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Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

Why is economics considered to be a social science

A

Seeks to meet the needs and wants of society

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2
Q

What are the 4 factors of production

A
  • Land
  • Labour
  • Capital
  • Enterprise
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3
Q

What is a supply issue

A

What there is a lack of one of the 4 factors of production

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4
Q

What is a demand issue

A

When there is a lack of demand factors eg low disposable income

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5
Q

What is a normative statement

A

A valued/subjective judgement (opinion) that can’t be supported or refuted by evidence

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6
Q

What is a positive statement

A

A factual statement, which can be supported or refuted by evidence

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7
Q

What does Ceteris paribus mean

A

‘All things being equal’

The assumption that all other variables are kept constant

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8
Q

Whilst observing data, what is the base period

A

The period (e.g. a month or a year) whose value is compared to all other values in a series of data

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9
Q

What is an index number

A

The value representing another value compared to its base number

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10
Q

What is a nominal value

A

A value not adjusted for inflation so at current prices

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11
Q

What is a real value

A

A value adjusted for inflation so at constant prices

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12
Q

What does ‘scarce resources’ mean

A

They are in limited supply and so due to opportunity cost choices have to be made for their allocation

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13
Q

What are economics agents

A

Individuals with economic interests eg firms, individuals, government etc

Similar to stakeholder groups

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14
Q

What are economic goods

A

Goods that are scarce due to their use having an opportunity cost

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15
Q

What are free goods

A

Goods that aren’t scarce so are unlimited in supply and their use has no opportunity cost

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16
Q

What is opportunity cost

A

The loss of alternatives when a choice is made

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17
Q

What is meant by the free market

A

An economy with no government intervention

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18
Q

What are command economies

A

An economy where the state makes most resource allocation decisions (high intervention)

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19
Q

What are the 3 parts to the economic problem that economies have to decide on

A
  • What is to be produced
  • How is production to be organised
  • Who is it for
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20
Q

What is factors of production

A

Inputs to the production process

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21
Q

What are the factors of production

A

Land, labour, capital and enterprise/entrepreneurship

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22
Q

What does ‘labour’ concern in the factors of production

A

The workforce

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23
Q

What is human capital

A

The value of a worker or value of productive potential of an individual or group of workers

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24
Q

What may be considered when evaluating human capital

A

Skills, talents, education and training of and individual or group, and represents their productivity

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25
Q

What does ‘capital’ concern

A

The stock of manufactured resources used in the production process (can include working and fixed capital)

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26
Q

What is working/circulating capital

A

Resources in the production system waiting to be transformed into goods to be sold as another product

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27
Q

What is fixed capital

A

Resources such as factories, machinery and offices that are used to transform working capital into good and services

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28
Q

What is enterprise/entrepreneurship

A

The seeking out of profitable opportunities for production and taking risks in an attempt to exploit these

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29
Q

What are entrepreneurs

A

Individuals who seek profitable opportunities and take risks in an attempt to exploit these

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30
Q

How are there rewards of factors of production

A

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)

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31
Q

What is the production possibility frontier (curve/boundary/transformation curve)

A

A curve showing the maximum potential level of output of one good given a level of output for all other goods in the economy

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32
Q

What is the margin

A

A point of possible change

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33
Q

When does production occur on the production possibility curve

A

When there is full and efficient utilisation of resources (fully employed resources)

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34
Q

Can production occur outside of the PPF

A

No, however it can shift outwards if supply of resources increases

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35
Q

What does it mean if production is inside the PPF

A

The economy is producing less than its maximum

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36
Q

What is productive efficiency

A

Any position on the PPF curve, where resources produce the maximum number of goods they can

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37
Q

What is allocative efficiency

A

Point at which production maximises social welfare

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38
Q

What occurs to the PPF curve as a result of economic growth

A

It shifts right/outwards

Eg increase labour, discovery of materials

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39
Q

What happens to the PPF in a shrinking economy

A

It shifts left/inwards

Eg lack of resources, lack of labour

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40
Q

What are consumer goods

A

Goods and services used by people to satisfy their needs and wants (for consumption)

