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New: A level Econ > Theme 1 Content > Flashcards

Theme 1 Content Flashcards

1
Q

1.1 - Nature of economics

What is the definition of PPF? (production possibility frontier)

1.1.4 - Production possibility frontiers

A

The maximum possible combination of goods that can be produced with current technology and resources.

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2
Q

1.1 Nature of Economics

What does a PPF curve show and why is it curved?

1.1.4 - Production possibility frontiers

A

It shows the maximum possible combination of goods that can be produced with current technology and resources. It is curved as both products depend on the same finite resource for their manufacture. Law of diminishing returns

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3
Q

1.1 Nature of Economics

Why is a PPF graph curved?

1.1.4 - Production possibility frontiers

A

Law of diminishing returns - there comes a point where an added production factor has less of an impact.

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4
Q

1.1 Nature of Economics

Sketch a PPF showing:
unobtainable, efficient, inefficient, firm specialising in one product:

1.1.4 - Production possibility frontiers

A
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5
Q

1.1 Nature of Economics

Define specialisation

1.1.5 - Specialisation and the division of labour

A

The production of a limited range of goods by an individual organisation.

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6
Q

1.1 Nature of Economics

Name an example of Division of Labour + EXPLAIN WHY USEFUL

1.1.5 - Specialisation and the division of labour

A

Production of cars. Different people produce different parts: Wheels, doors, engines.
Increasing productivity due to less time taken and reduces cost of production

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7
Q

1.1 Nature of Economics

4 functions of money

1.1.5 - Specialisation and the division of labour

A
  • Medium of exchange
  • Measure of value
  • Store of value
  • Method of deferred payment
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8
Q

1.1 Nature of Economics

Adam Smith (18th C)

1.1.5 - Specialisation and the division of labour

A

Father of modern economic theory. Described specialisation and the division of labour in a pin factory.

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9
Q

1.1 Nature of Economics

What are the advantages of specialisation

1.1.5 - Specialisation and the division of labour

A
  • Increased Productivity: Specialization allows workers to become more skilled in specific tasks, leading to higher efficiency. –> leads to higher profits for businesses
  • Economies of Scale: Larger quantities of identical goods can be produced more efficiently.
  • Lower Costs: Reduced training time and waste contribute to cost savings –> higher real incomes and GDP growth. When successful key cause of economic growth
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10
Q

1.1 Nature of Economics

Disadvantages of Specilisation

1.1.5 - Specialisation and the division of labour

A
  • Monotony: Workers may find repetitive tasks monotonous, leading to job dissatisfaction.
  • Dependency: An economy heavily dependent on a single industry or export can be vulnerable to economic shocks.
  • Lack of flexibility - for example, if the companies eventually move elsewhere, the workforce left behind can struggle to adapt
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11
Q

1.1 Nature of Economics

Advantages of Specializing for Trade

1.1.5 - Specialisation and the division of labour

A
  • Comparative Advantage: Nations can focus on producing goods and services where they have a comparative advantage, leading to higher efficiency.
  • Increased Standard of Living: Trade allows access to a wider variety of goods and services, enhancing overall living standards
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12
Q

1.1 Nature of Economics

Disadvantages of Specializing for Trade

1.1.5 - Specialisation and the division of labour

A
  • Vulnerability to External Shocks: Reliance on trade exposes nations to risks, such as changes in global demand or supply disruptions.
  • Income Inequality: Specialization may benefit certain industries or regions more than others, leading to income inequality.
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13
Q

1.1 Nature of Economics

Free Market Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Markets allocate scarce resources
  • Suppliers are driven by the profit motive
  • Private sector is dominant
  • Consumer tastes and preferences are really important
  • Key figures: Adam Smith, who advocated for the “invisible hand” of the market to allocate resources efficiently.
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14
Q

1.1 Nature of Economics

Mixed Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Mix of state and private ownership of businesses
  • Government intervention in most markets
  • The mix of state and market forces will vary from country to country
  • Example: Most modern economies, including the United States, have mixed economic systems.
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15
Q

1.1 Nature of Economics

Command Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Most resources are state owned (nationalised)
  • Government planning allocates most scarce resources
  • Little role for market prices and the profit motive
  • In a command economy, the government or central authority makes all economic decisions.
  • Key figures: Karl Marx, who envisioned a classless society with centralized planning, and Friedrich Hayek, a critic of central planning who believed in free markets.
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16
Q

