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Economics > Theme 1 (Micro) > Flashcards

Theme 1 (Micro) Flashcards

1
Q

What is ceteris paribus ?

(1.1.1)

Economies as a social science

A

Everything apart from the factors you are modelling is equal.

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2
Q

What is are positive and normative statements ?

(1.1.2)

Normative and positive statements

A

Positive Statement - Can be tested against real world evidence.
Normative Statement - Based on value judgemants which are subjective and cant be tested as proof.

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3
Q

What is the economic problem ?

(1.1.3)

Economic problem

A

Unlimited wants of cosumers.
Limited F.O.P to meet the demand.

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4
Q

Define Opportunity Cost ?

(1.1.3)

Economic Problem

A

The benefit foregone the next best alternative.

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5
Q

What are the TWE’s of Opportunity Cost ?

(1.1.3)

Economic Problem

A

Habitual behaviour - Consumers fall into routines.
Agents Face Multiple Options - Agents may not be able to compute all private costs and benefits.

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6
Q

Draw a PPF ?

(1.1.4)

PPF

A
Capital and Consumer goods.
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7
Q

What are Capital and Consumer Goods ?

(1.1.4)

PPF

A

Consumer Goods - Output that is consumed by households which derives utility.
Capital Goods - Piece of manufacturing equipment used in production process.

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8
Q

Where on a PPF is Efficient ?

(1.1.4)

PPF

A

Operating on the line of the PPF is efficient.

Operating within the PPF shows inefficency and a misallocation of resources.

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9
Q

What causes an outward shift in the PPF ?

(1.1.4)

PPF

A

An increase in the F.O.P will cause an outward shift in PPF.

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10
Q

What causes an inward shift in PPF ?

(1.1.4)

PPF

A

An inward shift is caused by external causes and represents economic decline.
Example - War / Natural Disaster

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11
Q

Whats Adam Smith’s theory ?

(1.1.5)

Specialisation

A

Adam Smith wrote about the division of labour.
Whereby splitting the production process - leads to specialisation - leads to Increased productivity / Decrease in waste.

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12
Q

Risks of Division of Labour ?

(1.1.5)

Specialisation

A

Boredom caused by :
-Repetition
-Lack of social interaction
-Low self worth

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13
Q

How to Compensate Boredom in the Division of Labour ?

(1.1.5)

Specialisation

A
  • Higher Pay, Linked to Output
  • Job Rotation (Variance)
  • Increase use of capital equipment
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14
Q

What are the Advantages of Specialising in Production ?

(1.1.5)

Specialisation

A

Increasing output allows for investment into machinery -> Automation is more productive -> More K can increase productivity of labour -> Overcome scarcity and allows for lower prices

Increasing investment into K & R&D -> Increase innovation -> Improve product quality = increase sales and support growth

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15
Q

What are the Disadvantages of Specialising in Production ?

(1.1.5)

Specialisation

A

High sunk costs = Risk of losses
Supply chain disruption = Production has to stop
Any mistake in production = High cost

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16
Q

What are the 4 functions of money ?

(1.1.5)

Specialisation

A
  • A medium of exchange: It is widely accepted token which can be exchanged for goods and services.
  • A measure of value: Prices reflect the value society places on them.
  • A store of value: Possible to use for future transactions.
  • A method of deffered payment: It can be postponed in the future, expressed as a form of debt
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17
Q

Define Free Market Economy ?

(1.1.6)

Markets

A

Free market economy: Where there is no government intervention and supply and demand dtermine what is produced through the price mechanism.

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18
Q

What was Adam Smith’s Argument ?

(1.1.6)

Markets

A

Smith argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests.
dynamic free markets are the best method to allocate resources through the price mechanism.

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19
Q

What’s the Advantages of a Free Market Economy ?

(1.1.6)

Markets

A

Allocative Efficiency - Whereby G/S that people demand are produced

Productive Efficiency - Firms cut costs and make efficient use of scarce finite reources.