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41
Q

What are capital goods

A

Goods/resources used in the production of other goods such as factories, offices and machinery
(Investment)

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42
Q

Where on the PPF graph do consumer goods and capital goods go

A

Consumer goods on the y axis, capital goods on the x axis

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43
Q

What is considered when the point at which an economy produces is being decided

A

Opportunity cost

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44
Q

What is specialisation

A

Where individuals, firms or countries concentrate on producing narrow range of goods or specific goods

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45
Q

What is division of labour

A

Specialisation of workers, who perform different tasks at different stages of production to make a good or service, with other workers

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46
Q

What is productivity

A

Output per unit of input

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47
Q

How does specialisation and division of labour increase productivity

A

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

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48
Q

What is a disadvantage of specialisation and division of labour

A

Jobs may become tedious and repetitive, decreasing motivation and thus productivity

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49
Q

What is labour productivity

A

The output per worker

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50
Q

What is capital productivity

A

Output per unit of capital employed

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51
Q

What is absolute advantage

A

The ability of a country to produce a greater quantity of a good than competitors using the same resources

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52
Q

Comparative advantage

A

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

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53
Q

What is Karl Marx’s economic theory

A

That everyone should be equal, being given the same opportunity in terms of resources, education etc.

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54
Q

What is Friedrich Hayek’s theory

A

Government intervention makes things worse unintentionally

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55
Q

What is Adam Smith’s theory (2 parts)

A
  • ‘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
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56
Q

How can money be defined

A

A medium that fulfils the four functions

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57
Q

Why are the 4 functions of money

A
  • A medium of exchange
  • A measure of value (price tags)
  • Store of value (wages)
  • A method of deferred payment (to settle debt)
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58
Q

What is a barter

A

Swapping one good for another without money

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59
Q

What are money substitutes and an example

A

A medium of exchange that is not a store of value

Eg credit cards

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60
Q

What is an economic system

A

Network of individuals, organisations and institutions and their social and legal interrelationships which allocates resources

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61
Q

What are the types of economy

A

Command economy
Mixed economy
Free market

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62
Q

What is a command economy

A

Economic system where government allocates resources in society through planning

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63
Q

What is a mixed economy

A

Both the free market mechanism and government planning process allocate proportions of resources

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64
Q

What is a free market economy

A

Economic system that resolves economic problems mainly through market mechanism

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65
Q

What is a sub market

A

A market which is distinct and identifiable part of a larger market
Eg. diesel in oil market

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66
Q

What is the Neo-classical theory

A

The theory that assumes all economic agents will act rationally in order to maximise their benefits

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67
Q

How does the neo-classical theory apply to consumers

A

Act to maximise their satisfaction/economic welfare

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68
Q

How does neo-classical theory apply to employees

A

Act to maximise their welfare at work eg money they receive and quality of life

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69
Q

How does the neo-classical theory apply to firms

A

Act to maximise reward of ownership (profits)

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70
Q

How does the neo-classical theory apply to governments

A

Act to maximise welfare of citizens

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71
Q

What is economic welfare

A

The level of well-being or standard of living

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72
Q

What is utility

A

The satisfaction or benefit derived from consuming a good

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73
Q

What is macroeconomics

A

The study the economy as a whole

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74
Q

What is microeconomics

A

Study of behaviour of individuals or groups such as consumers, firms, or workers typically within a market

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75
Q

What is marginal utility

A

Satisfaction gained from each additional unit of consumption

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76
Q

What is total utility

A

Total satisfaction from consumption

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77
Q

Draw a diagram showing marginal utility curve

A

Should fall

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78
Q

Draw a diagram showing total utility

A

Should rise then fall

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79
Q

Explain the law of diminishing marginal utility and example

A

Marginal Utility falls as consumption increases

Chocolate bar example

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80
Q

What is a consumer surplus

A

The difference between how much buyers are prepared to pay for a good and what they actually pay