1.1 Nature of Economics

Advantages of a Free Market Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Efficiency: Competition incentivizes firms to produce efficiently and innovate. Competition also helps keep prices low
  • Consumer Choice: Consumers have a wide range of choices in products and services.
  • Economic Growth: Free markets can lead to rapid economic growth and higher living standards.
  • Example: The United States’ free-market system has led to significant technological advancements and economic growth.
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17
Q

1.1 Nature of Economics

Disadvantages of a Free Market Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Inequality: Income and wealth disparities can be significant.
  • Lack of Public Goods: Some essential services may be underprovided without government intervention (e.g., public healthcare).
  • Boom-Bust Cycles: Free markets can be prone to economic cycles of booms and busts.
  • Example: The 2008 financial crisis exposed some of the shortcomings of unregulated financial markets.
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18
Q

1.1 Nature of Economics

Advantages of a Command Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Equality: Command economies aim to reduce income inequality through central planning.
  • Stability: Central control can provide stability during crises.
  • Prioritizing Social Goals: Resources can be directed toward public services and social welfare.
  • Example: North Korea’s command economy focuses on central planning and state control
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19
Q

1.1 Nature of Economics

Disadvantages of a Command Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Problems in fixing prices of goods and services - planners are unlikely to be as good as the market in determining suitable prices
  • Lack of Incentives: Central planning may discourage innovation and individual initiative. Also leading to low productivity
  • Resource Misallocation: Inefficient allocation of resources can lead to shortages or surpluses.
  • Bureaucracy: Command economies often involve complex bureaucracies.
  • Example: The collapse of the Soviet Union highlighted the challenges of central planning.
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20
Q

1.1 Nature of Economics

Roles of the State in a Mixed Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Regulation of Markets - e.g. employment protection for poeple in work and regulation of monopoly firms
  • Public goods - e.g. national defencce and public service broadcast
  • Welfare Services - e.g. Universal Credit, Child Benefit and State Pension
  • Merit Goods - e.g. State education, NHS and social housing
  • State-Owned Industries - e.g. - Network Rail and the BBC
  • Stabilisation and Economic Planning - Governments may use fiscal and monetary policies to manage economic cycles and prevent economic crises.
    Example: Central banks adjust interest rates to control inflation and promote economic growth.
21
Q

1.2 - How Markets Work

What are the Underlying Assumption of Rational Economic Decision Making

1.2.1 - Rational Decision Making

A
  1. Consumers Aim to Maximize Utility
  2. Firms Aim to Maximize Profits
  3. Consumer Decision-Making - Consumers make choices based on their preferences and budget constraints. Utility-maximizing consumers allocate their budgets to maximize satisfaction.
  4. Firm Decision-Making - Firms produce goods and services to meet consumer demand.
    Profit-maximizing firms adjust production levels and pricing to achieve the highest profit

Critiques of the Assumptions - Critics argue that in reality, consumers and firms may not always behave rationally due to bounded rationality, cognitive biases, and imperfect information
Importance of the Assumptions - Despite the critiques, the assumptions of utility maximization for consumers and profit maximization for firms serve as foundational concepts in economics.
They provide a framework for understanding and analyzing economic decision-making in various contexts.

22
Q

1.2 - How Markets Work

What is the different between a Movement and a Shift of the Demand Curve

1.2.2 - Demand

A
  1. Movements Along a Demand Curve - Movements along a demand curve occur when the quantity demanded changes due to a change in the price of the good or service, while other factors remain constant. The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.
  2. Shifts of a Demand Curve - Shifts of a demand curve occur when factors other than price cause a change in the quantity demanded at every price level. A shift indicates a change in overall demand, not just a response to price changes.
23
Q

1.2 - How Markets Work

Factors that may cause a shift in the demand curve

1.2.2 - Demand

A
  • Income
  • Consumer Preferences and Tastes
  • Prices of Related Goods
  • Population and Demographics
  • Expectations
  • Advertising
24
Q

1.2 - How Markets Work

How does Diminishing Marginal Utility Influence the Demand Curve

1.2.2 - Demand

A

The law of diminishing marginal utility contributes to the downward-sloping shape of the demand curve. As price decreases, consumers are willing to buy more because the marginal utility of each additional unit exceeds the price. Example: If a consumer enjoys ice cream, the first scoop provides high utility, but by the fifth scoop, the satisfaction gained from each additional scoop decreases.

