Theme 1 Flashcards
Why is economics considered to be a social science
Seeks to meet the needs and wants of society
What are the 4 factors of production
- Land
- Labour
- Capital
- Enterprise
What is a supply issue
What there is a lack of one of the 4 factors of production
What is a demand issue
When there is a lack of demand factors eg low disposable income
What is a normative statement
A valued/subjective judgement (opinion) that can’t be supported or refuted by evidence
What is a positive statement
A factual statement, which can be supported or refuted by evidence
What does Ceteris paribus mean
‘All things being equal’
The assumption that all other variables are kept constant
Whilst observing data, what is the base period
The period (e.g. a month or a year) whose value is compared to all other values in a series of data
What is an index number
The value representing another value compared to its base number
What is a nominal value
A value not adjusted for inflation so at current prices
What is a real value
A value adjusted for inflation so at constant prices
What does ‘scarce resources’ mean
They are in limited supply and so due to opportunity cost choices have to be made for their allocation
What are economics agents
Individuals with economic interests eg firms, individuals, government etc
Similar to stakeholder groups
What are economic goods
Goods that are scarce due to their use having an opportunity cost
What are free goods
Goods that aren’t scarce so are unlimited in supply and their use has no opportunity cost
What is opportunity cost
The loss of alternatives when a choice is made
What is meant by the free market
An economy with no government intervention
What are command economies
An economy where the state makes most resource allocation decisions (high intervention)
What are the 3 parts to the economic problem that economies have to decide on
- What is to be produced
- How is production to be organised
- Who is it for
What is factors of production
Inputs to the production process
What are the factors of production
Land, labour, capital and enterprise/entrepreneurship
What does ‘labour’ concern in the factors of production
The workforce
What is human capital
The value of a worker or value of productive potential of an individual or group of workers
What may be considered when evaluating human capital
Skills, talents, education and training of and individual or group, and represents their productivity
What does ‘capital’ concern
The stock of manufactured resources used in the production process (can include working and fixed capital)
What is working/circulating capital
Resources in the production system waiting to be transformed into goods to be sold as another product
What is fixed capital
Resources such as factories, machinery and offices that are used to transform working capital into good and services
What is enterprise/entrepreneurship
The seeking out of profitable opportunities for production and taking risks in an attempt to exploit these
What are entrepreneurs
Individuals who seek profitable opportunities and take risks in an attempt to exploit these
How are there rewards of factors of production
Owners of factors of production receive payments to allow other economic agents to use them for a period of time
Eg farmers letting fields (land) , workers offering themselves for work (labour)
What is the production possibility frontier (curve/boundary/transformation curve)
A curve showing the maximum potential level of output of one good given a level of output for all other goods in the economy
What is the margin
A point of possible change
When does production occur on the production possibility curve
When there is full and efficient utilisation of resources (fully employed resources)
Can production occur outside of the PPF
No, however it can shift outwards if supply of resources increases
What does it mean if production is inside the PPF
The economy is producing less than its maximum
What is productive efficiency
Any position on the PPF curve, where resources produce the maximum number of goods they can
What is allocative efficiency
Point at which production maximises social welfare
What occurs to the PPF curve as a result of economic growth
It shifts right/outwards
Eg increase labour, discovery of materials
What happens to the PPF in a shrinking economy
It shifts left/inwards
Eg lack of resources, lack of labour
What are consumer goods
Goods and services used by people to satisfy their needs and wants (for consumption)
What are capital goods
Goods/resources used in the production of other goods such as factories, offices and machinery
(Investment)
Where on the PPF graph do consumer goods and capital goods go
Consumer goods on the y axis, capital goods on the x axis
What is considered when the point at which an economy produces is being decided
Opportunity cost
What is specialisation
Where individuals, firms or countries concentrate on producing narrow range of goods or specific goods
What is division of labour
Specialisation of workers, who perform different tasks at different stages of production to make a good or service, with other workers
What is productivity
Output per unit of input
How does specialisation and division of labour increase productivity
They are more efficient methods than training staff all aspects of production and employing them to carry out these as this is costly and more time consuming
What is a disadvantage of specialisation and division of labour
Jobs may become tedious and repetitive, decreasing motivation and thus productivity
What is labour productivity
The output per worker
What is capital productivity
Output per unit of capital employed
What is absolute advantage
The ability of a country to produce a greater quantity of a good than competitors using the same resources
Comparative advantage
An economy’s ability to produce goods and services at a lower opportunity cost than that of trade partners, thus can sell at a lower price
What is Karl Marx’s economic theory
That everyone should be equal, being given the same opportunity in terms of resources, education etc.
