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Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

Define Ad valorem tax

A

an indirect tax imposed on a good where the value of the tax is dependent on the value of the good e.g VAT

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2
Q

What is meant by asymmetric information

A

when one party in an economic transaction has more information than the other.

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3
Q

What are capital goods

A

goods that make consumer goods

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4
Q

What is meant by ceteris paribus

A

all other things remain constant

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5
Q

What is a command economy

A

An economy in which all factors of production are allocated by the state, so they decide what to produce, how to produce it and who to produce it for

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6
Q

What are complementary goods

A

Good that are brought together e.g tennis ball and tennis racket

Have a negative XED

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7
Q

What is consumer surplus

A

The price difference between what consumers are willing to pay and what they actually pay

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8
Q

What is Cross Elasticity of Demand (XED)

A

Cross elasticity of demand measures the responsiveness in quantity demanded of good A in response to changes in price of good B

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9
Q

What is the formula for XED

A

XED = %change in QD of good A / %change in price of good B

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10
Q

Define Demand

A

The quantity of goods that consumers are willing and able to buy at a given price at a given moment in time

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11
Q

Define The Law of Diminishing Marginal Utility

A

The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction or utility they derive from the product decreases every additional unit they consume.

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12
Q

What is the Division of Labour

A

When the production process is divided into smaller separate tasks in order for workers to specialise in their field and work with much more efficiency

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13
Q

What is the Economic problem

A

The problem of scarcity; there are unlimited wants but limited resources

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14
Q

Define Efficiency

A

the extent to which scarce economic resources are used successfully to satisfy wants

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15
Q

Define Externalities

A

Cost/benefits to third parties from an economic transaction outside the price mechanism

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16
Q

What is a free market economy?

A

An economy without government intervention so consumers and producers allocate resources through supply and demand

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17
Q

What is the free rider problem

A

The free rider problem is an economic concept of a market failure that occurs when individuals benefit from public goods without paying for it. Therefore public goods will go underprovided by the private sector as firms are unable to make a profit.

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18
Q

What is government failure

A

When government intervention leads to a net welfare loss in society

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19
Q

What is meant by habitual behaviour?

A

when consumers are in the habit of
making certain decisions

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20
Q

What is Income elasticity of demand (YED)

A

Income elasticity of demand (YED) measures the responsiveness of demand to a change in income

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21
Q

What is the formula for Income elasticity of demand (YED)

A

%change in QD / %change in income

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22
Q

What are inferior goods?

A

Those which people demand less of if their income increases e.g. cheap clothing and/or supermarket branded foods

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23
Q

What are information gaps?

A

When an economic agent lacks the information needed to make a rational, informed decision

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24
Q

What is information provision?

A

When the government intervenes to provide information to correct market failure

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25
Q

What are normal goods

A

Those which people demand more of if their income increases e.g. designer clothes & expensive jewellery

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26
Q

What is market failure

A

When the price mechanism leads to a misallocation of resources

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27
Q

What is Price elasticity of supply (PES)

A

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in a goods price

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28
Q

What is the Price mechanism

A

The price mechanism is the interactions of consumers and producers to determine the allocation of resources.

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29
Q

What are private costs/benefits

A

costs/benefits to the individual participating in the economic activity

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30
Q

What are public goods

A

Goods that are non-excludable and non-rivalry

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31
Q

What is meant by producer surplus?

A

The difference between the price a producer would be willing to accept for their products versus the market price they actually receive

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32
Q

What is the social optimum position

A

Where social costs equals social benefits; the amount which should
be produced/consumed in order to maximise social welfare

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33
Q

What is the social optimum position

A

the amount which should
be produced/consumed in order to maximise social welfare

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34
Q

What is Specific tax

A

A fixed amount of tax placed on each unit sold of a particular good.

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35
Q

Define sate provision of
goods

A

Through taxation, the government provides public goods or merit goods which are underprovided in the free market

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36
Q

What is a Subsidy

A

Payments by the government to firms so that firms can reduce their prices and increase output.

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37
Q

What is supply?

A

The quantity of goods/services a supplier is willing and able to sell at a given price at a given moment in time

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38
Q

What is symmetric information

A

When both parties of an economic transaction have access to the same information.

