Theme 1 Flashcards
Positive and Normative statements
Positive statements- Objective statements that can be tested
Normative statements- Value judgements that cant be proven to be true of false
Functions of Money
Medium of Exchange- Facilitates trade
Measure of Value- Measures the price
Store of Value- Best store
Method of Deferred Payment- Legal tender
Behavioural Economics
Herd Mentality- Following the crowd
Habitual Behaviour- Sticking with their current situation
Computational Weakness- Not willing or able to make comparisons
Demand- Factors which affect Demand (PASIFIC)
Population
Advertising
Substitutes
Income
Fashion and Taste
Interest Rates
Complements
Supply- Factors which affect Supply (PINTSWC)
Productivity
Indirect Taxes
Number of Firms
Technology
Subsidies
Weather
Costs of Production
Consumer and Producer Surplus
Consumer- How much buyers are willing to pay
Producer- How much firms are willing to supply and price
PeD (PLANTS)
Proportion of Income
Loyalty
Addictiveness
Necessities
Time
Substitutes
Change in Q/Change in P
Quantity of a good or service that consumers are willing to buy at a given price.
Perfectly inelastic demand PeD=0 (No change in demand from price)
Price inelastic demand PeD is between 0 and -1 (Small change in demand from price)
Unitary elasticity of demand PeD= -1 (Proportionate change in demand from price)
Price elastic demand PeD= -1 and -infinity (Proportionate change in demand from price)
Perfectly elastic demand PeD= Infinity (Infinite change in demand from price)
PeS (BRITS)
The responsiveness of supply to a change in price
Barriers to Entry
Resources
Inventory
Time
Spare Capacity
Change in S/Change in P
Perfectly inelastic supply PeS= 0 ( No change in supply from change in price)
Perfectly elastic supply PeS= Infinity (Infinite change in supply from a change in price)
Price inelastic supply PeS= 0 and 1 (Small change in supply from price)
Price elastic supply PeS= +1 (Larger change in supply from a change in price)
Unitary elastic of supply PeS= 1 (Proportionate change in supply from a change in price)
Market Failure
Public Goods- A good which possesses the characteristics of non-rivalry
Positive Externalities- Benefit for third-party due to economic transaction (Schools, NHS)
Negative Externalities- Cost that is suffered by a third party (Cigarettes, Alcohol)
Information Gap- When there is a lack of information or asymmetric information in a market (Pensions, Housing)
Negative Externalities
Private Costs- Costs incurred by the seller and buyer in the transaction
External Costs- Costs incurred by a third party
Social Costs-Total costs to society of the consumption/production of a good
Social Costs= Private + External
Positive Externalities
Private Benefit- Benefits gained by the buyer in the transaction
External Benefit- Benefits gained by a third party
Social Benefit- Total benefit to society of a good
Social Benefit= Private + External
Minimum/Maximum Price
A Minimum Price is set by government, below which is isn’t allowed to fall
A Maximum Price is a price set by government, above which the price isn’t allowed to rise
Indirect Taxes + Subsidies
Direct Taxes- A tax levied on the income or profits of the person who pays for it
Indirect Taxes- A tax levied on a good or service
Ad-valorem Tax- A tax whose amount is based on the value of the transaction
Specific Tax- A tax that is a fixed amount for each unit of a good or service sold
Subsidies- A payment by the government to suppliers that reduce their costs of production and encourages them to increase output
Government Intervention
State Provision- Public Goods are a missing market so the government provides the good or service
Advantage- Government can provide the exact level deemed optimal
Disadvantage- Government provision may be inefficient
Provision of Information
If a market fails due to a lack of information, the government can try to improve it by providing information
Advantage- Leads to an improvement in society’s habits
Disadvantage- Time lags