What is Friedrich Hayek’s theory
Government intervention makes things worse unintentionally
What is Adam Smith’s theory (2 parts)
- ‘Invisible hand’, means he believes there should be a free market (no gov intervention), it is a laisez-faire approach
- Everybody is motivated by self-interest which benefits each other
How can money be defined
A medium that fulfils the four functions
Why are the 4 functions of money
- A medium of exchange
- A measure of value (price tags)
- Store of value (wages)
- A method of deferred payment (to settle debt)
What is a barter
Swapping one good for another without money
What are money substitutes and an example
A medium of exchange that is not a store of value
Eg credit cards
What is an economic system
Network of individuals, organisations and institutions and their social and legal interrelationships which allocates resources
What are the types of economy
Command economy
Mixed economy
Free market
What is a command economy
Economic system where government allocates resources in society through planning
What is a mixed economy
Both the free market mechanism and government planning process allocate proportions of resources
What is a free market economy
Economic system that resolves economic problems mainly through market mechanism
What is a sub market
A market which is distinct and identifiable part of a larger market
Eg. diesel in oil market
What is the Neo-classical theory
The theory that assumes all economic agents will act rationally in order to maximise their benefits
How does the neo-classical theory apply to consumers
Act to maximise their satisfaction/economic welfare
How does neo-classical theory apply to employees
Act to maximise their welfare at work eg money they receive and quality of life
How does the neo-classical theory apply to firms
Act to maximise reward of ownership (profits)
How does the neo-classical theory apply to governments
Act to maximise welfare of citizens
What is economic welfare
The level of well-being or standard of living
What is utility
The satisfaction or benefit derived from consuming a good
What is macroeconomics
The study the economy as a whole
What is microeconomics
Study of behaviour of individuals or groups such as consumers, firms, or workers typically within a market
What is marginal utility
Satisfaction gained from each additional unit of consumption
What is total utility
Total satisfaction from consumption
Draw a diagram showing marginal utility curve
Should fall
Draw a diagram showing total utility
Should rise then fall
Explain the law of diminishing marginal utility and example
Marginal Utility falls as consumption increases
Chocolate bar example
What is a consumer surplus
The difference between how much buyers are prepared to pay for a good and what they actually pay
Draw a graph showing the consumer surplus
Pg 39
What is demand
The quantity of goods or services purchased at any given price
What is effective demand
The quantity of goods or services purchased at any given price, give that other determinants of demand remain unchanged (ceteris paribus)
What is the demand curve
The line on a graph showing the quantity of demand at any given price
What is an extension of demand
Increase in demand due to a fall in price, shown by movement down the curve
What is a contraction of demand
A fall in demand due to an increase in price, shown by movement up the curve
What are conditions of demand/ demand factors
Factors other than price that influence demand and therefore cause a shift in the curve
What are the conditions of demand/demand factors
- Income
- Wealth
- Advertisement
- Tastes and fashion
- Demographic change
- Price of other products
- Government action/legislation change
What is a shift
A movement in demand curve caused by any factors other than price
What is elasticity of demand
A measure of how responsive demand is to a change in price, income or any other demand factor
What is income elasticity of demand
The responsiveness of demand to a change in income
What is cross elasticity of demand
The responsiveness of demand to a change in the price of other products
What is price elasticity of demand
The responsiveness of demand to a change in price
What is the formula for price elasticity of demand
Percentage change in QD/percentage change in p
How do you work out a percentage change
(Change/original) x 100
What answer will show that a good is elastic
Value will be greater than 1
What answer will show that a good is inelastic
Value will be less than 1
What does it mean if a good is perfectly inelatic
A change in price causes no change in demand
What value will a perfectly inelastic good have
0
What happens to revenue as price increase for a perfectly inelastic product
Increases
What does it mean if a good is inelastic
Demand changes by a smaller percentage than price
What value will an inelastic good have
Between 0 and 1
What happens to revenue as price increases for an inelastic product
Increases
