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Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

What’s a positive/ normative statement?

A

Positive statement: Objective, can be tested by referring to available evidence.
Normative statement: Subjective, they carry value judgements about what ought to be.

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2
Q

What does ceteris paribus mean?

A

All other things remain the same.

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3
Q

What is opportunity cost?

A

Cost of a choice made, measured in terms of the next best alternative given up/forgone

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4
Q

Assumptions about the objective agents: (what rational agents do)

A

Rational consumers: wish to maximise their satisfaction or utility from consumption
Government: wishes to improve the economic and social welfare of citizens
Producers: wish to maximise profits

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5
Q

Properties of a free market economy:

A

• all resources are privately owned
• Consumer sovereignty (they decide what’s produced)
• Firms produce goods as efficiently as possible and maximise profit

Advantages: innovation due to competition, economic growth, choice

Disadvantages: monopolies exist, public goods not provided, merit goods underprovided, imperfect information prevents efficiency, income inequalities, externalities occur

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6
Q

Properties of a planned economy:

A

• most resources are allocated by the state, market mechanisms only play a small part

Advantages: everyone created equal, equal wealth distribution

Disadvantages: failure to tailor to preferences of people, misallocation of resources

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7
Q

Properties of a mixed economy:

A

• It’s a mix between planned and market economies, government has input in certain sectors such as healthcare, education, military etc.

They overcome free market disadvantages:
• monopolies are limited
• the government provide public and merit goods
• benefits and taxes reduce income inequalities
• regulations and laws limit externalities
• government subsidies and incentive limit inefficiencies

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8
Q

What is specialisation?
What is overspecialisation?

A

When a product or task is focused on, it happens at all levels of economic activity.

Overspecialisation is when e.g an area become specialised in an industry meaning the labour lack transferable skills so leads to occupational immobility and risks regional deprivation if the industry were to shut down.

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9
Q

What is the division of labour? Who observed it?

A

Where production is broken down into many separate tasks.

Adam smith observed it.

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10
Q

Benefits/disadvantages of the division of labour:

A

Benefits
- More productive
- Higher quality
- Lower costs
- Surplus output to trade

Disadvantages
- Workers feel alienated (bad quality)
- ‘Excluded workers’ if they lose job
- Supply chain is reliant on each part, if one breaks = all is disrupted
- Mass produced = less variety
- vulnerable to (structural) unemployment

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11
Q

What is Demand?

A

The willingness and ability to purchase a good at a particular price at a moment in time.

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12
Q

What are the conditions of demand (cause the curve to shift)?

A

Population + age
Advertising
Substitutes
Income
Fashion and trends
Interest rates/legislation
Complementary goods

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13
Q

What is PED?

A

Price Elasticity of Demand- the responsiveness of changes in quantity demanded to changes in price

PED = %changeQD / %change£

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14
Q

PED values and examples:

A

0 = perfectly inelastic e.g healthcare
0-1 = inelastic e.g cigarettes
1 = unitary
>1 = Elastic
♾️ = perfectly elastic e.g currency

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15
Q

What’s income elasticity of demand

A

YED
It shows the responsiveness of demand for a product to a change in real income.

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16
Q

What’s the YED (income elasticity of demand formula)?

A

YED = %changeQD / %changeRealncome

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17
Q

What are the YED values of different types of goods?

A

Normal goods are positive YED (0<).
Inferior goods are negative YED (0>).
Luxury goods have a larger YED than necessities. (>1).

Meaning:
Normal goods demand increases as income increases.
Inferior goods demand falls as income increases.

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18
Q

What is Cross Price Elasticity of Demand (XED)?

A

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

Substitutes are positive.
Complements are negative.

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19
Q

What’s the cross price elasticity formula?

A

XED = %changeQD of good x / %changeQD of good y

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20
Q

What is supply? Market supply?

A

Supply: quantity of goods that suppliers are willing and able to supply at a given price over a period of time

Market supply: total supply brought to the market by producers at each price

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21
Q

Causes of a shift in supply:

A

Productivity
Indirect taxes
No. firms in the market
Technology
Subsidies + regulations
Weather
Exchange rates
Cost of production

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22
Q

What is joint supply?

A

When an increase or decrease in the supply of one good leads to an increase or decrease in supply of a byproduct

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23
Q

What’s the law of supply? Why?

