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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

What is opportunity cost?

A

The benefit lost of the next best alternative when making a choice

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2
Q

If a point is on the PPF, what does this mean?

A

Factors of production/ resources are being used to their maximum capability
(productively efficient)

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3
Q

If a point is inside the PPF curve, what does this mean?

A

Factors of production/resources aren’t being used to their maximum capability
(productively inefficient)

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4
Q

What is specialisation?

A

The process by which individuals, firms or regions concentrate their efforts on producing a narrow range of goods or services in which they have a comparative advantage

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5
Q

What is the idea of comparative advantage?

A

suggests that individuals, businesses or countries should focus on producing goods and services which they are relatively more efficient in producing or have lower opportunity costs compared to others

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6
Q

weaknesses of specialisation

A

-Reliance on a narrow range of goods/services
-Finite resources will run out one day
-Foreign competition - another country can produce the same product better and cheaper
-Reliance on international trade

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7
Q

Strengths of specialisation

A

-Higher output - more efficient allocation of resources , using comparative advantage
-Job opportunities (can lead to better living standards)

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8
Q

What is meant by division of labour?

A

The production process is broken down into many separate tasks, raising output per person.

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9
Q

Strengths of division of labour

A

-Workers are highly productive
-Specialist capital for workers
-Lower costs, lower prices
-Better quality
-Increased quantity

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10
Q

Weaknesses of division of labour

A

-Workers can become bored and demotivated doing the same tasks
-Some tasks can be replaced by machines
-Specialist workers can struggle to find employment elsewhere

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11
Q

What is the law of diminishing marginal utility?

A

As quantity consumed increases, the marginal utility derived from each extra unit consumed decreases

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12
Q

Factors affecting demand

A

Population
Advertising
Substitutes
Income
Fashion
Interest rates
Complements prices

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13
Q

What are the factors that effect PED?

A

Substitutes
Population
Luxury/necessity
Addiction
Trends

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14
Q

Explain income effect

A

If prices increase then our incomes cant stretch as far therefore we are less able to buy same quantity of goods/services so demand contracts

(we demand less)

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15
Q

Explain substitution effect

A

As prices go up other goods and services become more price competitive so we switch our demand to those goods and services instead so demand extends

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16
Q

What is the definition of demand ?

A

Quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

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17
Q

What are the 3 economic agents and what are their objectives?

A

Consumers - Try to maximise utility within their incomes. Want to balance their free time and work. Different consumers have different views of what maximising utility looks like

Producers - Maximise profits

Government - maximise living standards and welfare of state

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18
Q

If you increase the price of one good, what will happen to the quantity demanded of its complement good?

A

It decreases

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19
Q

Formula for PED

A

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

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20
Q

If PED is greater than one, is price elastic or inelastic ?

If PED is less than one ,is price elastic or inelastic ?

A

-PED greater than one = elastic

-PED less than one = inelastic

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21
Q

Formula for income elasticity of demand

A

% Change in Quantity demanded / % change in income

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22
Q

What is a normal good?

A

A product which increases in demand due to an increase in incomes
Always have a positive income elasticity of demand

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23
Q

What is an inferior good?

A

A product which decreases in demand when incomes increase
Always have a negative income elasticity of demand

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24
Q

What are complementary goods?

A

An increase in price of one good will lead to a decrease in demand for the other good. Complements have negative cross-price elasticities of demand.

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25
Q

Explain what is meant by substitute goods

A

An increase in price of one good will lead to an increase in demand of another good. Substitutes have positive cross elasticities of demand.

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26
Q

Law of supply

A

There is a direct relationship between price and quantity supplied. As price increases, so does quantity supplied.

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27
Q

What are the factors affecting supply?

A

Productivity
Weather
Technology
Costs
Number of suppliers

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28
Q

What are the factors influencing PES?

A

-Spare capacity
-Availability of FOP’s
-State of economy
-Stockpiles and perishability
-Time period

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29
Q

What is meant by inelastic supply?
What is meant by elastic supply?

