign of +1 or higher, there is an even better normal good. It’s called a luxury good
A negative sign denotes an inferior good

46
Q

What would a YED(income elasticity of demand) of -0.1 be determined as

A

An inferior good and inelastic

47
Q

What is cross elasticity of demand?

A

The responsiveness of demand of one good to changes in the price of a related good. This is either a substitute or a complimentary good

48
Q

How do you calculate cross elasticity of demand? And explain what it means if u get a high value

A

XED = %change in quantity demand of good A / %change in price of good B

The higher the value, the stronger the relationship. This means if price of a substitute good goes up, demand will increase for the good the higher the value it is. For example, Coke and Pepsi have a strong relationship so if the Coke price goes up you will buy Pepsi.

49
Q

What is the price mechanism

A

The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated by prices. Resources move towards where they are in shortest supply, relative to demand, and away from where they are least demanded

50
Q

What is the rationing function

A

Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of such a price rise is to discourage demand and conserve resources. The greater the scarcity, the higher the price and the more the resource is rationed as they know demand will fall.

51
Q

What is the signalling function

A

Higher prices send messages to consumers to reduce consumption or withdraw from the market completely and they give a signal to potential producers to enter the market. Vice versa

52
Q

What is the incentive function

A

Higher prices provide an incentive to producers to produce more, whereas for customers the incentive is to consume less. The incentive function of a price rise is associated with an extension of supply along the supply curve.

53
Q

Why aren’t we rational consumers

A
  • incomplete information
  • limited capacity to calculate all costs and benefits of a decision (computation)
  • influence by their social networks
54
Q

What is complete market failure

A

Occurs when the market simply doesn’t supply goods at all

55
Q

What is partial market failure

A

Occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price

56
Q

What is market failure

A

When the market fails to allocate resources effectively

57
Q

What are public goods

A

Public goods provide an example of market failure as a result of missing markets

58
Q

Characteristics of pure public goods

A

Non-excludable
Non-rival consumption
Non rejectable

59
Q

Definition of non-excludibility

A

The benefits derived from pure public goods cannot be confined solely to the person who paid for it

60
Q

Definition of non-rival consumption

A

Consumption by one consumer does not restrict consumption by other consumers

61
Q

Definition of non rejectable

A

The collective supply of a public good for all means that it cannot be rejected by people
For example a nuclear defence system

62
Q

What is the free rider problem

A

When people benefit from the good but do not pay for it

63
Q

Reasons against the government providing public goods

A

Not everyone benefits but everyone pay through taxes
Opportunity cost

64
Q

What is a quasi public good

A

A near public good such as beaches - they can be rejected and once it’s full you can’t use it

65
Q

what is a merit good

A

Goods and services that the government feels that people will under consume and which ought to be subsidised or provided free

66
Q

What is a demerit good

A

Goods which are thought to be ‘bad’ for you and leads to a negative externality

67
Q

What are principle agents

A

An arrangement in which one entity legally appoints another agent to act on its behalf
E.g appointing a lawyer

68
Q

What is asymmetric information

A

When one individual or party has much more information than another individual party, and uses that advantage to exploit the other party

For markets to work there needs to be symmetric information where they have a similar level of knowledge about the products

69
Q

What values would be determined as a substitute good or complimentary good in cross elasticity of demand

A

+ value is a substitute good
- value is a complimentary good

A Level Economics (6 decks)

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