Theme 1 Flashcards
What is ceteris paribus?
All other things being equal (the effect of one economic variable on another)
What is a normative statement?
Statement which are value based and involve opinions
What is a positive statement?
A statement which can be supported with evidence and facts
What is the problem with scarcity?
There are unlimited needs and wants but limited resources
What are the three economic questions?
- what to produce?
- how to produce it?
- for whom to produce?
Who are the four economic agents?
- producers
- consumers
- government
- workers
What do producers want to maximise?
Profit
What do consumers want to maximise?
Satisfaction
What do government want to maximise?
Social welfare
What do workers want to maximise?
The benefit of the job
What does law of dimishing marginal utility mean?
As the amount consumed of a commodity increases, the utility derived by the consumer decreases
What does total utility mean?
The total satisfaction from a given level of consumption
What does marginal utility mean?
The change in satisfaction from consuming an extra unit
What are capital goods?
Production equipment eg machines
What are consumer goods?
Finished good
What does production possibly frontier mean?
The maximum possible output combinations of two goods or services, an economy can achieve when all resources are fully used
What are the four factors of production?
- capital
- enterprise
- labour
- land
What does specialisation mean?
A particular area of knowledge or the process of becoming an expert in a particular area
What does division of labour mean?
Separating workers into different tasks in order to improve efficiency
What does productivity mean?
Controlling your inputs and maximising your outputs
What are the advantages of division of labour?
- more skilled workers
- higher customer service
- more organised and motivated
- more reliable
What are the disadvantages of division of labour?
- boredom
- no one else can do that job
- strikes
- cover?
What does country specialisation mean?
When a country specialises its resources into producing a limited range of goods and services
What does absolute advantage mean?
Being able to produce more of something than another country
What does comparative advantage mean?
Being able to produce something at a much lower opportunity cost than another country
What does opportunity cost mean?
The loss of other alternatives when one alternative is chosen
What are the advantages of country specialisation?
- makes full use of all resources
- increases output
- improve quality
- allows for exports
What are the disadvantages of country specialisation?
- what if there is world recession?
- risk of over specialisation
- overuse of natural resources
What does consumer surplus mean?
The difference between the total amount that consumers are willing to pay and the total amount that they actually pay
What does producer surplus mean?
The difference between the amount that the producer is willing to be paid to supply and the actual amount they receive
What does a direct tax mean?
A tax which is imposed on the income or profits of the person who pays it
What does indirect tax mean?
A tax imposed on goods and services
What does flat tax mean?
A tax imposed on firms, but can be passed on through higher prices
What does Ad valorem tax mean?
A unit tax (%)
What does free markets mean?
An economic system based on supply and demand with little or no government control
What does centralised/command economy mean?
An economic system where a government body makes economic decisions regarding the production and distribution of goods
What does a mixed economy mean?
An economy organized with some free-market elements and some socialistic elements
What does demand mean?
A principle of economics that captures the consumer’s desire to buy the product or service
What does the demand curve show?
The amount of the products that consumers would buy at different prices
What causes a shift demand?
- population
- change in price of substitute/complementary good
- income
- advertising
What does supply mean?
The quantity of a good or service that producers are willing and able to sell at each possible price
What does the supply curve show?
How much of a product producers will supply onto the market at each price
What causes a shift in supply?
- wages
- raw materials
- subsides
- taxes
- natural factors
- technology
What does equilibrium mean?
The demand and supply curve meet, at the point where all of the products that is supplied onto the market will be purchased
What does excess demand mean?
When the price of a good is lower than the equilibrium price
What does excess supply mean?
When the quantity supplied of a product or service exceeds the quantity demanded at a given price
What does price elasticity of demand mean?
The responsiveness of demand to change in price
What is the formula for price elasticity of demand?
% change in quantity demanded/% change in price
What is the answer when price elasticity of demand is elastic?
Between 0 and -1
What is the answer when price elasticity of demand is inelastic?
> 1
What happens when demand is price elastic?
- increasing price would reduce revenue
- decreasing price would decrease revenue
What happens when demand is inelastic?
- increasing price would increase revenue
- decreasing price would reduce revenue
What is the answer when price elasticity of demand is unitary?
= 1
What is the answer when price elasticity of demand is perfectly inelastic?
= 0
What are the determinants of elasticity of demand?
- time period
- number and closeness of substitute
- proportion of income that the product takes up
What does elasticity of supply mean?
The responsiveness of supply to the change in price
What is the formula for price elasticity of supply?
% change in quantity supplied/% change in price
What is the answer when price elasticity of supply is elastic?
> 1
What is the answer when price elasticity of supply is inelastic?
< 1
What are the determinants of elasticity of supply?
- four factors of production
- time
- spare capacity
- spare stock and components
What does elastic mean?
The change in quantity demanded due to a change in price is large (demand drops when price increases)
What does inelastic mean?
The change in quantity demanded due to a change in price is small (when price increases, demand stays the same)
What does income elasticity mean?
The responsiveness of demand to the change in income
What is the formula for income elasticity?
% change in demand/% change in income
What does a normal good mean?
When income rises, demand also rises (and vice versa)
What does an inferior good mean?
When income rises, demand falls (and vice versa)
What does a luxury good mean?
When income rises, a bigger demand rise happens (and vice versa)
What does cross elasticity of demand mean?
The responsiveness of demand of one good to changes in price of a related good
What is the formula for cross elasticity of demand?