A

Inelastic = Supply IS NOT responsive to changes in price. PES is between 0 and 1.
Elastic = Supply IS responsive to changes in price. PES is between 1 and infinity.

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30
Q

What is the coefficient when PES is perfectly inelastic vs perfectly elastic?

A

Perfectly inelastic = 0
Perfectly elastic = 1

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31
Q

Complementary goods have a ………………. XED

A

Negative

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32
Q

Substitute goods have a ………………. XED

A

Positive

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33
Q

Normal goods which are income inelastic have a YED between …………..

A

0 and 1

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34
Q

Normal good which are income elastic have a YED between …………..

A

1 and ∞

35
Q

What is consumer surplus and how is it represented on a diagram?

A

The difference between the price consumers are willing and able to spend on a good/ service and the price they actually pay.

Represented by the area underneath the demand curve and above the price line.

36
Q

What is producer surplus and how is it represented on a diagram?

A

The difference between the price that producers are willing to supply their good/service for and the price they actually supply it for

Represented by the area above the supply curve and below the price equillibrium line

37
Q

What is meant by market equilibrium?

A

DEMAND = SUPPLY

38
Q

What are the 4 price functions ?

A

Allocate scarce resources efficiently

Ration scarce resources by encouraging/discouraging consumption

Signal excess demand/supply and need for higher/lower resources

Incentivise producers to increase/decrease output to increase profit

39
Q

Explain what is meant by XED

A

XED measures the responsiveness of quantity demanded of a good/service given a change in price of another good/service.

40
Q

How do prices of other goods/services shift the supply curve?

A

If price of good A increases, this might make it more profitable to switch from supplying good B in order to supply good A.

41
Q

What is joint supply ?

A

This is when there is an increase or a decrease in the supply of one good/service leads to an increase/decrease in supply of a by-product.

e.g. Chicken can be used for meat and eggs

42
Q

If Factors of production are very available, then is supply likely to be elastic or inelastic?

A

Elastic

43
Q

If factors of production are not very available, then is supply likely to be elastic or inelastic?

A

Inelastic

44
Q

PES will be …………… when factors of production are not fully employed

A

-Elastic
-Easier for businesses to increase quantity supplied, because factors of production are very available

45
Q

PES will be …………… when factorsof production are fully employed

A

-Inelastic
-Harder for businesses to increase quantity supplied, because factors of production are not very available

46
Q

If a good can be stockpiled, then its PES is likely to be elastic or inelastic?

A

-Elastic
- When something can be stockpiled, if there is a change in price, then producers can act quickly to increase or decrease supply in order to maximise profits.
E.g. You can easily stockpile pencils. If there is an increase or decrease in price, you can act quickly to increase or decrease supply.

47
Q

Definition of a tax

A

A compulsory contribution to state revenue levied by the government

48
Q

Features of indirect tax

A

-Specific tax
-You can avoid it by not buying certain products
-Form of government intervention

49
Q

Features of direct tax

A

-Comes out of your income
-Goes straight to the government
-Cant avoid paying it
-E.g. Income tax, corporation tax

50
Q

Formula for government revenue from tax

A

Consumer burden + producer burden = Government revenue from tax

51
Q

Which way do taxes shift the supply curve and why?

A

-Taxes shift the supply curve left
-Firms have to increase price of good/service to make the profit, after the tax is imposed
-Increased price ——-> Decreased equilibrium

52
Q

Why is consumer burden bigger than producer burden when demand is more inelastic than supply?

A

Consumer burden is bigger than producer burden because demand is more inelastic than supply, so producers can pass on most of the tax to consumers through higher prices, without worrying about losing sales.

53
Q

When demand is more elastic than supply, why is consumer burden smaller than producer burden?

A

When demand is more elastic than supply, consumers will be more responsive to changes in price. So after the tax, producers will take on most of the tax themselves and only pass a small amount of tax onto consumers through higher prices - otherwise producers risk losing all of their consumers.

