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Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

What is meant by rational decision making?

A

Making choices to maximise utility from buying and consuming goods and services

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2
Q

What are the assumptions of rational decision making?

A

Consumers aim to maximise utility
Firms aim to maximise profits

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3
Q

Define the term demand

A

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

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4
Q

Explain the demand curve

A

Shows the relationship between the price of an item and quantity demanded over a period

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5
Q

Explain the difference between a movement along the demand curve and a shift in the demand curve

A

Movement along the demand curve is caused by a change in price
A shift in the demand curve is caused by a change in one or more factors other than price

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6
Q

Define price elasticity of demand

A

Measures the responsiveness of quantity demanded for a product after a change in price

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7
Q

The formula to calculate PED is

A

% change in QD / % change in P

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8
Q

What does it mean if PED = 0

A

Demand is perfectly inelastic and demand does not change when the price changes

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9
Q

What does it mean if PED is between 0 and -1

A

Demand is price inelastic

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10
Q

What does it mean if PED = -1

A

Demand is unit price elastic

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11
Q

What does it mean if PED > 1

A

Demand is perfectly elastic
Quantity demanded will fall to 0 if price rises

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12
Q

3 factors that are likely to make products have price inelastic demand

A

Lack of substitutes or competition
Addict goods
A small percentage of income

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13
Q

3 factors that are likely to make products have price elastic demand

A

Abundance of available substitutes
Luxury good
Large proportion of income

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14
Q

Define income elasticity of demand

A

Measures the relationship between a change in demand following a change in the real income of consumers

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15
Q

The formula to calculate YED is

A

% change in demand / % change in income

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16
Q

What does it mean if YED < 0

A

Inferior good
Demand falls as income rises

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17
Q

What does it mean if YED is between 0 and 1

A

Normal necessity
Rise in demand is less than proportionate to income
Demand is income inelastic

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18
Q

What does it mean if YED > 1

A

Luxury goods and services
Demand rises more than proportionate to a change in income
Demand is income elastic

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19
Q

3 products likely to be inferior

A

Own label discounters
Public transport
Economy class travel

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20
Q

3 products likely to be normal

A

Electronics
Clothing
High end restaurants

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21
Q

Define Cross elasticity of demand

A

Measures the responsiveness of demand for good x following a change in the price of good y

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22
Q

The formula to calculate XED is

A

% change in demand for good x / % change in the price of good y

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23
Q

What does it mean if XED < 0

A

Complement good
An increase in the price for good x will lead to a decrease in demand for good y

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24
Q

What does it mean if XED > 0

A

Substitute good
An increase in the price of good x will lead to a rise in demand for its substitute

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25
Q

Define the term supply

A

The quantity of a good or service producers are willing to supply at a given price

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26
Q

Define the supply curve

A

Shows a relationship between market price and how much a firm is willing and able to sell

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27
Q

Explain the difference between a movement along the supply curve and a shift in the supply curve

A

A movement is due to a change in price
A shift is due to any other factor excluding price

28
Q

4 factors that would cause a shift in the supply curve

A

Changes in production costs
Changes in technology
Government taxes or subsidies
Changes in climate (agricultural industries)

29
Q

price inelastic supply curve and a price elastic supply curve

A

Inelastic - Supply curve is flatter
Elastic - Supply curve is steeper

30
Q

Define price elasticity of supply

A

Measures the relationship between change in quantity supplied and a change in price

31
Q

Formula to calculate PES

A

% change in QS of X / % change in price of X

32
Q

What does it mean if PES > 1

A

Supply is price elastic

33
Q

What does it mean if PES < 1

A

Supply is price inelastic

34
Q

What does it mean if PES = 0

A

Supply is perfectly inelastic

35
Q

3 factors that are likely to make products have price inelastic supply

A

Lack of spare capacity
Low level of stock of raw materials and finished products
Short term

36
Q

3 factors that are likely to make products have price elastic supply

A

Spare capacity
Plentiful level of stock of raw materials and finished products
Long term

37
Q

How does excess demand occur

A

When Quantity demanded exceeds available supply

38
Q

How does excess supply occur

A

When supply is greater than demand and there are unsold goods in the market

39
Q

Define price mechanism

A

The means by which decisions of consumers and businesses interact to determine the allocation of resources

40
Q

Explain the price mechanism function of Rationing

A

Prices ration scarce resources when demand outweighs supply
Leaving only those willing and able to pay to buy

41
Q

Explain the price mechanism function of signalling

A

Prices adjust to demonstrate where resources are required
They rise and fall to reflect scarcities and surpluses

42
Q

Explain the price mechanism function of incentives

A

Through choices consumers send information to producers about their changing nature of needs and wants

43
Q

Disadvantages of the use of the price mechanism to allocate resources

A

May be inequality in income and wealth
In a free market there is an under-provision of public goods which require government intervention

44
Q

Difference between positive and normative sta

A

Positive statements can be tested by referring to evidence
Normative are subjective statements

45
Q

Define externalities

A

spill-over effects from production or consumption for which no appropriate compensation is paid to third parties

46
Q

What is market failure

A

Occurs whenever a market leads to a misallocation of resources.

47
Q

Define Negative externalities

A

Costs to 3rd parties as a result of the actions of producers

48
Q

Define Positive externalities

A

Third parties benefit from the spill-over effects of production/consumption

49
Q

Give 3 examples of activities and the associated negative externality

A

Factories producing air pollution
Industrial waste
Noise pollution

50
Q

Give 2 examples of activities and the associated positive externality

A

Health services eg. NHS
Nursery provision eg. Early years education

51
Q

Define consumer surplus

A

The difference between the price consumers are willing and able to pay for a good/service and how much they actually pay

52
Q

Define producer surplus

A

The difference between the price producers are willing and able to supply a good/service for and the price they actually receive

53
Q

Define indirect tax

A

Tax imposed by government that increased supply costs for producers

54
Q

2 examples of indirect taxes

A

VAT
Plastic bag charge

55
Q

Distinguish between ad valorem and specific indirect tax

A

Ad valorem - % tax
Specific - set amount per unit

56
Q

Define public goods

A

Beneficial to society but are not provided by private firms
Non excludable and Non rivalrous

57
Q

Examples of public goods

A

Police services
Public service broadcasting
Parks

58
Q

Explain the concept of free-rider problem

A

Individuals benefitting from a public good without contributing to the cost of the good
Because public goods are non excludable

59
Q

Subsidies

A

This is an amount given by the government to encourage production or consumption of a good that generates positive externalities

60
Q

Non rivalrous

A

One persons consumption does not affect the consumption of someone else

61
Q

Non excludable

A

One person cannot be excluded from consuming the good

62
Q

Government failure

A

Government intervened in a market and does not achieve the objectives they set out to achieve

63
Q

Define regulation

A

Intervention to tackle market failure by direct action to command and control behaviour

64
Q

Define traceable pollution permit

A

Controlling pollution based on a market for permits that allow firms to pollute up to a limit

65
Q

Advantages of a tradable pollution permit

A

Firms will have an incentive not to pollute
Overall level of pollution can be controlled by government

66
Q

Disadvantages of a tradable pollution permit

A

Must be sanctions in place for firms who pollute beyond permitted level
Firms who can afford to buy permits can pollute as much as they want

Economics (9 decks)

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