What does it mean if a good is unitary inelastic
Demand changes by exactly the same percentage as price
What value does a good that is unitary elastic have
1
What happens to revenue as price increase for a good that is unitary elastic
It remains constant
What does it mean if a good is elastic
Demand changes by a larger percentage than price
What value will a good that is elastic have
Above 1
What happens to revenue as price increase for a good that is elastic
Decreases
What does it mean if a good is perfectly elastic
Buyers are prepared to purchase all they can obtain at some given price but none at all at a higher price
What value will a perfectly elastic good have
Infinity
What happens to revenue as price increases for a perfectly elastic good
Decreases
What does unitary elasticity mean
The value of price elasticity of demand is 1, in other words demand is proportionally equal to the change in price
What are the 2 determinants of price elasticity of demand
Availability of substitutes
Time
How does the availability of substitutes effect price elasticity of demand
Better/more substitutes that there are, the higher the price elasticity of demand.
For example, salt has few subs so it’s low, whereas spaghetti has many, so if high
How does time effect price elasticity of demand
Over time, demand for a product is more price elastic
Eg oil is inelatic, however overtime if there are more electric cars then it may become elastic
What is income elasticity of demand
Measures the responsiveness of quantity demanded to a change in income
Formula for income elasticity of demand
Percentage change in demand/percentage change in income
What value will you get if a good is income inelastic
Between 1 and -1
What value will you get if a good is elastic
More than 1 or less than -1
What are normal goods with example
Goods that as Demand increases as income does
Eg fresh meat
What are inferior goods
Goods that as income rises their demand falls
Eg bus transport, due to the purchase of cars
Give an example of a good that can be both normal and inferior and explain why
Bread
It is a normal good for low incomes, but inferior for high incomes
Draw a graph showing a normal good, and inferior good, and a good that can be both such as bread
D1 diagonally up
D2 diagonally down
D3 curve going up and then back down
What value of income elasticity of demand will a normal good have
A positive value
What value of income elasticity of demand will and inferior good have
A negative value
What other factor about a good can effect its income elasticity of demand
Whether it is a basic good or a superior good
What is a basic good
A necessity
What is a superior good
A luxury
What is cross price elasticity of demand
Measures the responsiveness of demand of one good to a change in price of another
What is the formula to work out the cross price elasticity of demand for a good
Percentage change in quantity demanded of a good/percentage change in price of another good
What value will a good that is cross price elastic have
More than +1/less than -1
What value will a good that is cross price inelastic have
Between +1 and -1
What is a substitute
An alternative good serving a similar purpose
What cross elasticity of demand value will 2 substitute goods have
A positive value
What does it means if a good has a positive cross elasticity of demand with another
When one increases in price, demand increases for the other
Give an example of goods that will have a positive cross elasticity of demand
Coca-cola and Pepsi
What are complements
Goods purchased in conjunction with another
What cross elasticity of demand value will complements have
A negative value
What does it mean if goods have a negative cross elasticity of demand
As price of one product increases, demand for the other falls
Give an example of goods that will have a negative cross elasticity of demand
Holidays and suncream
What is supply
The quantity of a good that suppliers are will and able to sell at any given price over a period of time
How do high prices effect supply
Firms will increases supply (movement down supply curve)
How do low prices effect supply
Decrease supply (movement up supply curve)
How is an expansion of supply shown
Movement down supply curve
How is a contraction of supply shown
Movement down a supply curve
What are conditions of supply
Factors leading to a shift in the supply curve (not price)
What are the conditions of supply
Costs Taxes Subsidies Price of other products Technology
What is a producer surplus
The difference between the market price and the price at which it is prepared to supply at
Draw a graph, shading the producer surplus area
Area between supply curve and y axis, below equilibrium price
What is price elasticity of supply
Measures the responsiveness of quantity supplied to a change in price
What is the formula for price elasticity of supply
Percentage change in quantity supplied/percentage change in price
