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theme 1 & 2 : economics > theme 1 : microeconomics > Flashcards

theme 1 : microeconomics Flashcards

1
Q

what does PPF stand for?

A

production possibility frontier

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2
Q

what does PPC stand for?

A

production possibility curve

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3
Q

what are the four factors of production?

A

capital, enterprise, land, labour

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4
Q

what is capital?

A

the things used to make goods and services

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5
Q

what is enterprise?

A

the willingness of people in business to take risks to make a profit

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6
Q

what is land?

A

the natural resources used such as oil, forests and the land itself (this can be categorised as renewable or non-renewable)

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7
Q

what is labour?

A

the work done by humans in production

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8
Q

what are the three key economic questions?

A

what to produce?
how to produce it?
for whom to produce it for?

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9
Q

what is the main economic problem?

A

how do we use the available scarce resources to satisfy peoples infinite needs and wants as effectively as possible

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10
Q

what are economic agents?

A

groups that participate in the economy

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11
Q

give examples of economic agents.

A

producers (firms), consumers, government

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12
Q

what are the disadvantages of division of labour. (4)

A
  • increases absenteeism
  • have very specialised skills (may prevent movement of jobs)
  • boring, repetitive and tedious
  • interdependence on others
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13
Q

what is specialisation?

A

when people become experts at their job

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14
Q

what is division?

A

when the task is split into different roles in order to make a process more efficient

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15
Q

what is opportunity cost?

A

the opportunity cost of a decision is the value of the next best alternative forgone (to give up or do without)

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16
Q

what is ceteris paribus?

A

when you assume that all other variables remain constant in order to investigate something else

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17
Q

why is it difficult for economists to run experiments?

A

there are many contributing factors that could affect participants and therefore the experiment, which is hard to control

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18
Q

why is the ceteris paribus assumption necessary for economic analysis?

A

the assumption assumes that all other factors stay the same, apart from the one being analysed. this makes it easier to come to a conclusion

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19
Q

what does a PPF curve show?

A

the maximum potential output of a combination of two goods / services an economy can achieve when using all resources efficiently and productively.

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20
Q

what does productively efficient mean?

A

when all the factors of production are being used efficiently, given the current level of technology

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21
Q

define economic growth.

A

the increase in the production of goods and services in an economy

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22
Q

define negative economic growth.

A

the decrease in the production of goods and services in an economy

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23
Q

what does an outward shift on a PPF curve show?

A

economic growth

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24
Q

how is negative economic growth shown on a PPF curve?

A

inward shift of the curve (to the left)

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25
Q

list the three main reasons for economic growth.

A
  • increase in quantity of factors of production
  • improvement in quality of factors of production
  • combination of the two
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26
Q

give two examples when negative economic growth might occur.

A
  • a drought
  • a reduction in the level of skills in the workforce
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27
Q

what are consumer goods?

A

goods which do not produce other goods and satisfy consumers wants and needs

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28
Q

what are capital goods?

A

goods used to produce other goods and services

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29
Q

why may an economy not be at a point on its PPF?

A

there is an inefficient use of resources or underutilised resources

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30
Q

what are positive economic statements?

A

statements that can be proven true or false. they are objective

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31
Q

what are normative economic statements?

A

statements that express opinions and cannot be proven true or false. they are subjective and open to interpretation

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32
Q

a statement contains the words “fair, unfair, should, ought, better and worse”. what type of statement is it?

A

subjective / normative

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33
Q

how do consumers face opportunity costs?

A

they use it to decide what to spend income on

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34
Q

how do producers face opportunity costs?

A

they use it to decide what and how they are going to produce goods and services

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35
Q

how do governments face opportunity costs?

A

they use it to decide what policies to choose and enforce

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36
Q

what is specialisation?

A

when an individual, firm, region or country concentrates on the production of a limited range of goods and services

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37
Q

why does specialisation lead to more skilled workers?

