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Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

What is a positive statement?

A

A positive statement is a statement which is objective and made without any
obvious value judgements or emotions

A FACT

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2
Q

What is a normative statement?

A

A normative statement is one which is subjective and based on opinion,

OPINION

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3
Q

What is the basic problem of Economics?

A

The basic problem of economics is that of scarcity .
People have finite needs, but infinite wants.

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4
Q

What is Oppurtunity cost?

A

cost of one thing in terms of the next best option which has been given up.

Something you cant consume due to lack of resources.

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5
Q

What does a PPF show?

A

The maximum possible combinations of capital and consumer
goods that the economy can produce with its current resources and
technology.

Shifts along the curve will create oppurtunity costs.

GIVES NO INDICATION OF WHAT THE BEST PRODUCT IS.

IF THE CURVE SHIFTS, THE ECONOMY WILL SHRINK OR GROW!

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6
Q

What is a capital good?

A

A good a firm uses to produce consumer goods - man made.

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7
Q

What is a consumer good?

A

The final form of a good for the consumer.

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8
Q

Talk about innefficent / efficient allocation of resources on a PPF + changes in production.

A

points inside the curve are attainble but only possible through the MISSallocation of resources. A point more outwards of the curve isnt possible as a firm/economy lacks the tech or resources.

A curve can also shift from one point and pivot if the production of only one good improves.

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9
Q

What happens in a free market economy?

A

In a free market economy, individuals are free to make their own choices and own the factors of production without government interference.

Resources are allocated through the price mechanism.

ADAM SMITH AND FREDERIK HAYEK

THERE ARE NO COMPLETLEY FREE MARKETS TODAY AS THE GOVT AS TO INTERVENE TO AN EXTENT

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10
Q

Advantages and Disadvantages of a FM economy?

A

The system is automatic due to the invisible hand
There is political freedom.
MORE growth

High levels of inequality
Problem of externalities
monopolies could form

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11
Q

What is a command economy?

A

all factors of production, except labour, is owned by
the state.
“working for a common good.”

KARL MARX

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12
Q

Advantages and Disadvantages of Command economies?

A

State should provide a MIN QOL
State motivated by the wellbeing of country.

Bribery and Corruption
Consumers lose their freedom
Workers less motivated and productive

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13
Q

What is a mixed economy?

A

Combination of both, firms can be state or privately owned - NHS

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14
Q

what is Diminishing marginal utility?

A

The law of diminishing marginal utility states that as an extra unit of the good is
consumed, the marginal utility, i.e. the benefit derived from consuming the good,
falls. Therefore, consumers are willing to pay less for the good.

Demand slope is downward sloping - inverse relationship between price and quantity.

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15
Q

What is PED?

A

The price elasticity of demand is the responsiveness of a change in demand to a
change in price.

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16
Q

What is the forumla for PED?

A

% change of QTY demanded / % change in price

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17
Q

What is the PED of a price elastic good.

A

X > 1 - change in price = bigger change in demand.

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18
Q

What is the PED of a price inelastic good.

A

X < 1 - change in price wont signifcantly effect demand for the good.
DEMERIT GOODS.

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19
Q

What is a unitary elastic good?

A

CHANGE IN DEMAND = CHANGE IN PRICE
PED = 1
Curved demand curve.

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20
Q

Perfectly inelastic good?

A

PED = 0
demand WONT change with price

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21
Q

Perfectly elastic good?

A

PED = ∞
demand falls to 0 when price changes.

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22
Q

What are the factors influencing PED?

A
  • Neccessity (demand wont go down if its needed)
  • Substitutes (people just swap product)
  • Addictiveness (habitual)
  • Proportion of income spent on good (if its from 80p to 99p demand prolly wont change)
  • Durability of the good (more durable = more elastic as people j wait)
  • Peak and Off peak demand
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23
Q

What is YED?

AND FORUMLA

A

Income elasticity of demand - how demand changes in response to a change in income.

% change in Q demanded / % change in income

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24
Q

What is an inferior good?

A

Inferior goods are those which see a fall in demand as income increases - ALDI BEANS.

25
Q

What is a normal good?

A

Increase in income will cause some increase in demand.

26
Q

What is a luxury good?

A

Increase in income will massively increase demand.

FIRMS might switch to producing luxury goods in economic prosperity.

27
Q

What is XED?

AND FORMULA

A

Cross elasticity of demand - responsiveness of a change in demand of one good, X,
to a change in price of another good, Y.

IE salt and pepper.

%change in QTY demanded of x / %change in price of Y

28
Q

What is the XED of a compementary good?

A

Negative XED, if price rises in 1 product, both products demand will fall.

Demand is downward sloping

29
Q

What is the XED of a subsititute?

A

Positive XED, price rises in one will increase demand in the other product as people switch.

Demand is upward sloping

30
Q

What is the XED of an unrelated good?

A

XED = 0 , Monopoly will have 0 XED.

31
Q

What is PES?

FORMULA

A

Price elasticty of supply is the responsiveness of a change in supply to a change in price.

%change in QTY supplied / %change in price

32
Q

What is elastic supply?

A

A firm can increase supply quickly at little cost.
PES > 1

Supply line is more slanted towards horizontal axis

33
Q

What is inelastic supply?

A

An increase in supply will be expensive for firms and take a long time.
PES < 1

Supply line is like /

34
Q

What is perfectly elastic supply?

A

Supply is fixed, change in demand cant be met.
PES = 0

Supply line is vertical

35
Q

What is perfectly elastic supply?

A

Any QTY demanded can be met without changing price. IE online courses.
PES = Infinity

Supply line is horizontal

36
Q

What are the factors influencing PES?