What does it mean if a good perfectly inelastic of supply
There is no change in quantity supplied when price changes
What value will a perfectly inelastic of supply good have
Zero
What does it mean if a good is inelastic of supply
Quantity supplied changes by a lower percentage than price
What value will a good that is inelastic of supply have
Zero to 1
What does it mean if a good is unitary elastic of supply
The change in quantity supplied is equal to the change in price
What value will a good that is unitary elastic of supply have
1
What does it mean if a good is elastic of supply
Quantity supplied changes by a higher percentage than price
What value will a good that is elastic of supply have
1 or more
What does it mean if a good is perfectly elastic if supply
Producers are prepared to supply any amount at any price
What value will a good that is perfectly elastic of supply have
Infinite
What factors effect the elasticity of supply
- Availability of substitutes (for producer, eg farmer switching crops)
- Time (crops take until next season to replace)
In economics short term and long term have no meaning, but what does
Short run and long run
What does the short run mean
A period of time when atleast one factor input is fixed, but other can be varied
What does the long run mean
Period of time where all factor inputs can be varied but the state of technology remains constant
What is meant by excess demand
Demand is greater than supply
What is meant by excess supply
Supply is greater than demand
What is the equilibrium price
The price at which supply is equal to demand
What is the market-clearing price
The price at which everything is sold, there is no excess demand or supply
Draw on a graph the area shown by consumer surplus
Above the equilibrium price, between demand curve and y axis
Draw on a graph the area shown by producer surplus
Below the equilibrium price, between supply curve and y axis
What does the price mechanism do
Allocate resources in a market
What are the functions of the price mechanism
- Incentive function
- Rationing function
- Signalling function
What is the incentive function
Where changes in price encourage buyers and sellers to change the quantity they buy and sell
What is the rationing function
When changes in price change the quantity produced, caused by the change in demand by buyers
What is the signalling function
Where changes in price five information to buyers and sellers to buy or sell
What is an indirect tax
A tax on expenditure
What is an ad velorem tax
A tax levied as a percentage of the value of a good
What is a specific/unit tax
A tax levied on a volume of a good
What is the incidence of tax
The burden on the taxpayer on an indirect tax (sometimes the producer may take the cost of the tax)
What can the incidence of tax depend upon
The elasticity of the product being sold
How can the elasticity of the product being sold effect the incidence of tax of that product
If it is inelastic, the seller will pass the tax into the consumer
What is a subsidy
Money from the government to a firm, usually to incentivise low prices of a good or production of a good
How may a consumer not benefit from a firm receiving government subsidies
If the good is price inelastic of demand, price is unlikely to change
Why may economic agents not act rationally as neo-classical theories state
Due to behavioural economics
What are examples of behavioural economics
- Habitual
- Peer pressure (copying)
- Consumer weakness at computation
- Laziness
What is market failure
Where resources are inefficiently allocated due to the market mechanism not working properly
What is complete market failure
Where a market fails to supply any of a demanded good, creating a missing market
What is a missing market
Where the market mechanism fails to supply any of a good
What is partial market failure
Where a market exists but there is underproduction or over production of a good
What are types of market failure
- Externalities
- Under provision of public goods
- Information gaps
What is an externality
The difference between social costs + benefits and private costs + benefits
What is a private cost/benefit
A cost/benefit to an individual economic agent
What is a social cost/benefit
A cost/benefit to society as a whole
What are positive externalities/external benefits
Where the net social benefit is greater than the net private benefit
What is a negative externality/external cost
Where net social costs are greater than new private costs
What are production externalities
The social costs/benefits are different to the private costs/benefits
What is a negative production externality
Situation where social costs of production exceed private costs
What is a positive production externality
Situation where social costs of productivity are less than private costs
What are consumption externalities
Where social costs/benefits of consumption are different to private costs/benefits of consumption
