Theme 1 Flashcards
what is a PPF?
a PPF shows all of the possible combinations of two goods that a firm can produce using all of the factors of production efficiently
what does resource depletion mean?
when there are fewer resources because resources are destroyed
what is potential growth?
when maximum possible output increases because of increased resources
what is occupational mobility?
how well factors can switch from one job another
what are the 4 functions of money?
medium of exchange- can be spent on things you actually want
unit of account- use to value goods
store of value- can store and spend later
method of deferred payment- can postpone payment
what is spare capacity?
when firms can increase output without a rise in cost because they have spare factors of production
what is a command economy?
govt controls the allocation of resources
price mechanism has no role
what is the free market?
all resources are allocated by markets using prices
govt has very little role
resources are privately owned?
what are the advantages of a command economy?
can change the direction of the economy in a short period of time
little to no uncertainty
cheap public services offered to everyone
govt not focused on making largest profit
govt will provide goods that arent provided for by the private sector
what are the disadvantages of a command economy?
citizens lose motivation
requires a large bureaucracy which can be slow to react
limited freedom
less responsive to changes in consumer preferences
less incentive for companies to produce things efficiently as there is no profit motive
what is a mixed economy?
some resources are allocated through the market through prices
other resources are allocated by the government
what economy did adam smith favour and why?
free market
-he believed in the invisible hand
this is when prices adjust in a free market as they are responsive to changes in supply + demand
which economy did Karl Marx favour and why?
command economy
he felt that free markets led to the exploitation of labour as employees arent paid enough and capitalists earn excessive amounts
what are the advantages of a free market economy?
- increased choice due to profit motive
- inc quality, dec prices
- firms seek to be efficient
market is responsive to changes in consumer demand
what are the disadvantages of a free market economy?
firms may seeks to cut corners by underpaying staff
high levels of inequality
formation of monopolies
certain goods may not be produced by the market or priced at high levels where some individuals cant afford them
what is the role for state in a mixed economy?
redistribution from rich to the poor
provision of goods that the free market wont
defence and international security
provide public services
ensure customers are treated fairly by firms
what are the factors affecting supply?
productivity of labour
indirect tax
no of firms in the market
technology
subsidies
weather
what are the factors affecting demand?
population
consumer income
price of compliments and substitutes
advertising
seasonal influences
consumer preferences
what are the main functions of the price mechanism?
allocate- allocating scarce resources among competing uses
signalling- prices adjust to demonstrate where resources are required
rationing- prices serve to ration scarce resources when theres excess demand
incentives- when the price of a product rises, quantity supplier increases
what is consumer surplus?
the difference between the price the consumer is wiling and able to pay and the price they actually pay
what is producer surplus?
the difference between the price the producer is willing to charge and the price they actually charge
draw a specific tax diagram and show the area on the graph which shows how much tax is being paid, the value of the tax and what the producer gets
what are heuristics?
the human tendency to make decisions with a nearby reference point
why does herd behaviour cause irrational behaviour?
social norms in place?
the social pressure to conform
individuals want to be accepted
what are marginal benefits/costs?
the benefit/cost that occurs with an additional unit of output
what is a market failure?
occurs when the market fails to allocate resources in the best interest of society
where does the free market produce on a negative externality diagram?
free market overproduces the good and doesnt produce at the socially optimal level which leads to a dead weight loss to society
what is a free good?
good with no opportunity cost
why are public goods underprovided by free market?
because they’re non excludable
what are index numbers used for?
used for comparison of large numbers between countries
what are the methods of govt intervention?
taxes
subsidies
max and min prices
regulations
provision of public goods + info
what are the evaluations of using a tax to combat a negative externality?
how likely is govt going to be able to identify the correct size of tax to impose- could be under/overestimated
elasticity of demand may affect effectiveness of tax
tax may be regressive
could tax be inflationary
what are the evaluations for using a subsidy?
correct size of subsidy is important
subsidies may conflict with other government policies
subsidies are politically difficult to move
potential for subsidies not being spent on the intended good/service
what are the advantages of govt provision of public goods?
equality- all have access
products wouldnt be provided otherwise
what are the disadvantages of govt provision of public goods?
relies on tax revenue which may lead to the good being over provided
expensive + high opportunity cost
admin costs
no incentive to cut costs
corruption
what are the advantages of govt provision of info?
helps consumers act rationally
its best if the govt uses this alongside their policies
helpd deal with under consumption of merit goods and over consumption of demerit goods
what are the disadvantages of govt provision of info?
expensive for govt to do + high opportunity cost
govt may not have perfect info
consumers may not listen- irrational behaviour
what are merit goods?
Merit goods are goods for which the social benefits of consumption outweigh private benefits
what are demerit goods?
a good where the social cost of consumption outweighs the private cost
what are the advantages of regulations?
easy to understand
can ensure consideration of externalities
prevent exploitation of consumers + keep them informed
overcome market failure + maximise social welfare
what are the disadvantages of regulations?
controls may be too lax or too tight
opportunity cost, expensive to monitor
difficult to find the right level of regulation to ensure efficiency
firms pass on costs to the consumer
ignores cost of firms involved as they may all be different
what are the 4 reasons for govt failure?
law of unintended consequences
excessive admin costs
price signal distortion
imperfect info
what are the evaluations for using a maximum price?
may lead to shortages of goods that consumers previously purchased (excess demand)
they will only have an impact if set below free market equilibrium
what are the benefits of using a maximum price?
useful surrogate for competition
holds consumer prices down
incentives for businesses to cut costs to maintain profits
what are the downsides of using a maximum price?
reduce profits + less money for capital investment
may dissuade new entrants
firms may raise prices in other ways
may lead to excess demand
what are the evaluations for minimum prices?
if theres habitual demand - no effect
effectiveness depends on how elastic demand is
may lead to excess supply
what does it mean if cross price elasticity value is 0
goods are unrelated
what does it mean if XED is positive
the goods are substitutes
what are the 7 types of market failure
externalities, public goods, imperfect information, merit/ demerit goods, monopolies, immobility of factors of production, unequal distribution of income/ wealth
what is elasticity of supply always
positive
how would you identify the DWL on externality diagrams
DWL is the triangle that points towards the point where MSC=MSB
why do exernalities cause market failure
this is because a products price equilibrium isnt accurately reflecting the true costs and benefits of the product or service