A
  • Time scale - in the sr supply is more price inelastic
  • Spare capacity - If the firm is at full cap - they cant increase supply.
  • Level of stocks - Stockpiles - doesnt apply to perishable goods.
  • Barriers to enter the market - higher barries = less firms to supply increased demand = more price inelastic.
37
Q

What are the 3 functions of the Price Mechanism?

A

Rationing - scarce resources = increase price = rationilised the XS demand.

Incentive - High Price = More supply

Signalling - High price = firms enter market = Consumers reduce demand

38
Q

What is a producer surplus?

A

Difference between the price the producer is willing to charge and what they actually charge.

39
Q

What is consumer surplus?

A

Difference between the price the consumer is willing to pay and what they actually pay.

40
Q

What is economic welfare?

A

This is the total benefit society receives from an economic transaction.

41
Q

What are the 4 functions of money?

A

Medium of Exchange: Used to buy and sell goods easily.

Measure of Value: Provides a consistent way to price items.

Store of Value: Maintains purchasing power over time.

Method of Deferred Payment: Allows payments to be made in the future.

42
Q

Two types of indirect tax? (tax on goods/services)

A
  • Ad valorem taxes are percentages, such as VAT, which adds 20% of the unit
    price. This is the main indirect tax in the UK.
  • Specific taxes are a set tax per unit, such as the 58p per litre fuel duty on
    unleaded petrol.

SHIFTS SUPPLY INWARDS

IF demand is inelastic - tax will fall on consumer IF demand is elastic - tax will fall on producer

43
Q

What does an Ad Valorem Tax curve look like?

+ PED effect on govt revenue

A

It is pivoted as it is an exponential tax.

If demand is inelastic, government revenue from the tax is higher than if demand is
elastic. This is because demand will only fall slightly with the tax.
Tobacco and fuel raise lots of taxes for GOVT.

44
Q

What is a subsidy?

A

A subsidy is a payment from the government to a producer to lower their costs of
production and encourage them to produce more.

Shift Supply to the right and reduce price while increasing output.
Govt Spending on the Subsidy is the change in price to the 2 Supply curves.

45
Q

Effects of subsidies?

A

Subsidies increase output and lower prices for consumers, which could help families on low and fixed incomes.

They increase the employment rate.

They reduce inequality in society, if the subsidy is progressive.

46
Q

Effect of PED on subsidies?

Consumer vs Producer subsidy

A

Price Elastic = help producers more as costs can be cut and more are sold.

Price Inelastic = lower equilibrium price.

Consumer subsidies affect demand and do not shift the supply curve.
Producer subsidies lower the cost of production and shift the supply curve.

47
Q

Advantages of the specialisation of workers:

A
  • Higher output and potentially higher quality, since production focusses on what people and businesses are best at.
  • There could be a greater variety of goods and services produced.
  • There are more opportunities for economies of scale, so the size of the market increases.
  • There is more competition and this gives an incentive for firms to lower their
    costs, which helps to keep prices down.
48
Q

Disadvantages of the specialisation of workers:

A
  • Work becomes repetitive, which could lower the motivation of workers,
    potentially affecting quality and productivity. Workers could become
    dissatisfied.
  • There could be more structural unemployment, since skills might not be
    transferable, especially because workers have focussed on one task for so
    long.
  • By producing a lot of one type of good through specialisation, variety could in fact decrease for consumers.
  • There could be higher worker turnover for firms, which means employees
    become dissatisfied with their jobs and leave regularly.
49
Q

What types of market failure are there?

A
  • Externalities
  • Under provision of public goods
  • Infomation gaps
50
Q

Describe a negative production externality diagram:

A

MSC and MPC are split with MPB = MSB on the D curve. MSC is above MPC with deadweight loss being the center triangle.
wont reach Social opt due to external costs on society.

51
Q

Describe a positive consumption externality diagram.

A

MSC = MPC whereas MPB and MSB are split with MSB above.
center triangle represents welfare loss.
wont reach Socially Opt due to underconsumption
IE EDUCATION VACCINE TFL

52
Q

How can goverments intervene to correct externalities?

A

Indirect taxes and subsidies - taxes on neg goods subs on pos goods.
Tradeable pollution permits - limit what firms can produce
Provision of the good - for goods with high social benefit
Provision of infomation - encourage consumption of positive goods or discourage.
Regulation - banning smoking ads

53
Q

What is a public good?

A

One that is
NON rivalrous (one persons use doesnt stop anothers)
NON excludable (cant stop someone from using it or someone cant choose not to use it)

STREET LIGHT

54
Q

What is a quasi public good?

A

Partly public goods. Roads - tolls or traffic

55
Q

What is the free rider problem?

A

This says that you cannot charge an individual a price for the provision of a
non-excludable good because someone else will gain the benefit from it without
paying anything.

Private sector producers will not provide public goods so goverment have to provide.

56
Q

What is symmetric infomation?

A

Occurs where buyers and sellers have potential access to the same infomation .

57
Q

What is asymmetric infomation?

A

When one party has superior knowledge compared to another. Usually, the seller has more information than the buyer and this means they can take advantage of the other party’s lack of knowledge, by charging them a higher price.

Most advertising leads to information gaps as it is designed to change attitudes of
the consumers to encourage them to buy the good. It could cause them to think the benefits are greater than they actually are. - eval improvement of tech access to WWW.

58
Q

What are the 4 types of GOVT failure?

A
  • Distortion of price signals - overproduction or overconsumption
  • Unintended consequences
  • Excessive ADMIN costs
  • Info gaps
59
Q
A

Economics (13 decks)

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