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Economics > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

What is Ceteris Paribas?

A

All other things being equal. The assumption that everything else stays the same.

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2
Q

What are the problems with economics?

A
  • You cannot test some things in advance to see if it works
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3
Q

How are markets formed?

A

Suppliers supply and consumers demand

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4
Q

What is a normative statement?

A

Any statement that are a subjective, value judgement and based on opinion (e.g ‘I think, it should, you should’ etc.)

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5
Q

What is a positive statement?§

A

Objective statements that can be tested. They are based on evidence. Positive economics deals with objective explanation

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6
Q

What are the four Factors Of Production?

A

Land, labour, capital and enterprise

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7
Q

What is the opportunity cost?

A

The cost of an activity expressed in terms of the next best alternative, which has to be given up when making a choice.

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8
Q

Why does opportunity cost arise?

A

Arises because resources are scarce

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9
Q

What is the law of increasing costs?

A

The opportunity cost of producing a good increases as more of the good is produced.

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10
Q

What does a PPF show?

A
  • Shows the maximum possible output

- Shows the options that are available when you consider the production of just two types of goods and services

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11
Q

How can we develop the FOP to shift the PPF outwards?

A

Invest in apprenticeships, get mor efficient machinery/software, more intense practices, get more land/more appropriate land, encourage entrepreneurship, better trained staff, immigration.

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12
Q

What causes an inward shift on the PPF?

A

If we start to lose some or all of the FOP. Opposite to points that determine outwards shifts.

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13
Q

What is an absolute advantage?

A

Being able to produce more of something than another country (assuming both have the same amount of resources/FOP available)

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14
Q

What is a comparative advantage?

A

Being able to produce something at a much lower opportunity cost than another country (with all FOP being equal)

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15
Q

What are the problems with specialisation?

A
  • Expensive to train staff
  • Mass unemployment
  • Entrepreneurship affected if ppl work same job
  • Strikes
  • No multi skilling
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16
Q

What is the division of labour?

A

Specialisation of labour into separate tasks. Insures higher productivity per worker

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17
Q

What are the functions of money?

A

Medium of exchange, measure of value, method of settling debts

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18
Q

Name 3 economic theorists.

A

Adam Smith, Friedrich Heyak and Karl Marx

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19
Q

What were Adam Smith’s philosophies?

A

Wrote wealth of nations 1776, self interest, circular flow of income, risk and reward, trade leaves us all better off

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20
Q

What were Karl Marx philosophies?

A

Criticises capitalism, capitalists pay poor wages and profit, a better idea is shaping wealth (communism).

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21
Q

What were Friedrich Hayek philosophies?

A

Only buyers and sellers understand the market, the government might try to help, policies unintentionally makes things worse, better off leaving market alone.

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22
Q

What are the three types of economies?

A

Centralised, free market and mixed economy

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23
Q

What is a consumer surplus?

A

The difference between the total amount that consumers are willing to pay for a good or service and the total amount the actually do pay (the market price).

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24
Q

What is producer surplus?

A

The difference between the amount the producer is willing to supply goods for and the actual amount they receive.

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25
Q

What is a centralised/command economy?

A

Resources allocated by the government

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26
Q

What is the free market economy?

A

The market looks after itself (laissez faire), whatever people are willing to buy and sell

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27
Q

What is a mixed economy?

A

Free market with some government intervention

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28
Q

Who are the 4 economic agents?

A

Consumers, producers, workers and government

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29
Q

What is the basic economic problem?

A

Their are unlimited needs and wants, however resources are limited.

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30
Q

What is total utility?

A

The total satisfaction from a given level of consumption.

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31
Q

What is marginal utility?

A

The change in satisfaction from consuming an extra unit

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32
Q

What is the law of diminishing marginal utility

A

As the amount consumed of a commodity increases, the utility derived by the consumer from the additional units, i.e marginal utility goes on decreasing.

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33
Q

What does the demand curve show?

A

The amount of a product that consumers would buy at different prices. Demand is not a factor, it as a result of the other factors.

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34
Q

What does the supply curve show?

A

The amount the firm are willing to supply at a given price

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35
Q

What factors cause a shift in the demand curve?

A

Population advertising, income, change in price of a substitute good, change in price of complementary goods.

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36
Q

What factors cause a shift in the supply curve?

A

Costs of production (e.g wages and raw materials), technology, natural factors (e.g floods and droughts), government (e.g taxes and subsidies).

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37
Q

What is excess supply also known as?

A

A surplus

38
Q

What is excess demand also known as?

A

A shortage

39
Q

What is price elasticity of demand?

A

The responsiveness of demand to changes in price

40
Q

What is the formula for price elasticity of demand?

A

PED=%CHANGE IN QD/%CHANGE IN PRICE

41
Q

How do you calculate % change?

A

Diff/original x100

42
Q

Do businesses want the relationship to be inelastic or elastic and why?

A

Inelastic, to maximise profits.

43
Q

What are the values for inelastic and elastic?(PED)

A 
Inelastic = between 0 and -1
Elastic = between -1 and infinity
44
Q

What is elastic (PED)?

A

Where % change in demand is greater than %change in price

45
Q

What is inelastic (PED)?

A

Where % change in demand is less than % change in price

46
Q

What do perfectly elastic and perfectly inelastic demand curves look like?

A 
Inelastic = straight vertical
Elastic = straight horizontal
47
Q

What happens to the price and revenue of a product if it is elastic?

A

If you increase the price, revenue drops. If you decrease the price, revenue increases.