A

it allows them to focus on a specific job role, which only requires specific skills. this allows them to develop them, in turn making them more skilled. this increases their efficiency and productivity.

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38
Q

what is the specialisation of workers on specific tasks in the production process also known as?

A

the division of labour

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39
Q

why do firms benefit from division of labour?

A

it allows workers to become specialised in their role which can increase the efficiency and productivity. higher efficiency and productivity means higher quality. this could lead to higher profitability.

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40
Q

what is the equation for rate of productivity?

A

output produced / total input used

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41
Q

what is productivity?

A

measure of productive effort. measured in terms of the rate of output per unit of input

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42
Q

why does capital tend to increase labour productivity?

A

capital tends to be machinery used to produce goods. using machinery can automate and speed up some processes which can increase labour productivity.

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43
Q

what does increased productivity lead to?

A
  • higher output and higher quality
  • higher living standards
  • more efficient use of resources
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44
Q

state advantages of division of labour.

A
  • workers become more skilled through repetition of tasks
  • the productivity of workers rises so output increases
  • time is saved by workers focussing on narrow range of tasks
  • workers are easier and cheaper to train
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45
Q

why is higher productivity likely to increase profit?

A

increase in quality and output which allows you to sell more goods

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46
Q

what does each economic agent aim to maximise?

A

consumer - maximises utility (satisfaction)
producer - maximises profit
government - maximises health of population

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47
Q

describe the concept of utility.

A

a measure of the satisfaction that we get from purchasing and consuming goods / services

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48
Q

what is marginal utility?

A

the change in satisfaction from consuming an extra unit

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49
Q

what are the axis labels on a supply / demand graph?

A

x axis - quantity
y axis - price

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50
Q

demand graph : what is the relationship between price and quantity?

A

inverse relationship

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51
Q

what are the two methods of trading?

A
  • bartering
  • money
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52
Q

what are the functions of money?

A
  • medium of exchange
  • measure of value
  • store of value
  • method of deferred payment
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53
Q

what is planning?

A

the process by which a gvt allocates resources. this is funded through taxation.

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54
Q

what is price mechanism?

A

the process by which the market allocates resources

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55
Q

what is a command economy?

A

an economy in which resources are allocated solely by the state

56
Q

what is a mixed economy?

A

an economy in which resources are allocated by the state and the price mechanism

57
Q

what is a free market economy?

A

an economy in which resources are allocated solely by the price mechanism

58
Q

what two approaches are taken when making assumptions? briefly describe them.

A
  • deductive (starts with a hypothesis)
  • inductive (start will collecting evidence)
59
Q

when creating a model on the housing market an economist examined data when devising assumptions about house buyers. what type of approach is this?

A

inductive

60
Q

what is utility?

A

the satisfaction or benefit derived from consuming a good

61
Q

what is the utility for firms?

A

to maximise profits. this is achieved through producing as efficiently as possible. also achieved through producing goods that consumers want and can afford.

62
Q

what are the 3 things required for economic agents to make rational decisions?

A
  • time
  • information
  • the ability to process information
63
Q

can a consumer buying a pint of milk make a rational decision?

A

yes. they have the ability to read and process the price.

64
Q

can a consumer having a meal at a restaurant that they haven’t been to make a rational decision?

A

no. they may not make the best decision to maximise their utility (satisfaction) as they may not be able to process all the available information.

65
Q

what is behavioural economics?

A

economic thought based on evidence and observations to develop assumptions of economic decision making. this means it uses an inductive approach.

66
Q

what does behavioural economics assume?

A

that individuals have bounded rationality. this is when they wish to maximise utility but are unable to do so due to lack of time, info and ability to process info.

67
Q

what human behaviour prevents rational decision making?

A
  • habitual behaviour
  • consumer inertia
68
Q

how can we explain changes in the prices of goods and services?

A

develop a model that brings together the two fundamental economic agents that determine the price of a good : consumers and producers

69
Q

what is demand?