54
Q

Definition of a specific tax

A

A fixed amount of tax paid on each unit sold

55
Q

Benefits of a free market economy

A

-Price mechanism is efficient - Price will decrease to get rid of excess supply and price will rise to get rid of excess demand

-Lower prices - lots of producers competing so they have to lower costs, improve efficiency and lower prices to compete in the market

-Choice - this means that consumers have a choice between different options of the good. E.g. there are different brans for phones so consumers have more choice, improves consumer choice

56
Q

Weakness of a free market economy

A

-Inequality - Free markets can lead to capitalism and inequality as Karl Marx argued

-Monopolies - One big company dominates the market so can increase price as they are the only supplier. Consumers kind of have to choose the firm as they are the main supplier, this can mean that the firm becomes reluctant and quality decreases.

-Market failure - public goods will be underprovided and externalities not internalised

57
Q

Benefits of a command economy

A

-Correct market failure - Government has complete control so can intervene immediately if it notices negative externalities e.g. Tax on cigarettes
-Less inequality- Government is in control of all wages so everyone can be paid equally
-Stop monopoly abuse - One single dominant firm cant control the market and charge unfair unreasonable prices

58
Q

Cons of a command economy

A

-Government failure- unintended consequences like black market trading and smuggling
-Destroys incentives - If everyone is earning the same wage then what is the point of working harder, workers are less productive and firms have no profit incentive
-Limited choice - consumers have a limited range of products to chose from. In a free market there are lots of firms competing, driving down prices and being more innovative

59
Q

What is market failure?

A

When the price mechanism leads to a misallocation of resources

Price mechanism leads to a price and quantity that isn’t good for society

60
Q

How does habitual behaviour affect consumption?

A

-Consumers will stick with what they are used to even though they could maximise their utility by choosing another option

-End up overlooking better alternatives

61
Q

Several phone network providers were recently accused of overcharging consumers for phone contracts. One provider charged an extra $£40$ per month for the package it offered its customers, and yet few customers decided switch to another cheaper provider, even after their contract had expired.

The most likely explanation for consumers’ behaviour is:

Utility maximisation
Habitual behaviour
Profit maximisation
Herd behaviour

A

Habitual behaviour

62
Q

The acai berry has been advertised to provide anti-ageing benefits and reduce the risk of cancer because of its high potassium content $(75 \textnormal{mg})$. However, many dieticians argue the acai berry is “unremarkable” and contains no more potassium than a common banana.

In spite of this, in the last few years, sales of acai berry have increased by $720 and small jars of acai berries are now being sold for as much as $40.

Why have acai berries grown so popular?

Because of consumers maximising their utility
Because of consumers’ weakness at computation
Because of firms looking to minimise their profits
Because of firms’ weakness at computation

A

Because of consumers weakness of computation

63
Q

The driving force that compelled these investors to sink their money into these ventures, which they had little knowledge of, was the reassurance they received from seeing so many investors doing the same thing.
The reckless investing can be best described as an example of:

Habitual behaviour
Firms maximising their profits
Herd behaviour
Rational decision-making

A

Herd behaviour

64
Q

What is meant by Herd behaviour?

A

Consumers are influenced by the behaviour of others.
E.g. consumers may start smoking just because they see friends and celebrities smoking.

65
Q

What is meant by Habitual behaviour?

A

When consumers are in the habit of making certain decisions.
E.g. consumers may continue to buy car insurance from their current provider out of habit, even if there are cheaper car insurance providers available.

66
Q

What is meant by Weakness at computation?

A

Consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.

E.g. consumers may miscalculate which mobile phone contract offers the best value for money.

67
Q

What is meant by bounded rationality?

A

Decision making capacity of humans cannot be fully rational because of a number of limits that we face

68
Q

Steel production leads to high levels of carbon emissions.