What is a negative consumption externality
Where social costs of consumption exceed private costs
What is a positive consumption externality
Where social costs of consumption are less than private costs
What is meant by the marginal social/private costs/benefits
The impact of the last unit produced or consumed
What causes a greater market failure
A greater externality
Draw a graph showing a welfare loss from negative production externalities
Area between MPC, MSC, and equilibrium
Draw a graph showing the welfare gain from positive consumption externalities
Area between MSB, MPB, and equilibrium
What are private goods
Goods that posses the characteristics of rivalry and excludability
What does it mean if a good is rivalrous
Consumption of it by one person results in it not being available for someone else
What does it mean if a good is excludable
It is possible to prevent others from using it
What is a public good
A good that possesses non-rivalry, non-excludability and non-rejectability
Give an example of a public good
Street lights
Defence eg army
How else can a good be described instead of non-rivalrous
Non-diminishable or non-exhaustable
What does it mean if a good is non-rivalrous
Consumption of the good by one agent does not reduce its availability for others
What is meant by non-excludability
Once the good is provided, it is impossible to prevent another economic agent from consuming it
What is meant by non-rejectability
Once a good is provided, it is not possible for an agent to not benefit from/consume the good
Eg defence
What is meant by the free-rider problem
Where an economic agent receives benefits from a public good that they have not paid for
Where will public goods not be provided
In a free market economy
What is a quasi-public good
A good which isn’t perfectly public or private
Eg roads
What is meant by imperfect information
A situation where buyers or sellers (or both) lack information to make a rational/informed decision
What is meant by an information gap
A situation where buyers or sellers or both don’t have the information to make a decision ( at all)
What is meant by asymmetric information
A situation where buyers and sellers have different amounts of information in a market, so one agent can be exploited
Eg dentist
What is meant by the principal-agent problem
Occurs when the goals of principals are different from their agents (eg children (p) and parents (a))
What is meant by a moral hazard
Where an economic agent makes a decision in their best interest despite risks
When does government intervention take place
When there is market failure
What methods of government intervention are there
- Indirect taxes
- Subsidies
- Min/max prices
- Trade pollution permits
- Provision of public goods
- Provision of information
- Regulation
What are cap and trade schemes
Schemes which set a limit on a particular type of pollution, which result in pollution permits being issued
What is a pollution permit
Permission issued allowing a fixed amount of pollution from a firm
What can be done with pollution permits
The can be sold/traded to other firms
What is meant by government failure
When social costs are increased as a result of government intervention, rather than the free market
What is an example of government failure
Increasing minimum wage to reduce inequality, but unemployment rises as a result
How can government failure arise
- Distortion of price signals
- Unintended results
- Info gaps
- Conflicting objectives
- Rent-seeking
What is meant by rent-seeking
Where political power is used to gain personal benefit
What is meant by the public choice theory
Where governments act to benefit themselves whether or not economic welfare is increased
What are buffer stock schemes
Using commodity storage to stabilise prices in an economy or market
What is an example of a market where buffer stock schemes may be used
Wheat
In the case of a buffer stock scheme, what will happen if the supply of wheat is too low
The government will import more wheat to increase supply on the market, in order to reduce the price at which consumers have to pay for the commodity
Draw a graph showing a lack of supply of wheat and how the buffer stock is used as government intervention
Supply curve shift outwards, moving price below maximum price so that equilibrium for commodity is deemed affordable
In the case of a buffer stock scheme, what will happen if the supply of wheat is too high
The government will take wheat off of the market, in order to reduce its supply and so increase its price so that farmers receive minimum price (acceptable revenue)
Draw a graph showing excess supply of wheat and how the government will act on this
Supply will shift inwards when gov buy wheat, so supply is reduced and price rises
What are the advantages of buffer stock schemes
- Market remains stable
- Produces can plan
What are disadvantages of buffer stock schemes
- Costly for government
- Doesn’t support concept of free market
