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Economics > Theme 1 - Introduction To Markets And Market Failure > Flashcards

Theme 1 - Introduction To Markets And Market Failure Flashcards

1
Q

Ceteris Paribus

A

The assumption that everything else will remain the same

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2
Q

What are economic models?

A

A simplified description of reality

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3
Q

Economics seeks to…

A

…meet society’s needs and wants

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4
Q

Reasons for high rent prices (5)

A
  • limited housing supply
  • high property prices
  • high living costs
  • different regions
  • housing market instability
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5
Q

Basic economic problem

A

Unlimited wants but limited resources

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6
Q

The 4 types of markets

A

Centrally planned
Mixed
Free enterprise
Traditional

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7
Q

The 4 economic agents (and what they aim to achieve)

A

Government - maximise social welfare
Consumers - maximise their satisfaction
Workers/employees - maximise the benefits of work
Firms/businesses - maximise profit

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8
Q

Definition of utility

A

The economic term for satisfaction/value

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9
Q

Definition of marginal

A

Additional

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10
Q

Definition of marginal utility

A

The change in satisfaction from consuming an extra unit

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11
Q

Definition of total utility

A

The total satisfaction derived

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12
Q

Definition of demand

A

The amount of a product people are willing and able to buy at a given point

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13
Q

Demand and price have a … relationship

A

Inverse

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14
Q

Change in price…

A

Move along the curve

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15
Q

Change in any other factors (except price)…

A

Shift graph left/right

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16
Q

Definition of expansion

A

Lowering of the price leads to an increase in demand

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17
Q

Definition of contraction

A

Increase of the price leads to a decrease in demand

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18
Q

Main factors that shift the demand curve (6)

A
  • population
  • advertising
  • income/money
  • change in price of complementary goods
  • change in price of substitute goods
  • trends/fashion
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19
Q

The supply curve is the…

A

…correlation between the cost of a good/service and the quantity supplied for a given period.

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20
Q

Definition of a normative statement

A

Subjective statements that are based on an opinion (e.g. I think, it might, you should)

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21
Q

Definition of positive statement

A

Objective statements that can be tested/measured and are based evidence (e.g. will)

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22
Q

What are the 4 resources?

A
  • Capital
  • Enterprise (entrepreneurs)
  • Land
  • Labour
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23
Q

Definition of opportunity cost

A

The loss of other alternatives when one alternative is chosen

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24
Q

What does PPF (graph) stand for?

A

Production Possibility Frontier

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25
Q

What does a PPF show?

A

The maximum output combination of 2 products

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26
Q

Why is there an opportunity cost in PPF graphs?

A

Due to a scarcity of resources

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27
Q

Definition of specialisation

A

When an individual/firm/business concentrates on a product or task

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28
Q

Definition of division of labour

A

When production is broken down into many separate tasks and one person focuses and repeats one of those tasks

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29
Q

Definition of absolute advantage

A

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

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30
Q

Definition of comparative advantage

A

Being able to produce something at a much lower opportunity cost than another country

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31
Q

What is the equation for working out comparitive advantage/opportunity cost from a graph?

A

Factor A / Factor B = opportunity cost of Factor B

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32
Q

What are the functions of money? (4)

A
  • a medium of exchange (between suppliers and customers)
  • a measure of value (price tags)
  • a store of value (weekly wages)
  • a method of settling debts
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33
Q

The demand curve shows the amount of a product that consumers would buy at different…

A

Prices

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34
Q

The demand curve slopes … because as the price … the more of it people will buy

A

Downwards / decreases

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35
Q

Definition of taxes

A

A charge levied by the government to raise revenue (decrease supply)

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36
Q

Definition of subsidies

A

Any form of government support offered to producers to make products cheaper by offsetting some of their operating costs (increases output)

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37
Q

Surplus is…

A

Excess supply

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38
Q

Shortage is…

A

Excess demand

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39
Q

When demand = supply it is called…

A

Equilibrium

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40
Q

The opposite to equilibrium is…

A

Disequilibrium

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41
Q

Definition of derived demand

A

When the demand for a good/service is related to another good/service.
Eg. Increase in demand for cars leads to an increase in demand for fuel

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42
Q

What are the 4 basic types of elasticity?

A
  • price elasticity of demand (PED)
  • price elasticity of supply (PES)
  • income elasticity of demand (YED)
  • cross elasticity of demand (XED)
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43
Q

What is the equation for “Price Elasticity of Demand” (PED)?

A

(%change in quantity demanded) / (%change in price) = PED

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44
Q

(For PED and PES) What do the values mean? (5)

A

∞ = perfectly elastic
> 1 = elastic
1 = unit elastic
< 1 = inelastic
0 = perfectly inelastic

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45
Q

A highly inelastic graph would have a … demand line

A

(Almost) vertical

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46
Q

A highly elastic graph would have a … demand line

A

(Almost) horizontal

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47
Q

Name 3 economic theorists

A

Adam Smith (1723-1790) Capitalism / Mixed Economy
Karl Marx (1818-1883) Communism / Centralised Economy
Friedrich Heyak (1899-1992) Free Market / Free Economy

48
Q

Which theory did Adam Smith develop?