A

the quantity of a good or service purchased at a given price over a given time period.

70
Q

why is the public sector generally less efficient than the private sector?

A

there is no profit motive or competition in the public sector. this gives private firms an incentive to minimise costs, maximise profits and reduce waste.

71
Q

why do consumers sometimes fail to make rational decisions?

A

they don’t have the ability to process all the information with the time available.

72
Q

what type of relationship do demand curves have?

A

an inverse relationship (as price increases, quantity decreases)

73
Q

describe what is happening from d1 to d2.

A

a shift outwards due to a non price related factor

74
Q

what is happening from point a to b?

A

there is a extension in demand due to a decrease in price

75
Q

what is happening from point b to a?

A

there is a contraction in demand due to an increase in price

76
Q

what are substitute goods?

A

alternative products that can be used for the same purpose

77
Q

what are complement goods?

A

products that are used together. eg. car & petrol

78
Q

give four factors that can affect demand.

A
  • a change in the age structure of population
  • changes in income
  • advertising
  • changes in consumer preferences
79
Q

what is revenue?

A

the income that a gvt or firm receives

80
Q

what is supply?

A

the quantity of a good or service that firms are willing to sell at a given price over a given time period

81
Q

what type of relationship does a supply curve have?

A

direct relationship. (as price increases, quantity supplied increases)

82
Q

what does an increase in price result in on a supply curve?

A

an extension on the graph.

83
Q

what does a shift to s1 to s2 show?

A

a shift outwards indicates an increase in supply due to non price related factor

84
Q

how does the size of the population impact demand?

A

an increase in population, increases demand

85
Q

how does the price of a substitute good impact demand?

A

if a substitute good has a higher price, then demand of the original good will increase

86
Q

how does the price of a complement good impact demand?

A

if the price of a complement good increases, then the price of the corresponding good will also increase. this in turn decreases demand.

87
Q

state some conditions of supply.

A
  • number of firms
  • changes in production costs
  • improvements in technology
  • change in price of related goods
  • weather conditions
  • expectations about future prices
88
Q

what markets are most likely to be affected by the weather?

A
  • agriculture
  • tourism
  • insurance
89
Q

what is excess demand?

A

too much demand in relation to supply

90
Q

what is excess supply?

A

a surplus of producers on the market

91
Q

what is the equilibrium price?

A

the price where supply and demand are equal

92
Q

why is the equilibrium also known as the market clearing price?

A

because all the market clears due to supply meeting consumer demand. this means everything produced is bought.

93
Q

why is a barter system inefficient?

A

it takes a lot of time and effort to find traders to barter with

94
Q

what is a direct tax?

A

a tax levied directly on an individual or organisation

95
Q

what is an indirect tax?

A

a tax levied on a good or service

96
Q

give two examples of a direct tax.

A
  • corporation tax
  • income tax
  • capital gains tax
97
Q

give two examples of an indirect tax.

A
  • VAT
  • customs duties
  • sugar levy tax
98
Q

how does a specific tax impact the supply curve?

A

it causes a parallel shift in the supply curve

99
Q

what is a specific tax?

A

the tax is the same fixed amount at all prices. eg. 10p tax on a packet of cigarettes

100
Q

how does an ad valorem tax impact the supply curve?

A

it causes a non parallel shift in the supply curve

101
Q

what is an ad valorem tax?

A

the tax increases as the amount sold rises. 20% VAT rate on goods

percentage tax

102
Q

what is an advantage of ad valorem tax?

A

that the tax revenue to the government can rise automatically as the economy grows. this means that the tax rate does not need to be adjusted frequently, as in the case of specific taxes.

103
Q

why do governments impose taxes?

A

in order to raise government revenue and / or reduce certain economic activities (smoking etc.)

104
Q

why do governments give subsidies?

A

in order to encourage production

105
Q

how do subsidies impact the supply curve?

A

leads to a rightward (outward) shift in the supply curve

106
Q

when is the market in equilibrium?