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81
Q

Draw a graph showing the consumer surplus

A

Pg 39

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82
Q

What is demand

A

The quantity of goods or services purchased at any given price

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83
Q

What is effective demand

A

The quantity of goods or services purchased at any given price, give that other determinants of demand remain unchanged (ceteris paribus)

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84
Q

What is the demand curve

A

The line on a graph showing the quantity of demand at any given price

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85
Q

What is an extension of demand

A

Increase in demand due to a fall in price, shown by movement down the curve

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86
Q

What is a contraction of demand

A

A fall in demand due to an increase in price, shown by movement up the curve

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87
Q

What are conditions of demand/ demand factors

A

Factors other than price that influence demand and therefore cause a shift in the curve

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88
Q

What are the conditions of demand/demand factors

A
  • Income
  • Wealth
  • Advertisement
  • Tastes and fashion
  • Demographic change
  • Price of other products
  • Government action/legislation change
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89
Q

What is a shift

A

A movement in demand curve caused by any factors other than price

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90
Q

What is elasticity of demand

A

A measure of how responsive demand is to a change in price, income or any other demand factor

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91
Q

What is income elasticity of demand

A

The responsiveness of demand to a change in income

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92
Q

What is cross elasticity of demand

A

The responsiveness of demand to a change in the price of other products

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93
Q

What is price elasticity of demand

A

The responsiveness of demand to a change in price

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94
Q

What is the formula for price elasticity of demand

A

Percentage change in QD/percentage change in p

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95
Q

How do you work out a percentage change

A

(Change/original) x 100

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96
Q

What answer will show that a good is elastic

A

Value will be greater than 1

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97
Q

What answer will show that a good is inelastic

A

Value will be less than 1

98
Q

What does it mean if a good is perfectly inelatic

A

A change in price causes no change in demand

99
Q

What value will a perfectly inelastic good have

A

0

100
Q

What happens to revenue as price increase for a perfectly inelastic product

A

Increases

101
Q

What does it mean if a good is inelastic

A

Demand changes by a smaller percentage than price

102
Q

What value will an inelastic good have

A

Between 0 and 1

103
Q

What happens to revenue as price increases for an inelastic product

A

Increases

104
Q

What does it mean if a good is unitary inelastic

A

Demand changes by exactly the same percentage as price

105
Q

What value does a good that is unitary elastic have

A

1

106
Q

What happens to revenue as price increase for a good that is unitary elastic

A

It remains constant

107
Q

What does it mean if a good is elastic

A

Demand changes by a larger percentage than price

108
Q

What value will a good that is elastic have

A

Above 1

109
Q

What happens to revenue as price increase for a good that is elastic

A

Decreases

110
Q

What does it mean if a good is perfectly elastic

A

Buyers are prepared to purchase all they can obtain at some given price but none at all at a higher price

111
Q

What value will a perfectly elastic good have

A

Infinity

112
Q

What happens to revenue as price increases for a perfectly elastic good

A

Decreases

113
Q

What does unitary elasticity mean

A

The value of price elasticity of demand is 1, in other words demand is proportionally equal to the change in price

114
Q

What are the 2 determinants of price elasticity of demand

A

Availability of substitutes

Time

115
Q

How does the availability of substitutes effect price elasticity of demand

A

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

116
Q

How does time effect price elasticity of demand

A

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

117
Q

What is income elasticity of demand

A

Measures the responsiveness of quantity demanded to a change in income

118
Q

Formula for income elasticity of demand

A

Percentage change in demand/percentage change in income

119
Q

What value will you get if a good is income inelastic

A

Between 1 and -1

120
Q

What value will you get if a good is elastic

A

More than 1 or less than -1

121
Q

What are normal goods with example

A

Goods that as Demand increases as income does

Eg fresh meat

122
Q

What are inferior goods

A

Goods that as income rises their demand falls

Eg bus transport, due to the purchase of cars

123
Q

Give an example of a good that can be both normal and inferior and explain why

A

Bread

It is a normal good for low incomes, but inferior for high incomes

124
Q

Draw a graph showing a normal good, and inferior good, and a good that can be both such as bread