25
Q

1.2 - How Markets Work

What is PED

1.2.3 - Price, income and cross elasticities of demand

A

Price Elasticity of Demand
Measures the responiveness of the quantity demand to changes in the price of a good
Formula: PED = (% Change in Quantity Demanded) / (% Change in Price)

26
Q

1.2 - How Markets Work

What is YED

1.2.3 - Price, income and cross elasticities of demand

A

Incomne Elasticity of Demand
YED measures the responsiveness of the quantity demanded to changes in consumer income
Formula: YED = (% Change in Quantity Demanded) / (% Change in Income)

27
Q

1.2 - How Markets Work

What is XED

1.2.3 - Price, income and cross elasticities of demand

A

Cross Elasticity of Demand
XED measures the responsiveness of the quantity demanded of one good to changes in the price of another.
Formula: XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)

28
Q

1.2 - How Markets Work

Values for PED

1.2.3 - Price, income and cross elasticities of demand

A

Perfectly Elastic (PED = ∞): Quantity demanded is extremely responsive to price changes, demand is perfectly elastic.
Relatively Elastic (PED > 1): Demand is responsive to price changes.
Unitary Elastic (PED = 1): Percentage change in quantity demanded is exactly proportional to the percentage change in price.
Relatively Inelastic (0 < PED < 1): Demand is less responsive to price changes
Perfectly Inelastic (PED = 0): Quantity demanded does not respond to price changes, demand is perfectly inelastic.

29
Q

1.2 - How Markets Work

Values for YED

1.2.3 - Price, income and cross elasticities of demand

A

Inferior Goods (YED < 0): Demand decreases as income increases (e.g., low-quality goods).
Normal Goods (0 < YED < 1): Demand increases with income but at a decreasing rate.
Luxury Goods (YED > 1): Demand increases significantly with income (e.g., luxury cars).

30
Q

1.2 - How Markets Work

Values for XED

1.2.3 - Price, income and cross elasticities of demand

A

Substitutes (XED > 0): An increase in the price of one good leads to an increase in the quantity demanded of the other (e.g., Coke and Pepsi).
Complementary Goods (XED < 0): An increase in the price of one good leads to a decrease in the quantity demanded of the other (e.g., cars and gasoline).
Unrelated Goods (XED = 0): The price change of one good has no effect on the other.

31
Q

1.2 - How Markets Work

Factors Influencing Elasticites of Demand

1.2.3 - Price, income and cross elasticities of demand

A

Degree ofNecessity
Addictiveness
Availability Substitutes
Time - become more elastic over time
Income (% of)
Brand Loyalty

32
Q

1.2 - How Markets Work

Why is Elasticities of Demand Important to Firms

1.2.3 - Price, income and cross elasticities of demand

A
  • Firms use elasticities to set prices and predict revenue changes.
  • Elastic demand means price increases reduce total revenue, while inelastic demand means price increases raise total revenue.
33
Q

1.2 - How Markets Work

Why are Elasticities of Demand Important to the Government

1.2.3 - Price, income and cross elasticities of demand

A
  • Government uses elasticities to make taxation and subsidy decisions.
  • Inelastic goods can bear higher taxes, while elastic goods may see reduced consumption due to taxes.
  • Subsidies can encourage the consumption of essential goods.
34
Q

1.2 - How Markets Work

What is the difference between a movement along the supply curve and a shift of the supply curve

1.2.4 - Supply

A
  1. Movements Along a Supply Curve - Movements along a supply curve occur when the quantity supplied changes in response to a change in the price of the good or service, while other factors remain constant. The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied also increases, and vice versa.
  2. Shifts of a Supply Curve - Shifts of a supply curve occur when factors other than price cause a change in the quantity supplied at every price level. A shift indicates a change in overall supply, not just a response to price changes.
35
Q

1.2 - How Markets Work

Conditions of Supply

1.2.4 - Supply

A
  • Productivity
  • Indirect taxes
  • Number of firms
  • Technology - level of technology or technological advancements
  • Subsidies
  • Weather
  • Costs
  • Government policies and regulation
36
Q