A

when there is no tendency for the market price to change

107
Q

what is price elasticity of demand?

A

a measure of the responsiveness of demand given a change in price

108
Q

when is demand said to be price elastic?

A

when a change in price causes a proportionately larger change in demand

109
Q

when is demand said to be price inelastic?

A

when a change in price causes a proportionately smaller change in demand

110
Q

what are the five determinants of price elasticity of demand?

A
  1. number of substitutes
  2. necessity / luxury
  3. addictiveness
  4. time
  5. proportion of income on the product
111
Q

how does number of substitute goods affect PED?

A

the more substitute goods a product has, the more elastic that demand will be. this is because consumers have a greater degree of choice and so consumer switching will be high if price changes

112
Q

how does the type of good determine PED?

A

if a product is considered a necessity, demand is likely to be price inelastic as consumers require the product no matter what the price is

113
Q

how does addictiveness affect PED?

A

the more addictive a product is, the more price inelastic demand will be

114
Q

how does time affect PED?

A

time gives consumers the opportunity to find alternatives or substitutes. therefore, the greater the time period, the more price elastic demand will be

115
Q

how does proportion of income spent determine PED?

A

the greater the proportion of income spent on a product, the less able consumers will be able to afford any price rises. therefore, the greater the proportion of income spent on a product, the more price elastic demand will be.

116
Q

what PED value does an elastic product have?

A

>1

greater than one

117
Q

what PED value does an inelastic product have?

A

0 < x < 1

greater than zero but less than one

118
Q

what PED value does a unitary product have?

A

= 1

equals to one

119
Q

what is the equation to work out PED?

A

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

120
Q

what is the equation to calculate quantity demanded?

A

[(new - original) / original] x 100

121
Q

what is price elasticity of supply?

A

a measure of the responsiveness of supply given a change in price

122
Q

when is supply said to be price elastic?

A

when a change in price causes a proportionately larger change in supply

123
Q

when is supply said to be price inelastic?

A

when a change in price causes a proportionately smaller change in supply

124
Q

what are the five determinants of PES?

A
  1. time required to produce the product
  2. level of spare capacity
  3. number of stocks / finished goods available
  4. time
  5. perishability of the product
125
Q

how does time taken to produce a product affect PES?

A

the greater the amount of time needed to produce the product, the more price inelastic supply will be. if the product can be produced quickly, firms can react quickly to a change in price. so, goods with short production time are more price elastic.

126
Q

how does level of spare capacity determine PES?

A

the greater the spare capacity is, the more price elastic supply will be. this is because there will be factors of production available to be used in production. therefore, if there was a price rise, the firm can respond quickly and increase production.

127
Q

how does number of finished goods available affect PES?

A

the more finished goods available the more price elastic supply will be. this is because firms can respond to a price rise by releasing some / all of these stocks onto the market straight away.

128
Q

how does perishability of the product affect PES?

A

some products are more perishable than others. the more perishable a product is, the harder it is to store stocks of it. therefore, the more perishable the product, the more price inelastic the product will be.

129
Q

what is the equation for price elasticity of supply?

A

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

130
Q

what is the PES value for an elastic good?

A

> 1 greater than one

131
Q

what is the PES value for a inelastic good?

A

0 < x < 1 greater than zero, less than one

132
Q

what is the PES value for a unitary product?

A

= 1 equals to one

133
Q

what is the PES value for a perfectly elastic good?

A

= 0 equals to zero

134
Q

what is consumer surplus?

A

the extra amount of money consumers are prepared to pay for a good / service above what they actually pay. it is the utility or satisfaction gained from a good or service in excess of the amount paid for it.

135
Q

what is producer surplus?

A

the extra amount of money paid to producers above what they are willing to accept to supply a good / service at. it is the extra earning obtained by the producer above the minimum required for them to supply the good or service

theme 1 & 2 : economics (3 decks)

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