Which one of the following is likely to result in an increase in carbon emissions? (1)

A Introducing a tradable pollution permits scheme
B Shutting down steel factories
C Subsidising the steel industry to install cleaner technology
D Reducing indirect taxes on steel products

A

D

69
Q

There is currently excess supply (or a surplus) in the market. Explain how the price adjusts to bring the market back to equilibrium.

A

When there is an excess supply of a good, producers will decrease the price to sell off their surplus. The decreasing price signals to producers to supply less, and reduces incentive to supply, leading to a contraction in supply. It also increases quantity demanded because consumers will buy more goods as price decreases. This brings us to a new equilibrium at a lower price.

70
Q

What are the functions of money?

A

-Medium of exchange
-Unit of account
-Store of value
-Method of deferred payment

71
Q

What is meant by incomplete information?

A

Incomplete information is when someone doesn’t have full information about the benefits or costs of their decisions.

72
Q

Definition of government failure

A

When the government intervenes to correct market failure but makes the misallocation of resources even worse than before

73
Q

Outline the law of unintended consequences

A

Economists suggest that government intervention always leads to some form of unintended consequences for society creating a market failure. The government places speed bumps to slow down drivers saving lives but it also slows down ambulances who need to go fast in order to save people

74
Q

Outline features of a quasi-public good

A

Semi-non-rival
Up to a point, more consumers using a road or park doesn’t reduce the space available for others. But beaches can become crowded as do parks

Semi-non-excludable
It is possible but difficult or costly to exclude non-paying consumers for things such as fencing, a park or bench

75
Q

Features of a private good

A

Excludable - private goods are highly excludable. Sellers can prevent consumers from consuming it if they haven’t paid

Rivalous in consumption - When one person consumes the good, it reduces the supply available for others

Pricing and profit - private goods are typically priced in markets based on supply and demand. Consumers pay for what they consume

76
Q

Why does the government finance public goods?

A

Non-excludability - taxation ensures that everyone contributes to the funding of public goods, preventing free-riding and ensuring that the costs are distributed across the entire population

Economies of scale - producing public goods for a larger population can lead to cheaper unit costs per capita.

Public interest and equity - Taxation allows governments to allocate resources based on societal priorities and ensure that public goods are provided in a way that promotes social welfare

77
Q

Explain the term ‘asymmetric information’

A

-This occurs when one party knows more than the other in the market

-This can lead to problems in decision-making, since the party with less information may not have all the information needed to make the best decision

E.g. The landlords know more than the tenants

78
Q

What is a minimum price and why does the government impose them?

A

Minimum prices are legally imposed price floors and are most associated with minimum hourly wage rates in the labour market or guaranteed price support schemes for farmers and other producers

79
Q

What is a maximum price and why does the government impose them?

A

Maximum prices are legally imposed price ceilings which suppliers can’t exceed in a market.
It is imposed to prevent prices from rising above a certain level.
A key aim of max price is to improve the affordability of a good or service, especially those on lower incomes.

80
Q

Reasons FOR the Government imposing maximum prices in the Housing market

A

-Rent controls prevent landlords from exploiting tenants
-Keeps structural unemployment higher
-High rent reduces people’s effective disposable incomes meaning that if there wasn’t a price cap then people would have no other money to spend and would be living ‘wage to wage’

81
Q

Reasons AGAINST the Government imposing maximum prices in the housing market

A

-Results in landlords withdrawing investment leading to a diminished supply of private-sector rented housing
-Landlords might cut back on maintenance spending (because they aren’t making as much profit on the properties), increasing the risk of damp and damage
-Some landlords may demolish homes for rent and replace them with new housing to buy as there is greater profit incentive

82
Q

PROS of specialisation

A

-Get to enjoy a variety of goods
-More output
-Increased trade

83
Q

CONS of specialisation

A

-Over-specialising
-Vulnerable
-Natural resource depletion e.g. Nigeria and Saudi Arabia

Economics (10 decks)

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