A

As price increases, firms are willing to supply more (direct relationship).

When price ^ supply ^ due to:
• profit motive
• production and costs covered by ^£
• new entrants coming into the market

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24
Q

What is PES?

A

PES: Measure of the responsiveness of quantity supplied to a change in price.

PES = %changeQS / %change£

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25
Q

PES values and examples:

A

0 = perfectly inelastic e.g land
0-1 = inelastic e.g perishable goods
1 = unitary
>1 = Elastic
♾️ = perfectly elastic e.g currency

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26
Q

Factors affecting PES:

A

• Spare production capacity (more = elastic)
• Stocks of finished products and components (more=elastic)
• Ease and cost of factor substitution (if FOPs are mobile =elastic)
• Time period and production speed (supply quickly increased = elastic)

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27
Q

What is rationing?

A

The limiting of goods or services that are in high demand and short supply through higher prices.

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28
Q

What is the signalling function?

A

Prices adjust to demonstrate where resources are required and where they are not.
Changes in price provides information to both producers and consumers about changes in market conditions.

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29
Q

What is consumer surplus?

A

Measure of the welfare that people gain from consuming goods and services. Shown by the area above the market price and under the demand curve.

30
Q

What is producer surplus?

A

Difference between the price producers are willing + able to supply a G+S for and the price that they actually receive.

31
Q

What is an indirect tax?

A

A tax imposed by the government that increases the supply cost faced by the producers.

32
Q

What’s the difference between a specific tax and an ad valorem tax?

A

A specific tax is a set tax per unit.

An ad valorem tax is a percentage tax. E.g VAT, Fuel duties.

33
Q

Evaluating indirect taxes:

A
  • Depends on PED.
  • increased effect in low income groups
  • problems with setting tax at right level
  • does it generate enough revenue
  • unintended consequences
  • impacts businesses and reduced competitiveness
34
Q

What is a subsidy?

A

A form of government support, financial or otherwise, offered to producers (and occasionally consumers).

35
Q

What are reasons for a subsidy?

A
  • protect job loss
  • reduce costs of training
  • encourage arts and cultural services
  • encourage output/investment in emerging sectors
36
Q

What is habitual behaviour?

A

When people prefer to behave as they always have done. It can explain why consumers may act irrationally.

37
Q

Evaluating subsidies:

A
  • Are they effective in meeting their aims
  • How much does it cost
  • Does it help correct market failure?
  • Who benefits depends on PED.
38
Q

What are the functions of money:

A
  • Method of deferred payment
  • Medium of exchange
  • Store of value
  • Measure of value
39
Q

What is an inferior good?

A

A good who’s demand drops when income rises. E.g cheap substitutes

YED < 0

40
Q

What are the three functions of the price mechanism?

A
  • Signalling
  • Rationing
  • Incentive
41
Q

Why may consumers act irrationally?

A
  • Habitual behaviour
  • Consumer weakness at computation (find it hard to calculate the probability of stuff when making decisions)
  • Influence of other people
42
Q

What are the types of market failure?

A
  • Externalities
  • Under-provision of public goods
  • Information gaps
43
Q

What is market failure?

A

Inefficient distribution of goods and services in the free market

44
Q

What is a positive externality?

A

When third parties benefit from the spill-over effects of production/consumption.

45
Q

What’s a negative externality?

A

When production/ consumption impose external costs on third parties as spillover effects.

46
Q

How are negative externalities reduced?

A

Taxes and regulations

47
Q

What are the advantages of using taxes to fix negative externalities?
+ evaluation.

A

BENEFITS:
Costs sre internalised.

DISADVANTAGES:
Regressive, risk of tax evasion, low PED = tax won’t be as effective

EVALUATION:
Assigning right level of tax
Consumer welfare effect (producers pass on tax)
Employment and investment consequences (^COP=less competitive)

48
Q

Benefits/disadvantages of using Regulations to resolve negative externalities:

A

E.g Health and safely, ULEZ, Laws, NMW, Govt standards (food)

BENEFITS:
- allows innovation
- more effective on low PED goods
- gradually toughen them

DISADVANTAGES:
- cost of enforcement
- unintended consequences
- discourages small businesses

49
Q

How do you value externalities?