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20
Q

Risks of Free Market Economy ?

(1.1.6)

Markets

A

Risk market failure:
- Over-consumption of G/S with high private and external costs.
- Under-consumption of G/S with high private and external benefits.

Risk of absolute poverty is much higher.
High levles of wealth and income inequality.
High risk of monopolies.

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21
Q

What did Marx Believe ?

(1.1.6)

Markets

A

Owners with objectives of profit will end up exploiting workers wages.

Owners will replace labour with K causing monotonous jobs and unemployment.

Competition will cause firms to go bust leading to monopolies.

Capitalism has weaknesses and flawes and will eventually self-destruct.

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22
Q

What are the Characteristics of a Command Economy ?

(1.1.6)

Markets

A
  • Governments will own some or all goods and services within industries.
  • Production is decided by government agencies, who decide most socially efficient G/S to produce.
  • Government may set prices or give consumers rations directly.
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23
Q

What are the Advantages of a Command Economy ?

(1.1.6)

Markets

A
  • Low inequality and focus on social welfare
  • Prevent abuse of monopoly power

-Prevents mass unemployment

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24
Q

Hayeks Disadvantages of Command Economies ?

(1.1.6)

Markets

A

Hayek - criticised command economies as he claimed the government couldnt process all the information needed to distribute goods efficiently

Government intervention would distort the price mechanism and lead to an inefficient allocation of resources

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25
Q

Disadvantages of Command Economy ?

(1.1.6)

Markets

A
  • Price controls lead to shortages and surpluses
  • Inefficient firms are protected and keep going, therefore firms cant respond to consumer preferences efficiently
  • Creates a climate where government can extend control into peoples lives
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26
Q

What is a Mixed Economy ?

(1.1.6)

Markets

A

Mixed Economy - Where markets allocate resources, but governments interveen to different extents to ensure a minimum standard of living snd to correct other market failures

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27
Q

How do consumers aim to maximise utility ?

(1.2.1)

Rational decision making

A

You will continue to consume as long as the marginal private benefit is greater than the marginal private cost

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28
Q

What is consumer weakness at computation ?

(1.2.1)

Rational decision making

A

Information can be hard or complex to understand
If consumers are not aware of the full private benefit or full private cost and the alternatives
The choice they make may not lead to the highest level of utility

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29
Q

How does the influence of others effect peoples behaviours ?

(1.2.1)

Rational decision making

A

This is referred to as herding behaviour

As people consciously or unconsciously follow what others are doing - the market as a whole can display irrationality

Humans have a desire to not be left out - this can encourage market sentiment

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30
Q

What is habitual behaviour ?

(1.2.1)

Rational decision making

A

Def : A ridgid pattern of behaviour followed by an individual

Because of this consumers may stick to previous choice even though its now irrational

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31
Q

What are the TWE’s of Irrational Behaviour ?

(1.2.1)

Rational decision making

A
  • The private benefit of consumption is subjective
  • The risks of irrational behaviour increase when the private benefit and cost are hard to calculate
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32
Q

Define Demand ?

(1.2.2)

Demand

A

Def : quantity of a good or service that consumers are willing and able to buy at different prices during a certain time

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33
Q

Factors that Shift a Demand Curve ?

(1.2.2)

Demand

A

Population - Influeneces amount of possible consumers
Advertising - Increase awareness and perception of quality
Substitutes - Change in price or quality of competition effects opportunity cost
Income - Influenece ability to consume G/S
Fashion - Social trends cause high levels of utility for short time period
Interest Rate - Determines cost of borrowing, therefore sales of big ticket items
Complementary G/S - Where a products use is linked to another

PASIFIC

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34
Q

What is diminishing marginal utility and how does it influence demand ?

(1.2.2)

Demand

A

Marginal utility is the additional utility, or amount of satisfaction, gained from each additional unit of consumption
Marginal utility will usually decrease with each additional increase in the consumption of a good

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35
Q

What is Price Elasticity of Demand ?