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39
Q

What are Trade pollution permits

A

Licenses which allow businesses to pollute up to a certain amount.
Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount
they pollute.

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40
Q

What is a unitary price elastic good

A

When PED/PES=1
a change in price leads to a change in output by the same proportion

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41
Q

What is a positive statement

A

A statement that can be tested and verified, not based on a value judgement

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42
Q

What is a normative statement

A

A subjective statement based on a value judgement

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43
Q

What are opportunity costs?

A

the benefits lost from the next best alternative forgone

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44
Q

What is a PPF

A

A production possibility frontier is a graphical representation of the maximum output combination of two goods using all resources to their full potential

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45
Q

What concepts does the PPF capture?

A

Scarcity
Choice
Opportunity costs

46
Q

Why are points beyond the PPF curve impossible?

A

They exceed the current resources available making them unobtainable

47
Q

What does it mean when a product is price elastic?

A

When a product is elastic, a change in price quickly results in a change in the quantity demanded

48
Q

What does it mean when a product is price inelastic?

A

When a good is inelastic, there is little to no change in the quantity demanded with a change in the good’s price

49
Q

What is a mixed economy?

A

Both the free market mechanism and the government allocate resources

50
Q

What does it mean when the value after the minus sign is greater than 1 in the PED equation

A

The demand for this good is ELASTIC as the percentage change in QD is greater than percentage change in price

51
Q

What does it mean when the value after the minus sign is smaller than 1 in the PED equation

A

Demand for the good is INELASTIC as the percentage change in QD is smaller than the percentage change in price

52
Q

What does it mean when the value in the PED equation is equal to - 1

A

Demand for this good is UNITARY ELASTIC as the percentage change in QD is the same size as the percentage change in price

53
Q

What does it mean when the value in the PED equation is equal to 0

A

Demand for this good is PERFECTLY INELASTIC
Consumers are unresponsive to changes in price

54
Q

what are the disadvantages of the specialisation and division of labour

A
  • since workers are doing the same thing every day they may become bored and demotivated
  • decreases productivity and quality of work
  • increased absenteeism (workers intentionally skipping work
  • workers may quit to find something more interesting to do
  • results in production breakdown as everyone is specialised in their own tasks therefore if a worker quits no one else will be able to do that workers job
55
Q

state the functions of money

A
  1. Medium of exchange
  2. Unit of account
  3. Store of value
  4. Deferred payment
56
Q

When demand is elastic and price increases, what happens to total revenue?

A

Quantity demanded will decrease by a larger percentage, so total revenue will fall

57
Q

When demand is inelastic and price increases, what happens to total revenue?

A

Quantity demanded will decrease by a smaller percentage therefore total revenue will increase

58
Q

When demand is unitary elastic and price increases, what happens to total revenue?

A

total revenue doesn’t change

59
Q

What does a negative YED value represent?

A

the good is an inferior good

60
Q

What does a positive YED value represent

A

The good is a normal good

61
Q

Normal goods between 0 and 1 are….

A

Income inelastic goods - usually necessities i.e. bread and milk

62
Q

Normal goods between 1 and infinity are….

A

Income elastic goods - usually luxuries i.e. holidays

63
Q

what does a negative XED value represent

A

the two goods are complementary

64
Q

what does a positive XED value represent

A

The two goods are substitute goods

65
Q

unrelated goods have an XED value of…..?

A

Zero

66
Q

What is minimum price

A

A minimum price (also known as price floor) is the smallest price you can legally sell a good for, set above the market equilibrium.

67
Q

What type of market was Adam Smith an advocate for?

A

The free market economy

68
Q

Friedrich Hayek was in favour of which market and why?

A

Friedrich Hayek supported free market economies as he believed the price mechanism acted as a communication network for consumers and producers

69
Q

What type of market was Karl Marx an advocate for and why?

A

Karl Marx was in favour of command economies because he was strongly against capitalism and believed free market economy was a breeding ground for capitalism

70
Q

What is the law of unintended consequences?

A

The law of unintended consequences is the idea that government intervention from market failure always has negative effects that are unanticipated and unintended

71
Q

How can the government step in to address market failure?