A

• Shadow pricing - assign something a value
• Compensation - estimated cost of putting it right
• Revealed preference - how much people are willing to pay to avoid an externality

50
Q

What is a merit good?

A

A good that would be under provided if left to the free market.
E.g. education, healthcare
They have positive externalities.

51
Q

What are properties of public goods?

A

Non- excludable - benefits cannot be confined to solely those that have paid for it.
Non-rival consumption- each party’s enjoyment doesn’t diminish the enjoyment of others.
Non- rejectable

52
Q

What is a Quasi public good?

A

They have some of the characteristics of public goods. They are:
• semi-non-rival
• semi-non-excludable

53
Q

What is the free rider problem?

A

It leads to market failure. This is because public goods are non-excludable it is difficult to charge people for benefitting once a product is available. Leads to under provision of a good which leads to market failure.

54
Q

What is a private good?

A

Ownership is restricted to the individual that purchased it.

55
Q

What is information failure?

A

When people have inaccurate or incomplete data and so make potentially ‘wrong’ decisions.

56
Q

What are the causes of information failure?

A

• complexity - information failure when the product is highly complex
• long-term consequences- information gaps about long-term benefits/costs of consumption
• unbalanced knowledge - when the buyer knows more than the seller (vice versa)
• price information - when consumers are unable to quickly/cheaply find sufficient information on the best prices

57
Q

What is asymmetric information?

A

When there is an imbalance in information between buyer and seller which can distort choices.
E.g landlords and tenants

58
Q

What are forms of government intervention?

A
  • information provision
  • subsidies
  • taxes
  • command and control techniques
  • regulations
  • tradable pollution permits
  • minimum/maximum price
  • state provision of public goods
59
Q

What are problems with tradable pollution permits?

A
  • not all countries signed up to the agreement
  • stunts developing countries growth
  • pollution concentrated in certain areas
  • False offsets (hard to monitor)
  • need for international cooperation
  • unintended consequences (^prices)
60
Q

What are tradable pollution permits?

A

When countries are allocated a certain no. carbon units to use. With leftover units they can trade the excess with other countries. The units can be invested in other countries to reduce their carbon footprint and a as a result the investor will gain the difference in pollution.
The aim is to reduce pollution/ incentivise green technology use.

61
Q

What is a minimum price?

A

A price floor below which the normal market price cannot fall.
Has to be set above the equilibrium to be effective.

62
Q

What is government failure?

A

When intervention leads to a deeper market failure, or a new failure may arise.

63
Q

What are causes of government failure?

A
  • political self interest
  • information failures (food labelling)
  • high enforcement costs
  • disincentive effects
  • conflicting policy objectives
  • red tape (slowing stuff down)
  • policy myopia (quick fix)
  • regulatory capture (ppl regulating are involved with what they’re regulating)
64
Q

How can you evaluate government intervention?

A
  • value judgements
  • social science (can’t be forecast easily)
  • combination is likely to be necessary for it to be effective
  • market forces, can be better at finding profitable solutions
  • the law of unintended consequences (e.g shadow markets)
65
Q

Causes of government failure: (from spec)

A
  • distortion of price signals
  • unintended consequences
  • excessive administration costs
  • information gaps
66
Q

Examples of government failure:

A

• Food labelling (tackling obesity lead to eating disorders)
• quick fix of RACC (school concrete)
• NHS software updates are ineffective and slow
• ASBOS (antisocial behaviour orders)

67
Q

Reasons for minimum wage:

A
  • encourages training to increase productivity
  • prevents discrimination
  • higher incentive to work
  • reduces poverty
68
Q

Reasons against minimum wage:

A
  • can cause unemployment
  • lower profits for small businesses
  • firms may relocate
69
Q

Alternatives to minimum wage?

A
  • living wage
  • benefit reforms
  • more training to increase productivity
70
Q

What is a maximum price?

A

Govt set a maximum price to prevent the market price from rising above a certain level
(when they feel consumers are being exploited).

71
Q

Benefits/ disadvantages of maximum prices:

A

Benefits:
- useful surrogate for competition
- consumer welfare gains
- incentives for businesses to cut costs to maintain profit

Disadvantages:
- Reduces profit
- Discourages new entrants

72
Q

Alternatives to a maximum price?

A
  • measures to reduce barriers to entry within an industry
  • higher taxes on monopoly profits

Economics (3 decks)

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