(1.2.3)

P.E.D

A

The responsivness of quanitity demanded to a change in price
Elastic = Change is more than proportional
Inelastic = Change is less than proportional

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36
Q

What is the formula for PED ?

(1.2.3)

P.E.D

A

%Δ in QD
%Δ in P

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37
Q

Draw an elastic demand curve ?

(1.2.3)

P.E.D

A
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38
Q

What is meant by perfectly price elastic demand ?

(1.2.3)

P.E.D

A

An increase in price will see demand fall to zero

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39
Q

Draw an inelastic demand curve ?

(1.2.3)

P.E.D

A
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40
Q

What is meant by perfectly inelastic demand ?

(1.2.3)

P.E.D

A

If there is a change in price there will be no change in demand

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41
Q

What factors influence PED ?

(1.2.3)

P.E.D

A
  • Availability of substitutes
  • Addictiveness of the G/S
  • Price of product as % of income
  • Time period that product is needed (Emergency = High Price)
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42
Q

TWE’s of PED ?

(1.2.3)

P.E.D

A

PED is an estimated average and therefore can be incorrect

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43
Q

Types of PED with corresponding numbers ?

(1.2.3)

P.E.D

A

Perfectly Inelastic = 0
Relatively Inelastic = 0 to -1
Unitary = -1
Relatively Elastic = -1 to infinity
Perfectly Elastic = infinity

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44
Q

Define Unitary elasticity ?

(1.2.3)

P.E.D

A

This is when a change in demand is directly proportional to a change in price

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45
Q

Why is PED useful to government ?

(1.2.3)

P.E.D

A

The government will seek to reduce consumption of G/S with high private cost or negative externalities

If such products are inelastic the government will need to add a high priced tax to promote change

Opposite for G/S with high private benefit and positive externalities

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46
Q

Define cross elasticity of demand (XED) ?

(1.2.3)

X.E.D

A
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47
Q

Define substitute goods ?

(1.2.3)

X.E.D

A

As the price of one good increases the demand of another will increase

Subsitutes = positive number

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48
Q

Define Complementary goods ?

(1.2.3)

X.E.D

A

As the price for good Y increases the demand for good x falls
Complementary = negative number

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49
Q

What would an XED of 0 mean ?

(1.2.3)

X.E.D

A

The goods are independant of eachother and therfore dont affect one another

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50
Q

Define income elasticity of demand (YED) ?

(1.2.3)

Y.E.D

A
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51
Q

What is a inferior good ?

(1.2.3)

Y.E.D

A

A good whose demand drops when people’s incomes rise
Inferior = Negative number = <0

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52
Q

What is a normal good ?

(1.2.3)

Y.E.D

A

A good whose demand increases with an increase in income
Normal = Positive numbers
Normal inelastic = 0-1
Luxury = 1 to inifinity

53
Q

What is a luxury good ?

(1.2.3)

Y.E.D

A

YED of over 1 = luxury item

54
Q

What is another term for a luxury good?

(1.2.3)

Y.E.D

A

Elastic Normal Good - 1 to Infinity

55
Q

What is supply?

(1.2.4)

Supply Theory

A

Supply refers to the amount that producers are willing and able to sell at any given price in a given period of time.

56
Q

2 reasons why supply curves are upward sloping?

(1.2.4)

Supply Theory

A
  1. The supply curve is upward sloping to show that the suppliers increase their supply of a good when the price increases
  2. The law of supply shows supplier’s behavior who moves the supply of a good in the same direction as the change in the price of a good when other factors are constant.
57
Q

Illustrate an extension in supply / what would cause it

(1.2.4)

Supply Theory

A

Increase in :
Productivity
Indirect Tax
Number of firms
Tech
Subsidy
Weather
Costs

58
Q

Illustrate a contraction in supply / what would cause it

(1.2.4)

Supply Theory

A

Decrease In:
PINTSWC Factors

59
Q

What does PINTSWC stand for

(1.2.4)

Supply Theory

A

Productivity
Indirect Tax
Number of Firms
Tech
Subsidy
Weather
Costs

60
Q

What is the definition of PES & The formula

(1.2.5)

PES Theory

A

the responsiveness of quantity supplied to a change in price.