A

D1 diagonally up
D2 diagonally down
D3 curve going up and then back down

125
Q

What value of income elasticity of demand will a normal good have

A

A positive value

126
Q

What value of income elasticity of demand will and inferior good have

A

A negative value

127
Q

What other factor about a good can effect its income elasticity of demand

A

Whether it is a basic good or a superior good

128
Q

What is a basic good

A

A necessity

129
Q

What is a superior good

A

A luxury

130
Q

What is cross price elasticity of demand

A

Measures the responsiveness of demand of one good to a change in price of another

131
Q

What is the formula to work out the cross price elasticity of demand for a good

A

Percentage change in quantity demanded of a good/percentage change in price of another good

132
Q

What value will a good that is cross price elastic have

A

More than +1/less than -1

133
Q

What value will a good that is cross price inelastic have

A

Between +1 and -1

134
Q

What is a substitute

A

An alternative good serving a similar purpose

135
Q

What cross elasticity of demand value will 2 substitute goods have

A

A positive value

136
Q

What does it means if a good has a positive cross elasticity of demand with another

A

When one increases in price, demand increases for the other

137
Q

Give an example of goods that will have a positive cross elasticity of demand

A

Coca-cola and Pepsi

138
Q

What are complements

A

Goods purchased in conjunction with another

139
Q

What cross elasticity of demand value will complements have

A

A negative value

140
Q

What does it mean if goods have a negative cross elasticity of demand

A

As price of one product increases, demand for the other falls

141
Q

Give an example of goods that will have a negative cross elasticity of demand

A

Holidays and suncream

142
Q

What is supply

A

The quantity of a good that suppliers are will and able to sell at any given price over a period of time

143
Q

How do high prices effect supply

A

Firms will increases supply (movement down supply curve)

144
Q

How do low prices effect supply

A

Decrease supply (movement up supply curve)

145
Q

How is an expansion of supply shown

A

Movement down supply curve

146
Q

How is a contraction of supply shown

A

Movement down a supply curve

147
Q

What are conditions of supply

A

Factors leading to a shift in the supply curve (not price)

148
Q

What are the conditions of supply

A 
Costs
Taxes
Subsidies
Price of other products
Technology
149
Q

What is a producer surplus

A

The difference between the market price and the price at which it is prepared to supply at

150
Q

Draw a graph, shading the producer surplus area

A

Area between supply curve and y axis, below equilibrium price

151
Q

What is price elasticity of supply

A

Measures the responsiveness of quantity supplied to a change in price

152
Q

What is the formula for price elasticity of supply

A

Percentage change in quantity supplied/percentage change in price

153
Q

What does it mean if a good perfectly inelastic of supply

A

There is no change in quantity supplied when price changes

154
Q

What value will a perfectly inelastic of supply good have

A

Zero

155
Q

What does it mean if a good is inelastic of supply

A

Quantity supplied changes by a lower percentage than price

156
Q

What value will a good that is inelastic of supply have

A

Zero to 1

157
Q

What does it mean if a good is unitary elastic of supply

A

The change in quantity supplied is equal to the change in price

158
Q

What value will a good that is unitary elastic of supply have

A

1

159
Q

What does it mean if a good is elastic of supply

A

Quantity supplied changes by a higher percentage than price

160
Q

What value will a good that is elastic of supply have

A

1 or more

161
Q

What does it mean if a good is perfectly elastic if supply

A

Producers are prepared to supply any amount at any price

162
Q

What value will a good that is perfectly elastic of supply have

A

Infinite

163
Q

What factors effect the elasticity of supply

A
  • Availability of substitutes (for producer, eg farmer switching crops)
  • Time (crops take until next season to replace)
164
Q

In economics short term and long term have no meaning, but what does

A

Short run and long run

165
Q

What does the short run mean

A

A period of time when atleast one factor input is fixed, but other can be varied

166
Q

What does the long run mean

A

Period of time where all factor inputs can be varied but the state of technology remains constant