A

The invisible hand theory:
- Self Interest
- Circular Flow of Income
- Risk & Reward
- Trade leaves us all better off
- Wealth is created through productive labor, and that self-interest motivates people to put their resources to the best use.

49
Q

Which theory did Karl Marx develop?

A

Marxism
- Capitalists control the capital.
- The capitalists are motivated by profit so pay poor wages which affects spending.
- Marx believed sharing the wealth was a better idea.

50
Q

Which theory did Friedrich Hayek develop?

A
  • Only Buyers & Sellers understand the market.
  • The government might try to help.
  • But any policy unintentionally makes things worse.
  • Better off leaving the market alone.
  • Believes the only place for government is passing essential laws (Like Health and Safety), collecting general taxes (Like VAT).
  • Then letting the market take care of itself!
51
Q

Definition of elastic

A

A product is considered to be elastic if the quantity demand of the product changes more than proportionally when it’s price increases or decreases

52
Q

Definition of inelastic

A

When the price of a good/service changes, consumers’ buying habits stay about the same

53
Q

Determinants of Elasticity of Demand (SPLAT)

A
  • Substitutes (no. and closeness)
  • Percentage of increase
  • Luxury / necessity
  • Addictive / habit-forming
  • Time period
54
Q

What is the equation for Price Elasticity of Supply (PES)?

A

(%change in quantity supplied) / (%change in price) = PES

55
Q

Determinants of Elasticity of Supply? (PEPS T)

A
  • Pace of technological advancement
  • Ease of switching between products in production
  • spare Production capacity (CELL)
  • spare Storage capacity
  • Time period for production adjustment
56
Q

What is the equation for Income Elasticity of Demand?

A

(%change in quantity demanded) / (%change in income) = YED

57
Q

(For YED and CE) What do the values mean? (6)

A

> 1 = elastic
< 1 = inelastic
1 = luxury
< 1 = necessity
Negative - inferior good (and a substitute good)
Positive - normal (and a complimentary good)

58
Q

Definition of recession

A

2 consecutive periods of negative growth (6 months)

59
Q

Definition of cross elasticity

A

The responsiveness of demand of one good to changes in the price of a related good - either a substitute or a complementary good/service

60
Q

What is the equation for Cross Elasticity of Demand?

A

(%change in quantity demanded of good A) / (%change in price of good B) = XED

61
Q

What does a negative symbol in front of the XED value mean?

A

Substitute (positive relationship)

62
Q

What does a positive symbol in front of the XED value mean?

A

Complementary (inverse relationship)

63
Q

The higher the the value of XED…

A

…the stronger the relationship

64
Q

Definition of market failure

A

When the market fails to allocate resources effectively

65
Q

Definition of negative externalities

A

When a 3rd party is negatively effected by a market transaction

66
Q

What do the following stand for?
- MPC
- MPB
- MSC
- MSB

A

MPC - marginal private cost
MPB - marginal private benefit
MSC - marginal social cost
MSB - marginal social benefit

67
Q

What does the triangle show in a negative externalities graph?

A

The negative externalities (the extra cost to society)

68
Q

Which line is added in a negative externalities graph (and direction)?

A

Marginal Social Cost (MSC) - bottom left to top right

69
Q

Definition of positive externalities

A

When a 3rd party is positively effected by a market transaction

70
Q

Which line is added in a positive externalities graph (and direction)?

A

Marginal Social Benefit (MSB) - top left to bottom right

71
Q

Definition of Price Mechanism

A

The interaction of buyers and sellers in free markets to enable goods, services and resources to be allocated by prices

72
Q

What are the functions of the price mechanism (3)?

A
  • rationing function
  • signalling function
  • incentive function
73
Q

What is the rationing function?

A

Resources are scarce —> demand exceeds supply + price goes up
The greater the scarcity, the higher the price and the more the resource is rationed

74
Q

What is the signalling function?

A

Higher prices —> signals to consumers to reduce consumption + signals to firms to produce more
Falling prices —> signals to consumers to enter a market + signals to producers to leave a market

75
Q

What is the incentive function?

A

Higher prices —> incentive for consumers to consume less + incentive for producers to produce more
Falling prices —> incentive for consumers to consume more + incentive for producers to produce less

76
Q

Definition of rational decision making

A

(The assumption that) people aim to maximise their own welfare

77
Q

Reasons why humans are irrational decision makers (10)

A
  • incomplete information
  • limited capacity to calculate all costs and benefits - limited computation
  • influenced by social networks
  • often act reciprocally rather than self interests
  • lack self control and seek immediate satisfaction
  • loss averse
  • make different choices in cold/emotional states
  • often fall back on simple rules of thumb when choosing
  • satisfice rather than maximise
  • have a strong default to maintain the status quo
78
Q

Complete market failure is…

A

When there is no supply of products

79
Q

Partial market failure is…

A

When the market functions but produces the wrong quantity of a product or the wrong price

80
Q

What are public goods?