PES=
% change in Quantity Supplied
% change in Price

61
Q

Factors that influence PES

(1.2.5)

PES Theory

A
  • Complexity to make
  • Time Frame
  • Scarcity of raw materials
62
Q

What are the number ranges that determine the elasticity of PES

(1.2.5)

PES Theory

A

Answer between 0 & 1 = inelastic PES (less than proportional)

Answer greater than 1 = elastic PES (more than proportional)

63
Q

What is meant by perfectly elastic, perfectly inelastic & unitary PES

(1.2.5)

PES Theory

A

Perfectly inelastic = no change in supply at any price
Perfectly elastic = Price fell by any amount, supply falls by 100%
Unitary = answer = 1, directly proportional

64
Q

Elastic & Inelastic supply curve :

(1.2.5)

PES Theory

A
65
Q

Perfectly Elastic Supply Curve

(1.2.5)

PES Theory

A
66
Q

What is the economic term for Long Run

(1.2.5)

PES Theory

A

All FOP are variable

67
Q

What is the economic term for Short Run

(1.2.5)

PES Theory

A

at least one FOP is fixed

68
Q

Perfectly Inelastic Supply Curve

(1.2.5)

PES Theory

A
69
Q

What is the equilibrium?

(1.2.6)

Price Determination

A

Equilibrium is where supply and demand meet

70
Q

Illustrate equilibrium price and quantity of a product

(1.2.6)

Price Determination

A
71
Q

What is a Surplus & What is a Shortage?

(1.2.6)

Price Determination

A

Shortage = not enough of a G/S to meet demand
Surplus = demand is below the amount that is being produced

72
Q

Draw a shortage and explain how they are resolved ?

(1.2.6)

Price determination

A

Shortages are resolved by increasing the price to meet the new high demand

73
Q

Draw a suplus and explain how it is resolved ?

(1.2.6)

Price Determination

A

Surpluses are resolved b reducing price to meet the low demand

74
Q

Explain the signalling function for demand and supply ?

(1.2.7)

Price mechanism

A

Demand:
When prices increase this signals a G/S is valued by consumers

Supply:
When prices increase this signals that FOP is becoming scarce

75
Q

Explain the incentive for firms to produce a G/S ?

(1.2.7)

Price mechanism

A

Firms want to produce high priced G/S in seek of profit maximising
This means exisiting firms may increase output or new firms will enter the market

(Demand)

76
Q

Explain the rationing function for G/S ?

(1.2.7)

Price mechanism

A

Some consumers will not be able to afford higher price or not believe G/S is worth higher price

(Supply)

77
Q

What are the TWE of the price mechanism ?

(1.2.7)

Price mechanism

A
  1. If a G/S is to complex to make
  2. Monopolies have the power to choose qty sold or price set
  3. Government intervention
78
Q

Define consumer surplus and producer surplus ?

(1.2.8)

Consumer Surplus & Producer Surplus

A

CS - The difference between the amount consumers are willing to pay and the price they pay

PS - The difference between the amount producers are willing to sell for and the price they actually receive

79
Q

Illustrate consumer surplus and producer surplus on a graph ?

(1.2.8)

Consumer Surplus & Producer Surplus

A
80
Q

What is a tax ?

(1.2.9)

Tax & Subsidy

A

A compulsory contribution to state revenue, levied by the government

81
Q

What is the difference between direct and indirect tax ?

(1.2.9)

Tax & Subsidy

A

Direct tax is tax placed on an individual whereby money goes straight to the government Ex. Income tax

Indirect tax is a tax placed on G/S that consumers buy whereby money will first go to a third party than the government Ex. VAT

82
Q

What are the two types of indirect tax ?