167
Q

What is meant by excess demand

A

Demand is greater than supply

168
Q

What is meant by excess supply

A

Supply is greater than demand

169
Q

What is the equilibrium price

A

The price at which supply is equal to demand

170
Q

What is the market-clearing price

A

The price at which everything is sold, there is no excess demand or supply

171
Q

Draw on a graph the area shown by consumer surplus

A

Above the equilibrium price, between demand curve and y axis

172
Q

Draw on a graph the area shown by producer surplus

A

Below the equilibrium price, between supply curve and y axis

173
Q

What does the price mechanism do

A

Allocate resources in a market

174
Q

What are the functions of the price mechanism

A
  • Incentive function
  • Rationing function
  • Signalling function
175
Q

What is the incentive function

A

Where changes in price encourage buyers and sellers to change the quantity they buy and sell

176
Q

What is the rationing function

A

When changes in price change the quantity produced, caused by the change in demand by buyers

177
Q

What is the signalling function

A

Where changes in price five information to buyers and sellers to buy or sell

178
Q

What is an indirect tax

A

A tax on expenditure

179
Q

What is an ad velorem tax

A

A tax levied as a percentage of the value of a good

180
Q

What is a specific/unit tax

A

A tax levied on a volume of a good

181
Q

What is the incidence of tax

A

The burden on the taxpayer on an indirect tax (sometimes the producer may take the cost of the tax)

182
Q

What can the incidence of tax depend upon

A

The elasticity of the product being sold

183
Q

How can the elasticity of the product being sold effect the incidence of tax of that product

A

If it is inelastic, the seller will pass the tax into the consumer

184
Q

What is a subsidy

A

Money from the government to a firm, usually to incentivise low prices of a good or production of a good

185
Q

How may a consumer not benefit from a firm receiving government subsidies

A

If the good is price inelastic of demand, price is unlikely to change

186
Q

Why may economic agents not act rationally as neo-classical theories state

A

Due to behavioural economics

187
Q

What are examples of behavioural economics

A
  • Habitual
  • Peer pressure (copying)
  • Consumer weakness at computation
  • Laziness
188
Q

What is market failure

A

Where resources are inefficiently allocated due to the market mechanism not working properly

189
Q

What is complete market failure

A

Where a market fails to supply any of a demanded good, creating a missing market

190
Q

What is a missing market

A

Where the market mechanism fails to supply any of a good

191
Q

What is partial market failure

A

Where a market exists but there is underproduction or over production of a good

192
Q

What are types of market failure

A
  • Externalities
  • Under provision of public goods
  • Information gaps
193
Q

What is an externality

A

The difference between social costs + benefits and private costs + benefits

194
Q

What is a private cost/benefit

A

A cost/benefit to an individual economic agent

195
Q

What is a social cost/benefit

A

A cost/benefit to society as a whole

196
Q

What are positive externalities/external benefits

A

Where the net social benefit is greater than the net private benefit

197
Q

What is a negative externality/external cost

A

Where net social costs are greater than new private costs

198
Q

What are production externalities

A

The social costs/benefits are different to the private costs/benefits

199
Q

What is a negative production externality

A

Situation where social costs of production exceed private costs

200
Q

What is a positive production externality

A

Situation where social costs of productivity are less than private costs

201
Q

What are consumption externalities

A

Where social costs/benefits of consumption are different to private costs/benefits of consumption

202
Q

What is a negative consumption externality

A

Where social costs of consumption exceed private costs

203
Q

What is a positive consumption externality

A

Where social costs of consumption are less than private costs

204
Q

What is meant by the marginal social/private costs/benefits

A

The impact of the last unit produced or consumed

205
Q

What causes a greater market failure

A

A greater externality

206
Q

Draw a graph showing a welfare loss from negative production externalities

A

Area between MPC, MSC, and equilibrium

207
Q

Draw a graph showing the welfare gain from positive consumption externalities

A

Area between MSB, MPB, and equilibrium

208
Q

What are private goods

A

Goods that posses the characteristics of rivalry and excludability

209
Q

What does it mean if a good is rivalrous

A

Consumption of it by one person results in it not being available for someone else

