Theme 1 Flashcards

1
Q

What does “Ceteris paribus” mean?

A

all other things being equal

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2
Q

What is the economic problem?

A

Wants are unlimited resources are scarce - scarcity.

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3
Q

what is a positive statement

A

objective, factual and an absence of judgement

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4
Q

what is a normative statement?

A

This is subjective, opinionated and has judgement in its decision

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5
Q

what is an opportunity cost?

A

The next best alternative while the other options are forgone

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6
Q

What is a PPF?

A

a production possibility frontier is the model that conveys the maximum potential production that can occur is all resources are fully employed

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7
Q

What is specialisation?

A

when each worker is given a specific task in a production process to increase worker productivity and lower AC ~ Concept was discovered by Adam Smith

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8
Q

what is a free market economy?

A

This is when the market is in control of the economy and private individuals/ businesses try to allocate resources efficiently.
-Ignores inequality
-Can lead to increased output

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9
Q

what is a Command Economy?

A

this is when the govt allocates resources and distributes them to where they believe is in most need of them
- May limit democracy
-easier coordination of resources during time of crisis

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10
Q

What is a mixed economy?

A

This is when the market is controlled by both govt and forces of Supply and Demand

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11
Q

What are the functions of money?

A

Unit of account
Means of exchange
Legal tender
Store of value

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12
Q

What is rational decision making?

A

Consumers ~ maximising utility
Firms ~ maximising Profits
Govt ~ Maximising social welfare

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13
Q

What is demand?

A

The willing and ableness of a consumer to buy a certain good or service at a given time

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14
Q

What are the factors that effect Demand?

A

Population
advertising
related goods
expectations
income
taste/ trends
seasons

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15
Q

What is diminishing marginal utility

A

The more buyers are offered the less satisfied they are with the latest purchase compared tot he first. This shows an additional unit added can decrease the rational decision making

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16
Q

What are the types of demand?

A

Derived demand ~ when 1 good is linked to another
Composite demand ~ when the good demanded has more than one function

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17
Q

What is PED?

A

This is price elasticity of demand which shows the responsiveness to demand regarding a change in price

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18
Q

What is the formula for PED?

A

Δ in quantity/ Δ in Price

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19
Q

What are the types of PED?

A

Elastic ~ relatively responsive (x>1)
Inelastic ~ not responsive (X<1)
unitary ~ ped=1
Perfectly inelastic= (X=0)
perfectly inelastic = (x= ∞)

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20
Q

factors that influence PED?

A

Necessity
substitutes
habit
durability

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21
Q

What is the tax burden?

A

Tax can be passed on a good which the producer chooses to pass on the firm to keep consumers buying the product if its elastic or put the tax on the consumer if the product is inelastic. Hence consumer or producer burden is created

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22
Q

What is YED?

A

the responsiveness of a good to a change in income

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23
Q

formula for YED?

A

Δ in quantity / Δ in income

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24
Q

what are the types of goods regarding YED?

A

Inferior goods —-> essentials, bought when price falls
Normal goods—–> increase in demand for goods when income increases
Luxury goods —–> as income increases, these goods will be bought even more

25
Q

What is XED?

A

the responsiveness of a change in demand on 1 good to a change in the price of another good

26
Q

Formula for XED?

A

Δ in good A quantity/ Δ in good B price

27
Q

Types of XED goods

A

Substitutes ——> good A will be in higher demand if good B price increases as it is considered better value for money
Complementary——> Good A will be in demand when Good B is in demand
Unrelated goods —–> Good A’s price doesn’t effect Good B’s demand

28
Q

What is supply?

A

This is the willing and ableness a firm has to supply a good or service

29
Q

Factors that influence supply?

A

cost of production
indirect taxes
subsidies
technology
weather
number of firms
govt legislation

30
Q

What is PES?

A

This is the responsiveness of supply to a change in price at a given period of time

31
Q

formula for PES?

A

Δ in quantity / Δ in price

32
Q

factors that effect PES?

A

Time scale
spare capacity
level of stock
barriers to entry of the market
factors of production
Availability of substitutes

33
Q

What is the price mechanism?