(1.2.9)

Tax & Subsidy

A

Specific - adds a fixed set amount

Ad-valorem - adds a varying amount

83
Q

Name 3 reasons why the government might want to tax a product ?

(1.2.9)

Tax & Subsidy

A
  1. Discouragement of production of harmful goods
  2. To control inflation
  3. To raise revenue
84
Q

Draw a specific tax ?

(1.2.9)

Tax & Subsidy

A
85
Q

Draw an ad-valorem tax ?

(1.2.9)

Tax & Subsidy

A
86
Q

Why do taxes result in deadweight loss ?

(1.2.9)

Tax & Subsidy

A

Deadweight loss is the loss of something good economically that occurs because of the tax imposed

Taxes cause this because prevent people from buying a product that costs more than it would before the tax was applied

87
Q

What is a subsidy ?

(1.2.9)

Tax & Subsidy

A

Government financial support

88
Q

Draw a subsidy diagram ?

(1.2.9)

Tax & Subsidy

A
89
Q

Why do subsidy’s create dead-weight loss ?

(1.2.9)

Tax & Subsidy

A

Because total surplus in a market is lower than in a free market, which creates economic inefficiency

90
Q

What is market failure ?

(1.3.1)

Market Failure

A

When the price mechanism leads to an insufficient allocation of resources

91
Q

How do externalities lead to market failure ?

(1.3.1)

Market Failure

A

Negative externalities = over-consumption of goods with a large private and social cost

Positive externalities = under-consumption of goods with a large private and social benefit

Caused by information failure

92
Q

What is a public good ?

(1.3.1)

Market Failure

A

A good that is non-excludable and non-rivalrous

93
Q

How does the under provision of public goods cause market failure ?

(1.3.1)

Market Failure

A

Firms are profit maximising and will not produce public goods as they present no profit incentive

Some goods have a high private and external cost if they do not exist

If the government feels the good/service is in society’s best interest they will pay for the good/service to be put in place

94
Q

How do informtion gaps lead to market failure ?

(1.3.1)

Market Failure

A

when consumers are unaware of the full private benefit or cost of a good/service the decision made on the good/service is likely to be inneficient

95
Q

What is an external benefit and external cost ?

(1.3.2)

Externalities Theory

A

External benefit = When a 3rd party is impacted by the comsumption (social benefit > private benefit)

External cost = When a 3rd party is impacted by the consumption/prodcution (social cost > private cost)

96
Q

What is a social benefit and social cost ?

(1.3.2)

Externalities Theory

A

Social benefit = private benefit + external benefit

Social cost = private cost + external cost

97
Q

Draw a negative externalities diagram ?

(1.3.2)

Externalities Theory

A
98
Q

Draw a positive externalities diagram ?

(1.3.2)

Externalities Theory

A
99
Q

What are the 2 characteristics of a public good ?

(1.3.3)

Public Goods

A

Non-excludable
Non-rivalrous

If a good does not have both or only one it is a private good

100
Q

What does non-excludable and non-rivalrous mean ?

(1.3.3)

Public Goods

A

Non-excludable - Once a good is provided it is impossible to stop people from using it

Non-rivalrous - The consumption of a good by one person will not prevent anothers ability to consume the good

101
Q

What is the free rider problem ?

(1.3.3)

Public Goods

A

Where consumers will benefit from a product without paying for it

102
Q

What is a quasi public good ?

(1.3.3)

Public Goods

A

A good that is semi-non-rival and semi-non-excludable

Argues that some public goods may not be pure

Technology has found ways to privatize goods ex - toll roads

103
Q

What is asymmetric information ?

(1.3.4)

Information Gaps

A

When one economic agents know more than another or information is incomplete/imperfect

104
Q

Why does asymmetric information lead to market failure ?

(1.3.4)

Information Gaps

A

Over consmuption of G/S with high preivate cost = irrational and insufficient allocation of resources

105
Q

What is maximum pricing ?