A

Examples of missing markets/market failure

81
Q

Market failure leads to…

A

Government intervention

82
Q

What is another name for ‘public goods’?

A

‘Collective consumption goods’

83
Q

What are the 3 features of ‘public goods’?

A
  • non-excludability - the benefits derived from pure public goods cannot be confined solely to those who have paid for it
  • non-rival - consumption by one consumer doesn’t restrict consumption by other consumers
  • non-rejectable - cannot be rejected by people
84
Q

What is the ‘free-rider’ problem?

A

Public goods are non-excludable so it is hard to charge everyone for using them.
The government pays for the public good with taxation so everyone is charged.

85
Q

Definition of maximum pricing

A

When a price is set which the market will not be allowed to go above

86
Q

What are some sectors that the government like because of their positive externalities (4)?

A
  • rental market
  • elderly care
  • health/dental care
  • education market
87
Q

The maximum price has to be set… the current market price.

A

…below…

88
Q

Definition of minimum pricing

A

When a price is set which the market is not allowed to go below

89
Q

The minimum price has to be set… the current market price.

A

…above…

90
Q

What are some products which if minimum priced, society would benefit (4)?

A
  • sugar
  • energy drinks
  • cigarettes/vapes
  • alcohol
91
Q

Definition of flat tax

A

A tax on firms, that imposes the same tax rate on all individuals, regardless of their income levels (but can be passed on to costomers through higher prices)

92
Q

Examples of industries which would benefit from flat tax (6)?

A
  • cigarettes/vapes
  • sugar
  • fuel
  • gambling
  • fast food
  • alcohol/energy drinks
93
Q

Definition of ad valorem (unit tax)

A

a tax that is based on the value of a product or service (% tax)

94
Q

Main example of ad valorem tax

A

VAT

95
Q

In a flat tax graph, the supply line… and the demand line…

A

…shifts to the left…
…doesn’t move…

96
Q

In an ad valorem graph, the supply line… and the demand line…

A

…tilts to be more vertical…
…doesn’t move…

97
Q

Definition of a quasi-public good

A

A near-public good i.e. it has many but not all the characteristics of a public good

98
Q

Examples of quasi-public goods (3)

A
  • beaches
  • parks
  • swimming pools
99
Q

Definition of merit good

A

Goods/services that the government feels people will under-consume and ought to be subsidised or provided free at the point of use so that consumption doesn’t depend primarily on the ability to pay for the good/service

100
Q

Reasons why education is seen as a merit good (7)

A
  • more efficient/productive workforce
  • government can collect more tax
  • people can have a higher choice of jobs and opportunities
  • people can earn higher income
  • the prices of goods decrease due to increased supply
  • occupational mobility
  • reduces unemployment
101
Q

Definition of demerit goods

A

‘Bad for you’ goods
Market fails to take into account the negative externalities of consumption because the social costs exceeds the private costs

102
Q

Examples of demerit goods (3)

A
  • drugs
  • alcohol
  • cigarettes/vapes
103
Q

Definition of asymmetric information

A

Type of market failure in which one party has more information than the other party.
They use this to exploit the other party.

104
Q

… information is needed for markets to work

A

Symmetric…

105
Q

Examples of asymmetric information (5)

A
  • car sales/car insurance
  • doctors/dentists
  • landlords
  • mortgages
  • traders in financial/stock markets
106
Q

What is carbon trading?

A

A system of limiting carbon emissions through granting firms permits to emit a certain amount of carbon

107
Q

What are the advantages to a firm of producing less carbon than the government has permitted them to?

A

The firm can buy and sell these permits on the open market
They can then use this money to invest in their business

108
Q

Reasons why young people have such high car insurance payments (6)

A
  • less experience
  • more often have accidents
  • drive at peak times
  • learning to drive
  • live in bigger cities (London)
  • type of car they drive
109
Q

Factors that may increase the price of someone’s insurance (5)

A
  • postcode (London/area of high levels of crime)
  • lack of experience
  • young age
  • car’s mileage and type of car
  • previous convictions/behaviour
110
Q

What is the black box scheme?

A

A type of car insurance which sees a small device fitted out-of-sight in your car and it measures how well you drive in order to reward safe drivers with discounted insurance.

111
Q

What is ‘consumer surplus’?

A

The difference between the total amount that consumers are willing to pay and the total amount they actually have to pay.

112
Q

What is ‘producer surplus’?

A

The difference between the price the producer is willing to accept and the actual amount they receive.

113
Q

What is the combined consumer surplus and producer surplus called?

A

Welfare gain to society

114
Q

In a consumer surplus and producer surplus diagram, which triangle is which?

A

The top one - consumer surplus
The bottom one - producer surplus

115
Q

What does consumer/producer surplus diagrams tell us?

A

How much a good/service benefits society and how much the welfare gain is

Economics (4 decks)

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