A

this helps determine the allocation of resources through the invisible hand theory

34
Q

What are the 3 functions for price mechanism

A

Incentive function ~ this encourages a change in behaviour to help identify strategies that can increase their profits

Signalling function ~ this conveys the gaps in the market that help firms determine whether they should leave the market or enter it depending on other firm’s profits

Rationing function ~ This is when there is excess demand and not enough supply to satisfy consumers therefore leading to a price rise to give it to those who are willing to buy it while helping firms increase profits

35
Q

What is consumer surplus?

A

This is the difference between what they are willing to pay against what they can pay. On the diagram its above equilibrium and under the demand curve

36
Q

What is producer surplus?

A

difference between what they are willing to receive for a good against the minimum of what they are willing to accept. On the diagram its below equilibrium and above the supply curve

37
Q

What is an indirect tax?

A

This is a tax on expenditures.

38
Q

What are the 2 types of indirect tax?

A

Ad valorem ~ this is a tax paid dependent on the price of a the good

Specific ~ this is a set amount that has to be paid on top of the goods price like VAT

39
Q

What is a subsidy?

A

A grant is given by the govt to an industry to help encourage consumption like childcare.

40
Q

Why can some economic agents act irrationally?

A

Influence of others ~ consumers may not want the good purchased but buy it due to persuasion of others

Habitual behaviours ~ through forces of habit, consumers may buy the item even though its irrational.

Consumer weakness at computation ~ this is when consumers dont give up or choose a good because it requires a decision to be made therefore they go for the item they know guarantees satisfaction AKA consumer inertia.

41
Q

What is a market failure?

A

this occurs when the market doesnt collect resources efficiently and they are being wasted.

42
Q

What are the types of market failures?

A

Externalities
under-provision of public goods
Information gaps

43
Q

What are externalities?

A

This is when there is an economic transaction occurring but has an impact on a third party.

44
Q

Types of externalities?

A

Positive externalities ~ this is when the third party is beneficial to the transaction occurring

Negative externalities ~ this is when the third party faces drawbacks and costs due to the transaction occurring

45
Q

Formulas for externalities?

A

Private cost + externality = social cost
Private benefit + externality = social benefit.

46
Q

Externalities on a diagram

A

Supply curve = msc or mpc
demand curve= msb or mpb
welfare cost or welfare gain is shown through triangle made by the gap between social and private

47
Q

What is under provision of public goods?

A

When markets fail to provide society with a certain good as they don’t gain a high profit from it.

48
Q

What are public goods?

A

These are non- rivalrous and non- excludable to all members of society

49
Q

what is a quasi good?

A

This is a good that is semi rivalrous and semi excludable and contain characteristics of both public and private goods

50
Q

what are Private goods?

A

These are goods that are rivalrous and excludable depending on who has purchased it and restricts members of society using them once they are already in use

51
Q

What is the free riders problem?

A

This is when consumers benefit from a good that they aren’t contributing to the cost of thus causing less incentive for people to pay for them

52
Q

What are information gaps?

A

This is when there isnt symmetrical information between both parties involved in an economical transaction and therefore lead to misallocation of resources and irrational decision making since they have asymmetrical information

53
Q

What is a government intervention?

A

This is when the government puts strategies in place to help correct any market failure that has occurred in hope of allocating resources efficiently again and to internalise externalities.

54
Q

what is a Trade pollution schemes

A

this is a way for the government to reduce the pollution created by airlines through giving them a certain amount of pollution they are allowed to generate while also incentivising trade and consumption

55
Q

What is a maximum/ minimum price scheme?

A

Maximum ~ set to encourage underconsumption of merit goods by setting a price cap below the equilibrium price to help those in low income households access certain goods and services

Minimum ~ set to discourage the overconsumption of demerit goods by making it less affordable to the public as it is higher than the equilibrium price.

56
Q

what are other government intervention?

A

Regulations
state provision of public goods
provision of information ~ public messaging

57
Q

What is a government failure?

A

This is when the government causes the market failure to increase and worsen.

58
Q

What are examples of government failures?

A

Distortion of price signal ~ interrupting the market mechanism through a govt intervention causing demand to fall and consumption

Unintended consequences ~ assuming consumer behaviour but reality leads to harder implementation

59
Q
A