1.2 - How Markets Work

What is PES

1.2.5 - Elasticity of Supply

A

Price Elasticity of Supply
Measures the responsiveness of the quantity supplied of a good to changes in its prices
Formula: PES = (% Change in Quantity Supplied) / (% Change in Price

37
Q

1.2 - How Markets Work

Value for PES

1.2.5 - Elasticity of Supply

A
  • Perfectly Inelastic (PES = 0) - Quantity supplied doesn’t respond to price changes. Price are unable or unwilling to change supply
  • Relatively Inelastic (0 < PES < 1) - a percentage change in price results in a smaller percentage change in quantity supplied. Producers have limited flexibility to adjust supply quickl
  • Relatively Elastic (PES > 1) - a percentage change in price results in a larger percentage change in quantity supplied. Producers can respond to price changes by adjusting production.
  • Perfectly Elastic (PES = ∞) - even a slight price change results in an infinite change in quantity supplied. This is rare and usually occurs in markets where producers can instantly and costlessly adjust production.
38
Q

1.2 - How Markets Work

Factors Influencing PES

1.2.5 - Elasticity of Supply

A
  • Availability of substitutes
  • Stocks - shelf life
  • Production time
  • Availability of factors of production
  • Capacity
  • Ease of entry into the market

ASPACE

39
Q

1.2 - How Markets Work

What are the Functions of the Price Mechanism to Allocate Resources

1.2.7 - Price Mechanism

A
  1. Rationing Function - Prices allocate scarce resources among competing uses. When demand is higher than supply then price rises, so only people willing to oay get the goods
  2. Incentive Function - Provides incentive for producers to allocate resources. Higher prices motivate proders to produce more and vice versa
  3. Signaling Function - Convey information about market conditions allowing consumers and producers to make informed decisions
40
Q

1.2 - How Markets Work

The Price Mechanism in Local Markets

1.2.7 - Price Mechanism

A

In local markets, prices are determined by supply and demand conditions within a specific geographic area. Local factors, such as weather or local preferences, can influence prices. Example: The price of fresh produce at a local farmers’ market may vary based on seasonal factors and local supply.

41
Q

1.2 - How Markets Work

Price Mechanism in National Markets

1.2.7 - Price Mechanism

A

National markets cover an entire country and consider supply and demand at a broader scale. National policies and regulations, such as taxes and trade policies, can impact prices. Example: The national housing market may be influenced by government policies related to interest rates and mortgage regulations.

42
Q

1.2 - How Markets Work

Price Mechanism in Global Markets

1.2.7 - Price Mechanism

A

Global markets involve international trade and can be influenced by factors like currency exchange rates, global supply chains, and geopolitical events. Prices in global markets are interconnected and can impact local and national markets. Example: The price of oil in global markets affects fuel prices around the world, impacting consumers and industries in various countries

43
Q

1.2 - How Markets Work

What is Consumer Surplus

1.2.8 - Consumer and Producer Surplus

A

Consumer surplus is the additional benefit or utility that consumers receive when they are able to purchase a good or service at a price lower than what they are willing to pay. It represents the difference between what consumers are willing to pay (their maximum price) and what they actually pay in the market.

44
Q

1.2 - How Markets Work

What is Producers Surplus

1.2.8 - Consumer and Producer Surplus

A

Producer surplus is the additional profit that producers earn when they sell a good or service at a price higher than their minimum acceptable price. It represents the difference between the market price and the producer’s marginal cost of production.

45
Q

1.2 - How Markets Work

What is a Subsidy

1.2.9 - Indirect Taxes and Subsidies

A

Money grant given to producers by the government to lower costs of production and encourage an increase in output

46
Q

1.2 - How Markets Work

What are Indirect Taxes

1.2.9 - Indirect Taxes and Subsidies

A

A tax that increases a firms cost of production but can be transferred onto the consumer via higher price
Or a tax on spending

47
Q

1.2 - How Markets Work

When are Subsidies used

1.2.9 - Indirect Taxes and Subsidies

A

PE in consumption – Used when there is an underconsumption of a good, so by lowering the cost of the production via a subsidiary there is a socially optimum quantity of the good and also a lower price level. E.g buses and rail
PE -

48
Q

1.2 - How Markets Work

What is the impact of indirect taxes on consumers

1.2.9 - Indirect Taxes and Subsidies

A
  • Increased prices
  • Possible behavioural changes
  • Possible regressive impact

New: A level Econ (16 decks)

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