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🔱Microeconomics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

What’s the Neo-classical theory?

A

Assumption that economic agents will maximise their benefits and act rationally
- so supply and demand is used

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2
Q

What shifts demand (D)?

A

PASIFIC:
Population
Advertising
Substitutes (competition)
Income
Fashion/ taste
Interest rates (cheaper to borrow when low)
Complement price (something similar with it)

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3
Q

What shifts supply (S)?

A

PINTSWC:
Productivity
Indirect tax
Number of firms
Technology
Subsidy
Weather (for agriculture etc.)
Costs of production - transport, raw materials, labour, regulation, utilities etc.

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4
Q

What are the 3 sectors of the economy?

A

Primary sector
- raw materials extracted
Secondary sector
- manufacturing
Tertiary sector
- services

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5
Q

How do taxes effect supply?

A

Supply shifts up to the left
the tax revenue is the box from the new equilibrium down to the old curve
Consumers pay the price difference, producers pay the rest
producers at bottom, consumers on top

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6
Q

How do subsidies affect supply?

A

Supply shifts down to the right
Total subsidy is from the new equilibrium up to the old curve
Consumers pay the price difference
consumers at bottom, producers at top

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7
Q

What are externalities/ the spill over effect?

A

the difference between social costs and benefits
and private costs and benifiets
A cost or benefit by an economic factor that is not suffered/ enjoyed by that same actor

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8
Q

What are negative externality diagrams?

A

Shows the externality where Marginal Social Cost (MSC) > Marginal Private Cost (MPC)
MSB = MPB
so theres market failure where MPC=MSB and MPB as thats where the externality is largest

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9
Q

What are positive externality diagrams?

A

Shows the externality where MSB > MPB
MSC = MPC
so theres market failure where MPB = MSC and MPC as thats where the externality is largest

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10
Q

What are positive externalities?

A

If social benefit > private benefit, then there’s a positive externality
Means a benefit for a person/ firm will benefit the society even more
E.g someone getting a vaccine

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11
Q

What are negative externalities?

A

If social cost > private cost, then there’s a negative externality
Means a negative impact on someone will have an even worse impact on the society
E.g someone drinking

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12
Q

What’s market failure?

A

Misallocation of resources
occurs if market prices don’t accurately reflect the costs and benefits to society of economic activities

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13
Q

Rationing function

A

When supply is limited, the price can be rationed up as there will be less demand.

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14
Q

Signalling function

A

When price changes influence decisions to buy/ sell

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15
Q

Incentive function

A

changes in price encourage producers to supply more, because of the possibility of greater profit

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16
Q

What are the 4 elasticities?

A

Price of demand (PED)
Price elasticity of supply (PES)
Income elasticity of demand (YED)
Cross elasticity of demand (XED)

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17
Q

Price of demand (PED)

A

the responsiveness of demand compared to how prices change
PED = %△Q demanded/%△price

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18
Q

Price elasticity of supply (PES)

A

the responsiveness of Q supplied compared to how prices change
PES = %△Q supplied/%△price

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19
Q

Income elasticity of demand (YED)

A

the responsiveness of Q demanded compared to how income changes
YED = %△Q demanded/%△income

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20
Q

Cross elasticity of demand (XED)

A

the responsiveness of Q demanded compared to how price of another good changes
XED = %△Q demanded of X/%△price in Y

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21
Q

What will XED be for substitutes?

A

Demand for substitutes will increase if price of product increases
So XED is positive

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22
Q

What will XED be for complements?

A

Demand for complements will decrease if price of product increases
So XED is negative

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23
Q

Normal goods

A

goods that increase in demand when income increases

24
Q

Inferior goods

A

goods that decrease in demand when income rises

25
Q

What causes the PPF to expand?

A

Expands when economic growth happens
Quality of resources increase
Quantity of resources increase

26
Q

Allocative efficiency

A

occurs when a social welfare is maximised

27
Q

What does it mean if goods are excludable?

A

goods that prevent others from using them
E.g tickets for football matches

28
Q

What does it mean if goods are rivalrous?

A

goods, which once someone has brought, is no longer available for anyone else
E.g clothing, plane tickets, food

29
Q

What are private goods?

A

Goods that are both rivalrous and excludable

30
Q

What are public goods?

A

Goods that are both non-rivalrous and non-excludable
The marginal cost of providing a unit of the good is zero
not many pure public goods - E.g the army

31
Q

What are Quasi-public goods?

A

a public good that doesn’t fully fulfil the characteristics of non-rivalrous and non-excludable
E.g the Dartford Crossing

32
Q

Free rider problem

A

someone who receives the benefit but allows others to pay for it in a free market
so people could refuse to pay for the public goods in a free market, so taxes are used

33
Q

Ceteris Paribus

A

assuming everything else stays constant

34
Q

Real value

A

adjusted by inflation

35
Q

Nominal value

A

(normal)
values that haven’t been adjusted to inflation

36
Q

Positive economics

A

the scientific/ objective study that’s factual
Statements of fact can be tested
supported by evidence

37
Q

Normative economics

A

Judgements on how economies and markets should work
statements can’t be refuted by evidence
Statements contain value judgements

38
Q

What’s the basic economic problem?

A

Nearly all resources are scarce, but human wants are infinite, so resources have to be allocated

39
Q

The 4 factors of production

A

Land
Labour
Capital
Enterprise/ Entrepreneurship

40
Q

Barter

A

swapping one good for another without using money

41
Q

What are the 4 functions that money has to fulfil?

A

a medium of exchange - buying and selling
a measure of value
a method of deferred payment (able to make delayed payments)
a store of value

42
Q

Near monies

A

act as a store of value, but can’t exchange them
but are convertible into it
have higher paid interest than current accounts
E.g - savings account, treasury bills

43
Q

Law of diminishing marginal utility

A

the more you get of something, the less value it has to you
explains why wood is cheaper than diamonds

44
Q

What affects PED?

A

SPLAT:
Substitution
Percentage of income
Luxury/ necessity
Addictive/ Habit forming
Time period

45
Q

What affects YED?

A

Availability of substitutes for the producer
Time period - shorter time, harder to switch
short run
long run

46
Q

Principal-agent problem

A

where the principal gains/ looses from the decision but it is made by the agent

47
Q

Ad valorem tax

A

A tax expressed as a percentage
The higher the quantity, the higher the tax
Supply curves of before and after are not in parallel

48
Q

Specific tax

A

A tax expressed as a fixed value
Supply curves of before and after are in parallel

49
Q

What can subsidies do to positive externality diagrams

A

The gov could give a firm a subsidy so they can operate at MSB instead of MPB to correct market failure

50
Q

Trade pollution permits

A

The gov give out permits to firms to emit CO2
these firms can buy/ sell these permits if wanted/ needed
reduces pollution as it’ll be too expensive to emit if emitting a lot

51
Q

Public choice theory

A

assumes politicians act in a way that maximises their own benefit and not the economy/ society

52
Q

Administration

A

occurs when a business can no longer meet its debt obligations

53
Q

Policy short termism

A

when politicians are too focused on short term, for votes
can lead to gov failure in long term

54
Q

Regulatory capture

A

when the gov operates in favour of producers rather than consumers

55
Q

Bureaucracy

A

a complex organisation that has multi-layered systems and processes

56
Q

Red tape

A

refers to bureaucracy which is no longer useful (redundant)

57
Q

Computational weakness

A

When prices like £3.99 are used to look cheaper and harder to add up

🔱Microeconomics (11 decks)

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