210
Q

What does it mean if a good is excludable

A

It is possible to prevent others from using it

211
Q

What is a public good

A

A good that possesses non-rivalry, non-excludability and non-rejectability

212
Q

Give an example of a public good

A

Street lights

Defence eg army

213
Q

How else can a good be described instead of non-rivalrous

A

Non-diminishable or non-exhaustable

214
Q

What does it mean if a good is non-rivalrous

A

Consumption of the good by one agent does not reduce its availability for others

215
Q

What is meant by non-excludability

A

Once the good is provided, it is impossible to prevent another economic agent from consuming it

216
Q

What is meant by non-rejectability

A

Once a good is provided, it is not possible for an agent to not benefit from/consume the good
Eg defence

217
Q

What is meant by the free-rider problem

A

Where an economic agent receives benefits from a public good that they have not paid for

218
Q

Where will public goods not be provided

A

In a free market economy

219
Q

What is a quasi-public good

A

A good which isn’t perfectly public or private

Eg roads

220
Q

What is meant by imperfect information

A

A situation where buyers or sellers (or both) lack information to make a rational/informed decision

221
Q

What is meant by an information gap

A

A situation where buyers or sellers or both don’t have the information to make a decision ( at all)

222
Q

What is meant by asymmetric information

A

A situation where buyers and sellers have different amounts of information in a market, so one agent can be exploited
Eg dentist

223
Q

What is meant by the principal-agent problem

A

Occurs when the goals of principals are different from their agents (eg children (p) and parents (a))

224
Q

What is meant by a moral hazard

A

Where an economic agent makes a decision in their best interest despite risks

225
Q

When does government intervention take place

A

When there is market failure

226
Q

What methods of government intervention are there

A
  • Indirect taxes
  • Subsidies
  • Min/max prices
  • Trade pollution permits
  • Provision of public goods
  • Provision of information
  • Regulation
227
Q

What are cap and trade schemes

A

Schemes which set a limit on a particular type of pollution, which result in pollution permits being issued

228
Q

What is a pollution permit

A

Permission issued allowing a fixed amount of pollution from a firm

229
Q

What can be done with pollution permits

A

The can be sold/traded to other firms

230
Q

What is meant by government failure

A

When social costs are increased as a result of government intervention, rather than the free market

231
Q

What is an example of government failure

A

Increasing minimum wage to reduce inequality, but unemployment rises as a result

232
Q

How can government failure arise

A
  • Distortion of price signals
  • Unintended results
  • Info gaps
  • Conflicting objectives
  • Rent-seeking
233
Q

What is meant by rent-seeking

A

Where political power is used to gain personal benefit

234
Q

What is meant by the public choice theory

A

Where governments act to benefit themselves whether or not economic welfare is increased

235
Q

What are buffer stock schemes

A

Using commodity storage to stabilise prices in an economy or market

236
Q

What is an example of a market where buffer stock schemes may be used

A

Wheat

237
Q

In the case of a buffer stock scheme, what will happen if the supply of wheat is too low

A

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

238
Q

Draw a graph showing a lack of supply of wheat and how the buffer stock is used as government intervention

A

Supply curve shift outwards, moving price below maximum price so that equilibrium for commodity is deemed affordable

239
Q

In the case of a buffer stock scheme, what will happen if the supply of wheat is too high

A

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)

240
Q

Draw a graph showing excess supply of wheat and how the government will act on this

A

Supply will shift inwards when gov buy wheat, so supply is reduced and price rises

241
Q

What are the advantages of buffer stock schemes

A
  • Market remains stable

- Produces can plan

242
Q

What are disadvantages of buffer stock schemes

A
  • Costly for government

- Doesn’t support concept of free market

Economics (5 decks)

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