A
  • through taxing demerit goods and subsidising merit goods
  • providing pollution permits to reduce global warming
  • enforcing minimum and maximum prices to increase the price of demerit goods and decrease the price of beneficial goods
  • providing information to consumers to reduce the information gaps consumers have about their decisions
72
Q

What are the four factors that cause market failure?

A
  1. positive externalities
  2. negative externalities
  3. information gaps
  4. public goods
73
Q

What is incomplete information?

A

Incomplete information is when an economic agent doesn’t have the full information about the benefits or costs of their decisions

74
Q

What are examples of public goods?

A
  • roads
  • fire brigade
  • police force
  • flood defences
  • parks
  • street lights
75
Q

what are the functions of the price mechanism?

A
  1. signalling
  2. incentivising
  3. rationing
76
Q

What are the three types of market failure?

A
  • externalities
  • public goods
  • information gaps
77
Q

What are the factors that affect supply

A
  • productivity
  • indirect taxation
  • number of suppliers
  • technology
  • subsidies
  • weather
  • cost of production
78
Q

What are the factors that affect demand

A
  • Advertisement
  • Income
  • Fashion/ trends
  • season
79
Q

What are the factors that affect PED

A
  • necessity
  • addiction and habit
  • availability of substitutes
  • brand loyalty
  • proportion of income
  • time period
80
Q

Define maximum price

A

A maximum price also known as price ceiling is a limit or cap on a price set by the government. It is the highest price that a producer can sell their goods for.

81
Q

Define minimum price

A

A minimum price also known as price floor is the lowest price that can legally be sold for, set above the equilibrium price

82
Q

Define quasi public goods

A

A quasi-public good, also known as a semi-public good, is a type of good or service that exhibits some but not all of the characteristics of a pure public good.

83
Q

What are some causes for a shifts in the demand curve?

A
  • income
  • price of substitutes
  • price of complements
  • population size
  • direct taxation
84
Q

draw a positive production externality diagram.

A

check on google

85
Q

draw a positive consumption externality diagram.

A

check on google

86
Q

draw a negative production externality diagram.

A

check on google

87
Q

What is government intervention

A

action taken by the government to overcome market failure.

88
Q

Draw a consumer surplus diagram

A

check on google.

89
Q

Draw a producer surplus diagram

A

check on google.

90
Q

Draw a change in consumer surplus diagram

A

check on google.

91
Q

Draw a change in producer surplus diagram

A

check on google.

92
Q

Draw a specific tax diagram

A

check on google.

93
Q

Draw an ad valorem tax diagram

A

check on google.

94
Q

Draw a subsidy diagram

A

check on google.

95
Q

What is meant by producer surplus?

A

Producer surplus is the difference between the price at which a producer would be willing to sell their good or service for and the market price they actually receive.

96
Q

What is meant by consumer surplus?

A

Consumer surplus is the difference between what a consumer is willing to pay and what they actually paid for a product.

97
Q

Define elasticity

A

elasticity measures the responsiveness of one economic variable to a change in another

98
Q

What is the difference between a positive and normative statement?

A

A positive statement is one that can be tested and verified and is not based on a value judgment whereas a normative statement is a subjective statement based on a value judgement.

99
Q

Define Enterprise

A

The decision making and risk taking when combining the other factors of production to produce goods

100
Q

Define Labour

A

The physical human work put in to transform resources into goods

101
Q

Define Land

A

The primary resources involved in the production process

102
Q

Define Capital

A

The assets and machinery needed in the production process to transform resources into goods

103
Q

State the 3 institutions

A

public sector
private sector
voluntary sector

104
Q

Define the public sector

A

Organisations using taxation to provide services such as education and health

105
Q

Define the public sector

A

Organisations primarily motivated to make financial profit that are not run by the gov

106
Q

Define the voluntary sector

A

Organisations where charitable work is conducted with less intention of profit

107
Q

Give some examples of non profit organisations

A

Unicef or The Salvation Army

108
Q

Give an example of a command economy

A

North Korea

109
Q

Give the definition of a firm

A

Economic agents whose role is to transform factors of production into goods and services to sell

110
Q

Give the definition of a government

A

An economic agent which provides rules for how consumers and producers should interact.

Economics (9 decks)

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