Theme 1 Flashcards
What are the four economic agents?
Government, consumers, firms, employees
What are the three economic questions?
What to produce? How to produce? For whom to produce?
What’s total utility?
Total satisfaction from a given level of consumption
What do suppliers pass onto consumers from the government?
VAT
What happens when tax reduces supply?
Subsidies increase
What does the supply curve show?
how much of a product producers will supply onto the market at each price
What does change in price do on a supply curve?
A movement along the curve
What’s equilibrium?
The price at which the supply and demand curve meets, this is when the product that’s supplied onto the market will be bought
What’s the price elasticity of demand equation?
Ped = % change in quantity demanded / % change in price
Price Elasticity of demand definition
the responsiveness of demand to changes in price
Inelastic and elastic definitions
if the answers between 0 and +1 the relationship is inelastic
if the answers between -1 and infinity the relationship is elastic
Elasticity equation
difference/ original x 100 (to find the percentage)
What does the number or closeness of substitutes do to the elasticity of a product?
the greater the number of substitutes the more elastic the product is
How does the proportion of income taken up by the product affect elasticity
The smaller the proportion of income taken up the more inelastic the product is
What are the determinants of elasticity of supply?
Land, labour, capital and enterprise
What’s the income elasticity of demand?
How much demand changes when income does
What’s a normal good?
Demand rises as income rises and vice versa (positive)
What’s an inferior good?
a good whose demand drops when people’s incomes rise
What make something a luxury good?
When it’s got an elasticity of 2+
What values do substitutes and complements have?
Substitute is positive
Complement is negative
What can the value tell you about the relationship of a product?
The higher the value the stronger the relationship
What’s the definition of capital?
The financial or physical resources used to produce value in an economy
What’s price mechanism?
The interaction of buyers and sellers in free markers
What are the three functions of price mechanism?
Rationing, signalling and incentive
What’s a rationing function?
When price rises the amount of people who can afford the product is rationed so rations the materials used for the product as less are made
What’s a signalling function?
price change sends contrasting messages to producers and consumers, price decrease leads to consumers buying more and when demand increases when price increases it gives other producers a chance to enter the market
Ceteris paribus
All other things being equal
Why are there shifts in the supply curve
Costs of production I.e. Wages, raw materials
Government i.e. Taxes and subsidies
Natural factors i.e. floods, droughts
Technology
What’s consumer surplus
What you’re willing to pay compared to what you actually pay (must be lower)
What’s producer surplus
The cost to make the product compared to the price charged
Marginal cost
The cost to a firm of producing an additional unit of output.
Why are there shifts in the demand curve
Population, advertising, income, changes in price of a supplementary good
What is a production possibility frontier (PPF)?
The maximum output of a combination of 2 products being produced through scarce resources.
What is absolute advantage?
Being able to produce more of something than another country (assuming both have the same amount of resources)
What is a comparative advantage?
Being able to produce something at a much lower opportunity cost than another country
What are the functions of money?
A medium of exchange (between suppliers and consumers)
A measure of value (price tags)
A store of value (weekly wages)
A method of settling debts.
What did Karl Marx discover?
Capitalist control the capital
Motivated by profit
Pay poor wages
Affects spending
Long term capitalists fail
A better idea is sharing wealth
Why was Karl Marx right in his discoveries?
Rich got richer, poor got poorer
Large amount of homeless
Poor wages, increased profit
Inequality
Why was Karl Marx wrong in his discoveries?
Minimum wage
People in poverty has dropped by 1 billion
Why share money
Benefit systems - NHS
What did Adam Smith discover?
Wealth of nations
Self interests
Circular flow of income
Risk and reward
Trade leaves us all better off
Why was Adam Smith right in his discoveries?
Profit - as demand goes up so does price
Free will
Everyone’s better off with trade
Market only produces what’s demanded so there’s no waste
Lots of innovation
More employed and earning wages
Why was Adam Smith wrong in his discoveries?
Benefit system
Charities and voluntary sector
One person/ firm controls everything
Cuts off the poor
Encourages demerit goods
What shows Elasticity
How much demand changes when income does
Elasticity - elastic
Where % change in demand is greater than % change in price
Elasticity - inelastic
Where % change in demand is less than % change in price
Determinants of elasticity of demand
-Time period - the longer the time under consideration the more elastic a good is likely to be
-Number of closeness of substitutes
-The promotion of income
-Luxury or necessity
-Habit forming
Determinants of elasticity of supply
-the availability of the 4 factors of production
-time
-spare capacity
-spare stock and components
What is the three basic economic problems?
1- Unlimited wants and needs
2- problems of scarcity
3- limited resources
What are the reasons for a shift in the demand curve?
- population
- advertising
- income
- Change in price of a supplementary good
- change in price of a complementary good
Income elasticity of demand definition
How much demand changes when income does
In elasticity what shows a luxury?
As income grows, proportionally more is spent on luxuries
- income elasticity is more than 1
What shows necessities in elasticity?
As income grows, proportionally less is spent on necessities
- income elasticity less than 1 but more than 0
What is cross elasticity?
The responsiveness of demand of one good to change in the price of a related good - either a substitute or a complement.
If it was a positive value what would it mean?
That it is a substitute
- larger values also mean close substitutes and strong relationships
If the elasticity was a negative value what would that mean?
That it is a complement
What is price mechanisms
The interaction of buyers and sellers in free markets enable goods, services and resources to be allocated by prices
What are the three types of price mechanisms?
Rationing function
Signalling function
Incentive function
What is rationing function?
If price rises it rations the amount of people who can afford it and so rations the materials used as not as many of the product will be made
What is Signalling function?
Price changes send contrasting messages to consumers and producers weather to enter or leave the market
What is incentive function?
High prices provide an incentive to existing producers to supply more because they provide the possibility of more revenue and increased profits
What is asymmetric information?
When an individual has more information than another individual and uses it to their advantage
What is direct tax
Direct tax is paid directly by the taxpayer to the government and cannot be shifted, like federal income tax
What is indirect tax
indirect tax, such as business property taxes, can be passed on or shifted to others.
Advantages of specialisation and the division of labour
Increased productivity
Lower costs
Economies of scale
Disadvantages of specialisation and the division of labour
High staff turnover
Dependancy
Structural unemployment
Lack of variety