48
Q

What happens to the price and revenue of a product that is inelastic?

A

Increase price, increased revenue. Decrease price, decreased revenue.

49
Q

What is income elasticity of demand?

A

The responsiveness of demand to changes in income.

50
Q

What is the formula for income elasticity of demand (YED)?

A

YED=%CHANGE IN QD/%CHANGE IN INCOME

51
Q

What is a normal good? (YED)

A

Demand rises as income rises and vice versa (positive answer)

52
Q

What is an inferior good?(YED)

A

Demand falls as income rises and vice versa (negative answer)

53
Q

What is a luxury good?

A

A positive sign of 2 or more

54
Q

What is cross elasticity?

A

The responsiveness of demand of one good to changes in the price of a related good. Some goods are substitutes (positive answer) for each other and some goods are complements (neg answer)

55
Q

What is the formula for cross elasticity?

A

XED = %CHANGE QD OF GOOD A/%CHANGE OF GOOD B

56
Q

What is the price mechanism?

A

Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes therein. It is the buyers and sellers who actually determine the price of a commodity.

57
Q

What is a rationing function?

A

The greater the scarcity, the higher the price and the more the resource is rationed.

58
Q

What is the signalling function?

A

Price changes send contrasting messages to consumers and producers about whether to leave or enter a market. Rising prices give a signal to consumers to reduce demand, and give a signal to potential producers to enter a market (AND VICE VERSA)

59
Q

What is the incentive function?

A

Something that motivates a producer or consumer to follow a course of action or to change behaviour. The incentive function of a price rise is associated with an extension of supply along the existing supply curve.

60
Q

What is rational decision making?

A

When making decisions people aim to maximise their own welfare

61
Q

Why are we not always rational? (3 reasons)

A

Incomplete info, lack self control and seek immediate satisfaction, they are loss averse(losses matter more than gains), are influenced by social networks, emotional choices

62
Q

What is market failure?

A

When the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social loss.

63
Q

What is complete market failure?

A

Occurs when the market simply does not supply products at all - we see missing markets

64
Q

What is a partial market failure?

A

Occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price. Often leads to govt. intervention

65
Q

Public goods - what is non excludability?

A

Public goods cannot be confined solely to those who have paid for it

66
Q

Public goods - What is non rival consumption?

A

Consumption by one consumer does not restrict consumption by other consumers

67
Q

Public Goods - what is non rejectable?

A

Collective supply of a public good for all means that it cannot be rejected by people (e.g flood defences)

68
Q

What is a quasi public good?

A

A near public good

69
Q

What TWO things are quasi public goods?

A

Semi non rival and semi non excludable

70
Q

Why are pure public goods not normally provided by the private sector?

A

Because they would be unable to supply them for a profit

71
Q

What is the free rider problem?

A

People benefiting from a good and not having to pay for it

72
Q

How are public goods generally paid for and why?

A

Many public goods are free at the point of use and then paid through taxation. Because public goods are non excludable it is difficult to charge people for benefitting from a good once it’s provided

73
Q

What is a merit good?

A

A raw material or service (e.g education) that is regarded by society as deserving of public finance. A merit good will be under consumed and is regarded by society that people should have regardless of their ability

74
Q

What is a demerit good?

A

Where consumption leads to a negative impact on the consumer and society

75
Q

What are the benefits for an increase in government spending on public goods?

A

Economies of scale, access and affordability, state provision(to overcome market failure), public goods drive long run economic growth

76
Q

What are the risks of increased government spending on public goods?

A

Absence of profit motive, links with corruption, wasteful spending could lead to government failure

77
Q

What is asymmetric information?

A

This type of market failure exists when one individual or party and uses that advantage to exploit the other party

78
Q

What does the government do to close the info gap?

A

Compulsory labelling on cigarette packages, improved nutritional info on foods, consumer protection laws, industry standards

79
Q

How can imperfect information be caused?

A

Misunderstanding or uncertainty about the true costs or benefits of a product, complex info, inaccurate or misleading info, addiction, lack of awareness

80
Q

What is a consumer surplus?

A

The difference between the total amount that consumers are willing to pay for a good or service and the total amount that they actually do pay

81
Q

What is a producer surplus?

A

The difference between the amount the producer is willing to supply goods for and the actual amount they receive

82
Q

What are subsidies?

A

Refer to direct payments that governments provide businesses to offset operating costs

83
Q

What are the types of market failure?

A

Asymmetrical information, lack of info, public goods, factor immobility, negative and positive externalities

84
Q

What are negative externalities?

A

A negative effect on a third party outside the externality

85
Q

What are the negative impacts on a third party in the alcohol industry?

A

Decreased productivity of workers if they are hungover, healthcare having to care for those intoxicated, health scares for family

86
Q

What are the benefits of subsidies?

A

Keeps suppliers in business, multiplier effect, encourages investment in tech.

87
Q

What are the cons of subsidies?

A

Costs money for govt., not sustainable, opportunity cost

88
Q

What is a positive externality?

A

A product which has a positive impact on the third party. The problem is that right now its undervalued and under consumed.

89
Q

What industries have positive externalities?

A

Healthcare, education, apprenticeships, leisure industry.

90
Q

What is government failure?

A

When the govt. attempts to correct market failure and fail themselves

91
Q

What are some examples of govt. intervention?

A

Subsidies, indirect taxes (e.g petrol), min pricing (e.g alcohol), max pricing (rent), provision of public goods, info gaps, pollution permits, road pricing

Economics (4 decks)

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