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Economics Term 1 2017 > The allocation of resources > Flashcards

The allocation of resources Flashcards

1
Q

How is what to produce decided in a market system?

A

What consumers want if found through the price mechanism.

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2
Q

How is how to produce decided in a market system?

A

The lowest cost methods of production are used in order to make the highest profit.

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3
Q

How is for whom to produce decided in a market system?

A

The consumers that are willing and able to buy it as a result of their income.

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4
Q

What are three advantages of the market system?

A
  1. Consumers have a lot of choice.
  2. Competition encourages new and better products to be developed.
  3. More efficient production methods result from competition.
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5
Q

What are two disadvantages of the market system?

A
  1. Certain goods and services may not be produced as profits cannot be made from them.
  2. The consumption of harmful goods may occur, eg. drugs.
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6
Q

What are the problems with planned economies?

A
  1. There are often shortages
  2. Goods are often of poor quality
  3. There is little range of goods and services
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7
Q

What five factors can cause a shift in demand?

A
  1. A change in income
  2. A change in price of complementary goods
  3. A change in price of substitute goods
  4. A change in consumer’s tastes and preferences
  5. A change in population
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8
Q

What is demand?

A

Demand is the amount of a good or service that a consumer is willing and able to purchase at a range of prices in a given time period.

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9
Q

What is supply?

A

Supply is the amount of a good or service that a producer is willing and able to produce and sell at a range of prices and in a given time period.

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10
Q

What five factors can cause a shift in supply?

A
  1. Cost of production
  2. A change in price of related goods
  3. A change in the level of technology
  4. A change in business expectations (eg. if a business fears an economic downturn they may move resources out of the production of more luxury goods)
  5. Global factors
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11
Q

What is the price elasticity of demand?

A

The responsiveness of quantity demanded of a good or service to a change in its price.

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12
Q

How is PED calculated?

A

% change in QD / % change in P

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13
Q

What does price inelastic mean?

A

When the % change in QD is less than the % change in P.

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14
Q

What does price elastic mean?

A

When the % change in QD is more than the % change in P.

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15
Q

What does a PED less than one mean?

A

That it is price inelastic.

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16
Q

What does a PED more than one mean?

A

That it is price inelastic.

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17
Q

What should a producer do if their product is price inelastic?

A

They should probably increase their price.

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18
Q

What should a producer do if their product is price elastic?

A

They should probably decrease their price.

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19
Q

What factors determine the PED?

A
  1. The number of substitutes
  2. The degree of necessity
  3. The proportion of income spent on a product
  4. The time period
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20
Q

How does the number of substitutes determine the PED?

A

When consumers can choose between many substitutes, they will likely switch to another product. Making it price elastic. When there are few substitutes demand will be price inelastic. (Note: toothpaste is inelastic but one brand of toothpaste is elastic).

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21
Q

How does the degree of necessity determine the PED?

A

Goods that consumers need tend to have inelastic demand. Goods that consumers want tend to have elastic demand.

22
Q

How does the proportion of income spent on a product determine the PED?

A

Relatively cheap goods that tend to take up only a little proportion of a consumers income tend to have inelastic demand. Goods that take up a large portion of a consumers income (ie. a car) tend to be elastic.

23
Q

How does the time period determine the PED?

A

I don’t know… Ask Palmer.

24
Q

What does a perfectly vertical graph represent?

A

Perfectly price inelastic, PED = 0.

25
Q

What does a perfectly horizontal graph represent?

A

Perfectly price elastic, PED = infinity.

26
Q

What is the price elasticity of supply?

A

PES is a measure of the responsiveness of the amount of a good or service supplied to a change in its price.

27
Q

What factors affect the PES?

A
  1. The period of time (it make take more time to get more, supply is price inelastic).
  2. The availability of resources (a firm may find it hard to get scarce resources so supply will be price inelastic).
28
Q

What are taxes?

A

Taxes are a compulsory payment to the government. It is used to finance government services.

29
Q

What is direct tax?

A

Where taxes placed on income and wealth.

30
Q

What is indirect tax?

A

Where taxes are placed on goods and services.

31
Q

What are subsidies?

A

Subsidies are payments to producers by the government to help reduce the producers costs of production.

32
Q

What are ad velarum taxes?

A

Taxes that are placed on the selling price of a good or service.

33
Q

What do fixed price mark up taxes do?

A

They increase the cost of production because they have to be paid by the producer or seller.

34
Q

Why does the government introduce subsidies?

A
  1. To encourage producers to produce more of what they are producing for consumers.
  2. To encourage the production of new and innovative goods and services which private sector firms might otherwise find too costly and risky to produce initially.
35
Q

What are some of the disadvantages of subsidies?

A
  1. They can distort competition

2. They can result in excess supply.

36
Q

What is the private benefit from production?

A

The profit made from selling output.

37
Q

What are the external costs/externalities of production?

A

These are the negative effects of business activities on others/third parties.

38
Q

What are the social costs of production?

A

This is the total cost to the whole society of business activity. it includes both private costs and external costs.

39
Q

What are private costs?

A

Private costs are the monetary costs of producing a product. Eg. wages, rent, the cost of raw materials, services like transport.

40
Q

What are external benefits?

A

External benefits are the positive effects of business activity on others/third parties.

41
Q

What are social benefits?

A

Social benefits are the total benefit to the whole society. It includes the private and external benefits.

42
Q

What is an economical use of resources?

A

Where social benefits are greater than social costs.

43
Q

What is an uneconomical use of resources?

A

Where social costs are greater than social benefits.

44
Q

What is a cost-benefit-analysis?

A

Where the social costs and social benefits are estimated to see if a project should go ahead.

45
Q

What is a market failure?

A

A market failure is a situation in which the allocation of goods and services is not efficient so that social costs are greater than social benefits. Also not enough may be being produced when there are external benefits.

46
Q

How can the market fail?

A
  1. When only goods that are profitable are produced.
  2. Resources will only be employed if it is profitable, this means that many people can become unemployed.
  3. Harmful goods may be produced and sold freely.
  4. Producers may ignore environmental impacts.
  5. Where monopolies dominate supply of products and charge high prices.
47
Q

How can the government prevent market failure?

A
  1. Taxation
  2. Subsidies
  3. Nationalism (some industries providing large external benefits may be taken over and run by the government).
  4. Laws and regulations (these can reduce the amount of external costs that a firm creates).
48
Q

What are the problems with some of the methods that a government may use to prevent market failure?

A

They can create conflicts of interest. For example, people with higher incomes may have to pay higher taxes without benefiting from the services provided. Eg. Public transport.

49
Q

What kind of external costs can consumers create?

A 
Consumers can do things like:
1. Smoke
2. Drink and drive, causing accidents
3. Play loud music at night
All of these may negatively affect other people/third parties.
50
Q

What kind of external benefits can consumers create?

A

By becoming better educated and staying healthy by being vaccinated, people are more productive. This means that more can be produced so everyone benefits.

51
Q

How is percentage change calculated?

A

By

52
Q

What does a PED of exactly 1 mean?

A

That demand is unitary and revenue will remain the same at every price.

Economics Term 1 2017 (7 decks)

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