Theme 1 Flashcards
What is utility?
The amount of satisfaction a person gets from consumption of a certain item (also known as total utility)
What is marginal utility?
The change in satisfaction from consuming 1 more unit
What factors shift the demand curve?
Income
Population changes
Changes in price of other goods
Changes in fashion
When demand increases which way does the demand curve shift?
Right
When demand decreases which way does the demand curve shift?
Left
Factors that shift the supply curve
Change in cost of production
Natural factors
Government taxes
When supply increases which way does the supply curve shift?
Right
When supply decreases which way does the supply curve shift?
Left
What is equilibrium (Market cleaning)?
Where the supply and demand curves meet. At this point all of the product supplied onto the market should be bought
What is derived demand?
Whend the demand for x comes from the demand for y
What is price elasticity of demand?
The responsiveness in demand to changes in price
What is the price elasticity of demand (Ped) equation?
Change in quantity demanded
Ped=. ——————————————-
%Change in price
What are elastic values in numbers?
Greater than 1
What are inelastic values numerically?
Between 0 and 1
What is 1 unitary elastic?
% Change in quantity demanded is the same as % change in price. (see graph)
What is 0 perfectly inelastic?
% Change in quantity demanded stays the same no matter the price (see graph)
What is infinite perfectly elastic?
% Change in quantity demanded drops off completely if there’s any change in price. (see graph)
What are the determinants of elasticity of demand?
- Time period, the longer the time under consideration the more elastic a product is likely to be
- Number and closeness of substitutes
- Proportion of income
- Is it luxury or necessity
What is income elasticity of demand (Yed)?
The responsiveness in demand to changes in income
What is a normal good?
Demand and income increase or decrease simultaneously
What is an inferior good?
Demand and income are indirectly proportional
How is a normal good shown with notation?
It has a positive sign
How is a luxury good denoted?
A value over 2 and a positive sign
What is inferior good notation?
Has a negative sign
What is income elasticity of demand (Yed) equation?
% Change in QD of good
Yed=. ————————————
% Change in income
What is cross elasticity of demand (Xed) ?
The responsiveness of demand for a good to change in price of a related good
What is the cross elasticity of demand (Xed) equation?
% Change in QD of good A
Xed=. ————————————-
% Change in price if good B
What is ceteris paribus?
All other things being equal
What is a normative statement?
A statement based on opinions and values
What is a positive statement?
A statement which can be supported by evidence and fact
What is a capital good?
Goods used to achieve a finished product eg machines, production equipment, vehicles for transport
What is a consumer good?
Finished product
What are the four factors of production? (CELL)
Capital
Enterprise
Land
Labour
What is a PPF?
The maximum possible output combinations of two goods / services an economy can achieve when all resources are fully utilised (see graph)
What is division/specialisation of labour?
Specialising workers into different tasks
Advantages of the division of labour
-Workers become highly skilled at job
-Less mistakes are made
-Quicker/more efficient
-Higher productivity
Division of labour disadvantages
-Job can become boring and repetitive to worker
-If a specialised worker leaves their job a less skilled worker replaces them
-Workers demand higher wages for better quality work
-Who can cover the worker if theyre ill
What is country specialisation?
When counries specialise their resources into producing a limited range of goods and services
What is absolute advantage?
Being able to produce more of something than another country (assuming both have the same amount of resources available)
What is comparative advantage?
Being able to produce something at a lower opportunity cost than another country (ceteris paribus)
Country specialisation advantages
Fully use resources
Increased output
Increased quality
Allows exports
Country specialisation disadvantages
Risk of a worldwide recession
Risk of over-specialising (one industry)
Overuse natural resources
What is opportunity cost?
What you up in order to acheive something else
What is consumer surplus?
The difference between the total amount the consumer is willing to pay and what they actually pay
What is producer surplus?
The difference between the amount a producer is willing to supply and the actual amount they recieve
Explain scarcity
Unlimited wants and limited resources
What is flat tax?
Imposed on firms, but can be passed on through higher prices
What is ad valorem tax?
Unit tax (percentage tax) VAT is an example of this
What are the determinants of elasticity of supply?
