Theme 1 (Need To Learn ) Flashcards
Problem of Scarcity
Relative concept as scarcity is in relation to demand
Disadvantages of specialisation
Boring (leads to poor quality), one delay causes domino effect, creates structural unemployment
Functions of money
Medium of exchange, measure/store of value, method for deferred payment
Adam Smith argument
‘Invisible hand’, free market works best as resources allocated to everyone’s advantage
Fredrick Hayek argument
State control of an economy leads to a loss of freedom
Karl Marx Theory
Workers always bound to rise against employers, command economy better
Advantages of a command economy
Less inequality, less resource wastage, government motivated by wellbeing , provides long-term planning
Disadvantages of command economy
Less motivation, less entrepreneurship, increased corruption
Underlying assumptions of rational decisions
Consumers maximise utility, firms maximise profits, government maximise social welfare
Factors influencing PED
availability of substitutes, addictive, time, necessity, % of income
Significance of PED
Determines effect of taxes/subsidies
Significance of YED
Businesses know how sales impacted by income
Factors shifting the supply curve
Costs of production, weather, price of other goods, technology, taxes/subsidies, producer cartels
Factors influencing PES
Spare capacity, ease of entry into market, short-term fixed factors of production, long-term variable, availability of substitutes, availability of factors of production
Price mechanism
Functions allocation resources/prices
Rationing function
Price increases - resources rationed to those who can afford it (example in house market, shops and 1973 oil embargo)
Signalling function
Price indicates where resources should be moved ( I.e house building if prices go up )
Incentive function
Money an incentive for people to work hard - also price incentive for when to buy/sell a good
Consumer surplus
Always above equilibrium, shows welfare gain for consumers
Producer Surplus
Always below equilibrium, shows economic gain for producers
Ad Valorem Tax
Tax increase in proportion to value of good (VAT)
Specific tax
Amount added to price of good (excise duties )
Incidence of tax
If PED elastic or PES inelastic, supplier pays majority of tax. If PED inelastic of PES elastic, consumer pays majority of tax
Consumer behaviour
Usually rational, can be influenced by habits
Market failure
Causes a loss in social welfare
Externality market failure
Leads to overproduction of negative goods
Other types of market failure
Under-provision of public goods, information gaps
Government control of externalities
Taxes (negative ) or subsidies ( positive ), trade pollution permits, regulation, provision of gold through tax revenue, provision of information
Free-rider problem
Benefiting from a good without paying ( I,e unemployed with public good )
Issues with information gaps
Leads to mis-allocation of resources due to producers taking advantage of asymmetric information
Effects of Indirect taxation
Causes a fall in supply, increases government revenue - used on goods with negative externalities
Disadvantages of indirect taxation
Creation of a black market, regressive, conflicts with growth, doesn’t work if demand for the good is very inelastic
Advantages of a subsidy
Maximise welfare, increase equality
Disadvantages of a subsidy
Opportunity cost, increases inefficient business, difficult to remove
Advantages of a Tradable pollution Permit
Limits amount of pollution, incriminates companies exceeding
Disadvantages of Tradable Pollution Permits
Expensive to monitor, raise costs for businesses
Consequences of government intervention
Can worsen conditions, keep inefficient business running, lead to excess demand/supply, administration costs
Impacts of regulation
Advantage - overcome market failure, Disadvantage - expensive, regulatory capture, firms pass costs onto consumers
Advantages of a free market economy
Greater consumer choice, higher motivation for profits, competition creates productive efficiency, higher growth
Disadvantages of a free market economy
Higher inequality, lack of regulation of demerit goods, monopolies, issues with externalities
What is a mixed economy?
A combination of both command economy and free market, governments usually have been 40-60% of control, have 4 roles
Roles of the government in a mixed economy
Create rules for the economy , supplement and modify the price system ( don’t want overconsumption of demerit goods), redistribute income, stabilise the economy
Producer cartels
Firms come together to decrease supply to increase profits
Advantages of government provision of public goods
Corrects market failure, brings equality, further benefits (I.e NHS creates healthy workforce)
Disadvantages of government providing public goods
Expensive, high opportunity cost, government may be inefficient, corruption within the government may cause issues
Renewable resource
A resource that can be replaced
Non-renewable resource
Resource that can’t be replaced
Opportunity cost
Where the use of one good results in a cost of not using another good
Causes of economic decline
Natural disasters, natural resources running out, decrease of quantity/quality of labour
How can the PPF curve change shape?
When there is an increase/decreased in the ability to only produce consumer or capital goods, and output of the other good isn’t effected
Division of labour
When labour becomes specialise in a particular part of the industrialisation process
Adam Smith’s belief over specialisation
Specialisation could increase growth as it would boost labour productivity
Advantages of specialisation
Increased labour productivity, higher quality goods/services, time not wasted, cheaper training
Advantages of specialisation for a country
Theory of comparative advantage, greater global output + lower prices
Disadvantages of specialisation for a country
Over-dependence of one export, could run out of resources needed for the good, high interdependence of countries meaning global economy could crash due to war in one country
Free market meaning
Resources allocated through the price mechanism
Factors causing the demand curve to shift
Population, income, availability of related goods, advertising, seasonality, expectation of future
Diminishing marginal utility
The satisfaction derived from the consumption of an additional unit of the gold will decrease as more of the good is consumed
How could subsidies be ineffective?
If the good is highly inelastic , output won’t increase
XED
Cross elasticity of demand
What does it mean if XED is greater than 0?
The goods are substitutes
What does it mean if XED is less than 0?
The goods are compliments
Significance of XED
Firms know how price changes by other firms effect them
Excess demand impact on firms
Encourages firms to raise prices
Excess supply
Encourages firms to put goods on sale
More inelastic demand
More consumer surplus
More inelastic supply
More producer surplus
Impacts of tax
Producer costs rise + supply decreases, increases price for consumers
External costs/benefits
The impact on a third party due to consumption of a good ( difference between social cost/benefit and private cost/benefit)
Characteristics of a public good
Non-rejectable, non-rival consumption, non p-excludable
Why are public goods provide by the government?
Private producers won’t produce them as unsure if they will make profits due to them being non excludable
Advantages of indirect taxation
Improves social welfare, increases government revenue which could be used to improve externality
Advantages of a max/min price
Considers externalities, can reduce poverty
Maximum price reasoning
Price suppliers can’t charge above, stops exploitation of consumers from monopolies
Minimum price reasoning
Usually set on goods with negative externalities to discourage consumption
Disadvantages of max/min price
Causes excess supply/demand, leads to creation of black markets, difficult to know where to set the price
Advantages of government providing consumers information
Helps rational behaviour, reduces exploitation by firms, can be used to benefit other policies
Disadvantages of government providing information to consumers
May not listen to government, can be expensive to get data