% change of demand of good A/% change in price of good B
- complements have a negative sign
- substitutes have a positive sign
What did Karl Marx believe in economics?
The value of a produced good can be measured by the average number of labor hours required to produce it
What are some advantages in Karl Marx theory?
- more people would get a higher wage so leads to more spending
- reduces poverty
- creates entrepreneurship
What are some disadvantages in Karl Marx theory?
- rewarding laziness
- causes inflation
- shortages of some jobs
What did Adam Smith believe in the economy?
He claimed that an individual would invest a resource so as to earn the highest possible return on it
What are some advantages in Adam Smith theory?
- the market would always supply things that consumers want
- society is better off
- rewards the effort
What are some disadvantages in Adam Smith theory?
- unequal society
- cuts off the poor
- encourages demerit goods
What did Hayek believe about economics?
The government always makes things worse when they get involved in markets
What does merit goods mean?
A good that benefits the consumer
What does demerit good mean?
A good that doesn’t benefits the consumer
What does negative externalities mean?
When a third party is negatively affected by markets transactions
What does positive externalities mean?
When a third party is positively affected by markets transactions
What does an information campaign mean?
A powerful tool for raising awareness about important issues, causes, or initiatives
What does price mechanism mean?
The way price changes in response to changes in demand or supply, so that a new equilibrium position is reached
What are the three functions of price mechanism?
- rationing function
- signalling function
- incentive function
What does rationing function mean?
When the supply of a good is limited, its price increases, which can help to reduce demand and allocate the available quantity to those who are willing and able to pay the higher price
What does signalling function mean?
The price of a good changes, this signals to the consumer or producer that they should change their level of consumption or production
What does incentive function mean?
Higher prices provides an incentive to existing producers to supply more but also more consumers to decrease demand
Why might people (economic agents) not be rational?
- have limited capacity to calculate all costs and benefits of a decision
- are influenced by their social networks
- make different choices in emotional states
What does public goods mean?
A good which provided by one, benefits everyone
What does market failure mean?
The price mechanism fails to allocate scarce resources efficiently leading to net social welfare loss
What does complete market failure mean?
Market simply doesn’t supply products at all
What does partial market failure mean?
Market does actually function but it produces either the wrong quantity or price
What does non-excludability mean?
The benefits derived from pure public goods cannot be confined solely to those who have paid for it
What does non-rival consumption mean?
Consumption by one consumer doesn’t restrict consumption by another consumer
What does non-rejectable mean?
The collective supply of a public goods cannot be for all means that it cannot be rejected by people
What are the three parts of market failure?
- free rider problem
- asymmetric information
- information gaps
What does the free rider problem mean?
People benefit from goods or services without paying for it (leads to under provision)
What does asymmetric information mean?
When one individual or party has much information than another
What does information gap mean?
When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision
What does quasi public good mean?
Near public good (semi-non rival, semi non-excludable)
What are some of the advantages of government provision of public goods?
- many public goods are provided free at the point of use and then funded by taxation
- social welfare is improved
- helps affordability
What are some of the disadvantages of government provision of public goods?
- opportunity cost
- free rider problem
- non beneficiaries pay
What does principle agent relationship mean?
An arrangement in which one entity appoints another to act on its behalf
What does imperfect information mean?
When the economic agents lack information about a good or any other information relevant to the transaction
What does perfect information mean?
When the economic agents are perfectly informed when making their decisions
What does subsides mean?
Direct payment that governments provide businesses to offset some of their operating costs
What are some advantages of subsides?
- can help low income families and small businesses
- creates jobs
- encourages production
What are some disadvantages of subsides?
- opportunity cost
- taxation
- rewards laziness
What does maximum pricing mean?
When a price is set which the market will not be allowed to go above
What are some advantages of maximum pricing?
- attracting essential workers
- increases spending and consumption
- motivates key workers to work
- rewards hard work
What are some disadvantages of maximum pricing?
- takes products of the market
- aimed to help low income families but actually helps high income families
- excess money could be used for other things (bad)
What does minimum pricing mean?
Setting a floor price which the market is not allowed to go beneath
What are some advantages of minimum pricing?
- reduce consumption
- correcting market failure
- increase the price producers receive
What are some disadvantages of minimum pricing?
- consumers will be paying more for their goods
- resources are allocated inefficiently
- wasted resources
- increased storage costs
What does carbon trading mean?
System of limiting carbon emissions through granting firms permits to emit a certain amount of carbon dioxide
What are some advantages of carbon trading?
- a revenue source for the government
- cost effective way to tackle climate change
What are some disadvantages of carbon trading?
- doesn’t necessarily encourage companies to clean up their act
- extra cost gets push onto the consumer
- businesses could move to other countries
What does carbon offsetting mean?
When a polluting company buy a carbon credit to make up for the greenhouse gas it has emitted
What are some advantages of carbon offsetting?
- saves species from extinction
- easier than reducing carbon footprint
- improves public image
What are some disadvantages of carbon offsetting?
- it’s potentially worthless
- it’s not a fix-all solution
What does congestion charge mean?
A fee charged on most cars and motor vehicles being driven within the Congestion Charge Zone
What are some advantages of the congestion charge?
- it controls congestion on the roads
- may turn to public transport
- reduce pollution which improves our environment and our health
What are some disadvantages of the congestion charge?
- it may harm low-income people rather high income
- economic burdens faced by the communities