- Availability of the 4 factors of production (CELL)
- Time
- Spare capacity
- Spare stock and components
What are the 3 functions of the price mechanism?
Signalling
Incentive
Rationing
What is the price mechanism?
The interaction of buyers and sellers in free markets allows resources, products and services to be allocated by price
Explain the rationing function
When resources are scarce, demand exceeds supply and prices are driven up. This prices rise helps discourage demand and conserve resources
Explain the signalling function
Price changes send contrasting messages to consumers and producers. Increased price leads to consumers reducing demand. Decreased price leads to consumers to re enter markets
Explain the incentive function
If prices are higher it provides producers with an incentive to increase production in order to make profit
Why can’t you make science experiments in economics?
Because you can’t keep variables constant
What is a free market (Adam Smith)?
Where buyers and sellers decide without government intervention
Why is a free market a good idea? (Adam Smith’s argument)
-The market produces what consumers want
-Motivates people to take risks(not restricted by government law/tax)
-Acting in self interest leads to production of goods there is. high demand for to make profit
-Rewards effort and high quality goods
Why is free market a bad idea?
-Heirarchy is formed
-Monopolies are formed reducing competition
-Greed/profiteering
What is a demerit good?
Goods that give off negative externalities
What is the centralised/command economy? (Karl Marx)
The government decide on production and distribute it
What was Marx’s argument?
Capitalists control the capital leading to inequality and poorer wages. Poor wages means less spending and capitalists will fail in the long term
Why was Marx’s argument fair?
-Individuals shouldn’t hold too much power
-Less inequality
Why was Marx’s argument bad?
-Doesn’t reward hard work
-Rewards laziness
-Money invested into business can serve the population
What is a mixed economy?
Partial government intervention
What did Friedrich Hayek say?
-Government involvement ruins the market
-Intervention leads to short term booms resulting in going bust and government investment isn’t sustainable
Functions of money
-Medium of exchange
-Measure of value
-Store of value
-Method of settling debts
2 main parts of rational decision making kinda
Producers want to maximise profit and consumers want to maximise utility
What is the principal agent?
The relationship where one entity legally appoints another to act on its behalf
What is a merit good
A good that gives of positive externalities. The government believes these goods need to be encouraged
3 ways the government encourages the purchase of merit goods
-Free at the point of use
-Subsidies
-Laws
What is a quasi public good?
A near public good
What is the free rider problem?
Type of market failure where people don’t benefit from goods they pay for (public goods)
Xed types of good
Complimentary, substitute and unrelated.
Price elasticity of supply equation
% Change in quantity supplied
PES = ——————————————
% Change in price
What is price elasticity of supply?
The responsiveness of a supply of a good or service after a change in its market price.
Why would consumers not behave rationally?
-Assymetrical information
-Habitual behaviour
-Computation problems
-Peer pressure
What is market failure
The market failing to allocate goods and services correctly
Types of market failure
-Information gaps
-Externalities
-Under provision of public goods
Qualities of a public good (explain)
- Non-rival: supply of the good isn’t affected by consumption
- Non-excludable: no group/person is excluded from using it
- Non-rejectable: collective supply of good can’t be rejected by people
All graphs you have to know for theme 1
-PPF
-Country specialisation graph
-Producer and consumer surplus
-Producer and consumer tax
-Ad valorem tax graph
-Negative/positive externalities graph
-Min/max pricing
-Subsidy graph
-Utility curve
-Types of elasticity graphs
Parts of a negative externalities graph
-MSC (marginal social cost)
-MPC (marginal private cost)
-MPB (marginal private benefit)
-Social optimum
Types of government intervention
-Indirect taxes (ad valorem and specific)
-Subsidies
-Min and max pricing
-Provision of public goods
-Tradable pollution permits
Positives of pollution permits
-Rewards eco friendly action
-Government source of revenue
-Reduced negative externalities
Problems of pollution permits
-Some businesses have to pollute to make profit
-Reduced emissions can reduce profit
-Some business aren’t affected by fine
What is government failure?
When government involvement results in a net welfare loss
What is welfare?
Overall economic well-being
Types of government failure
-Distortion of price signals ( e.g. inefficient subsidies)
-Unintended consequences
-Information gaps
-Excessive administration costs