(1.4.1)

Maximum Pricing

A

Where a firm is not allowed to charge above the set price cap

has to be set underneath ‘e’

106
Q

Give 2 reasons why a government would set a maximum pricing ?

(1.4.1)

Maximum Pricing

A

The G/S is considered an essential item

Monopolies are abusing there power

107
Q

Draw a maximum pricing diagram ?

(1.4.1)

Maximum Pricing

A
108
Q

Give 2 disadvantages of maximum pricing ?

(1.4.1)

Maximum Pricing

A

Leads to a shortage = No profit incentive to produce G/S = innefficient

Leads to lack of investment into a market = couls result in black market trade

109
Q

Give 2 advantages of Maximum Pricing ?

(1.4.1)

Maximum Pricing

A

Maximum pricing is very reactive to a problem

Makes markets more competitive = if monopolies are abusing power

110
Q

What is a minimum price ?

(1.4.1)

Minimum Pricing

A

legally-imposed price floors

111
Q

Why do governments set minimum pricing ?

(1.4.1)

Minimum Pricing

A

To stop consumption of goods with high private cost

112
Q

Draw a minimum price diagram ?

(1.4.1)

Minimum Pricing

A
113
Q

What are the disadvantages of minimum pricing ?

(1.4.1)

Minimum Pricing

A

Harms low income groups the most
Creates a black market

Increasing the rate of tax is better = polluter pays principle

114
Q

What is a pollution permit ?

(1.4.1)

Tradeable Pollution Permits

A

The government decides desired level of pollution and then releases permits

115
Q

Draw a pollution permits diagram ?

(1.4.1)

Tradeable Pollution Permits

A
116
Q

How do pollution permits reduce negative externalities ?

(1.4.1)

Tradeable Pollution Permits

A

Restricts supply = (MPB=MSC)

117
Q

What are the advantages of pollution permits ?

(1.4.1)

Tradeable Pollution Permits

A
  1. Gradual reductions in permits = reduce CO2
  2. Potentially global solution
  3. Will lead to firms increasing productive efficiency so they can increase their profit margins
118
Q

What are the TWE’s of pollution permits ?

(1.4.1)

Tradeable Pollution Permits

A
  1. Difficult to know how many permits to provide
  2. Difficult to measure pollution levels
119
Q

How are state provisions funded ?

(1.4.1)

State Provision of G/S

A

Tax revenue

120
Q

Why do the government provide G/S ?

(1.4.1)

State Provision of G/S

A

When left to the market G/S are underconsumed due to the free rider problem
Leads to MF whereby MSB doesnt equal MSC

121
Q

What are the TWE’s of state provision ?

(1.4.1)

State Provision of G/S

A
  1. MF can occur through inefficent allocation of resources
  2. Higher tax rates for all = to fund projects
  3. Information failure from government can limit the effectivness
122
Q

How does regulation effect the market for G/S with negative externalities ?

(1.4.1)

Regulation

A
123
Q

What are the advantages of regulation ?

(1.4.1)

Regulation

A
  1. Often simple to understand
  2. Can eliminate whole markets
  3. It is fairer than taxes
124
Q

What are the disadvantages of regulation ?

(1.4.1)

Regulation

A
  1. Risk of government failure
    of tax receipts
  2. Could lead to black markets
125
Q

What are the advantages of tax

(1.4.1)

Tax

A
  1. Polluter pays principle
  2. Tax revenue
  3. Promotes innovation to avoid tax
126
Q

What are the disadvantages of tax ?

(1.4.1)

Tax

A
  1. Lower income groups pay higher percentage of wealth
  2. Consumers may seek substitute G/S = Black market
    3.
127
Q

What is government failure ?

(1.4.2)

Government Failure

A

Government intervention to correct market failure leads to a more innneficient allocation of resources

128
Q

What are the types of government failure ?

(1.4.2)

Government Failure

A
  1. Distortion of price mechanism
  2. Unintended consequences
  3. Excessive administrative cost
  4. Information gaps

Economics (4 decks)

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