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[OBSELETE] S - Econ > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

what is a PPF?

A

a PPF shows all of the possible combinations of two goods that a firm can produce using all of the factors of production efficiently

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2
Q

what does resource depletion mean?

A

when there are fewer resources because resources are destroyed

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3
Q

what is potential growth?

A

when maximum possible output increases because of increased resources

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4
Q

what is occupational mobility?

A

how well factors can switch from one job another

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5
Q

what are the 4 functions of money?

A

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

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6
Q

what is spare capacity?

A

when firms can increase output without a rise in cost because they have spare factors of production

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7
Q

what is a command economy?

A

govt controls the allocation of resources
price mechanism has no role

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8
Q

what is the free market?

A

all resources are allocated by markets using prices
govt has very little role
resources are privately owned?

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9
Q

what are the advantages of a command economy?

A

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

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10
Q

what are the disadvantages of a command economy?

A

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

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11
Q

what is a mixed economy?

A

some resources are allocated through the market through prices
other resources are allocated by the government

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12
Q

what economy did adam smith favour and why?

A

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

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13
Q

which economy did Karl Marx favour and why?

A

command economy
he felt that free markets led to the exploitation of labour as employees arent paid enough and capitalists earn excessive amounts

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14
Q

what are the advantages of a free market economy?

A
  • increased choice due to profit motive
  • inc quality, dec prices
  • firms seek to be efficient
    market is responsive to changes in consumer demand
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15
Q

what are the disadvantages of a free market economy?

A

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

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16
Q

what is the role for state in a mixed economy?

A

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

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17
Q

what are the factors affecting supply?

A

productivity of labour
indirect tax
no of firms in the market
technology
subsidies
weather

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18
Q

what are the factors affecting demand?

A

population
consumer income
price of compliments and substitutes
advertising
seasonal influences
consumer preferences

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19
Q

what are the main functions of the price mechanism?

A

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

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20
Q

what is consumer surplus?

A

the difference between the price the consumer is wiling and able to pay and the price they actually pay

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21
Q

what is producer surplus?

A

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

22
Q

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

A
23
Q

what are heuristics?

A

the human tendency to make decisions with a nearby reference point

24
Q

why does herd behaviour cause irrational behaviour?

A

social norms in place?

the social pressure to conform

individuals want to be accepted

25
Q

what are marginal benefits/costs?

A

the benefit/cost that occurs with an additional unit of output

26
Q

what is a market failure?

A

occurs when the market fails to allocate resources in the best interest of society

27
Q

where does the free market produce on a negative externality diagram?

A

free market overproduces the good and doesnt produce at the socially optimal level which leads to a dead weight loss to society

28
Q

what is a free good?

A

good with no opportunity cost

29
Q

why are public goods underprovided by free market?

A

because they’re non excludable

30
Q

what are index numbers used for?

A

used for comparison of large numbers between countries

31
Q

what are the methods of govt intervention?

A

taxes

subsidies

max and min prices

regulations

provision of public goods + info

32
Q

what are the evaluations of using a tax to combat a negative externality?

A

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

33
Q

what are the evaluations for using a subsidy?

A

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

34
Q

what are the advantages of govt provision of public goods?

A

equality- all have access

products wouldnt be provided otherwise

35
Q

what are the disadvantages of govt provision of public goods?

A

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

36
Q

what are the advantages of govt provision of info?

A

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

37
Q

what are the disadvantages of govt provision of info?

A

expensive for govt to do + high opportunity cost

govt may not have perfect info

consumers may not listen- irrational behaviour

38
Q

what are merit goods?

A

Merit goods are goods for which the social benefits of consumption outweigh private benefits

39
Q

what are demerit goods?

A

a good where the social cost of consumption outweighs the private cost

40
Q

what are the advantages of regulations?

A

easy to understand

can ensure consideration of externalities

prevent exploitation of consumers + keep them informed

overcome market failure + maximise social welfare

41
Q

what are the disadvantages of regulations?

A

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

42
Q

what are the 4 reasons for govt failure?

A

law of unintended consequences

excessive admin costs

price signal distortion

imperfect info

43
Q

what are the evaluations for using a maximum price?

A

may lead to shortages of goods that consumers previously purchased (excess demand)

they will only have an impact if set below free market equilibrium

44
Q

what are the benefits of using a maximum price?

A

useful surrogate for competition

holds consumer prices down

incentives for businesses to cut costs to maintain profits

45
Q

what are the downsides of using a maximum price?

A

reduce profits + less money for capital investment

may dissuade new entrants

firms may raise prices in other ways

may lead to excess demand

46
Q

what are the evaluations for minimum prices?

A

if theres habitual demand - no effect

effectiveness depends on how elastic demand is

may lead to excess supply

47
Q

what does it mean if cross price elasticity value is 0

A

goods are unrelated

48
Q

what does it mean if XED is positive

A

the goods are substitutes

49
Q

what are the 7 types of market failure

A

externalities, public goods, imperfect information, merit/ demerit goods, monopolies, immobility of factors of production, unequal distribution of income/ wealth

50
Q

what is elasticity of supply always

A

positive

51
Q

how would you identify the DWL on externality diagrams

A

DWL is the triangle that points towards the point where MSC=MSB

52
Q

why do exernalities cause market failure

A

this is because a products price equilibrium isnt accurately reflecting the true costs and benefits of the product or service

[OBSELETE] S - Econ (42 decks)

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