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Economics > Theme 1 (textbook) > Flashcards

Theme 1 (textbook) Flashcards

1
Q

Define ceteris paribus

A

All other things being equal

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2
Q

What is a positive statement

A

A statement that is about facts and is testable

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3
Q

What is a normative statement

A

A statement that involves a value judgement about what ought to be

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4
Q

Define scarcity

A

A situation that arises when people have unlimited wants in the face of limited resources

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5
Q

Define free goods

A

Goods such as the earth’s atmosphere that are not normally regarded as being scarce

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6
Q

Define economic goods

A

Goods that are scarce

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7
Q

Define opportunity cost

A

The value of the next-best alternative forgone

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8
Q

Who are the 3 key economic agents

A

Consumers
Producers
Government

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9
Q

What are the 4 factors of production

A

Land
Labour
Capital
Enterprise

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10
Q

What are the rewards for each factor of production

A

Land - rent
Labour - wages
Capital - interest
Enterprise - profit

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11
Q

What is the difference between renewable and non-renewable resources

A

Renewable - natural resources that can be replenished
Non renewable - natural resources that once used cannot be replenished

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12
Q

Give 2 examples of renewable resources and non-renewable resources

A

Renewable - forests that can be replanted, solar energy
Non-renewable - coal, oil

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13
Q

What is a production possibility frontier

A

A curve showing the maximum combinations of goods and services that can be produced in a given period

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14
Q

Define a trade-off

A

A situation in which the choice of one alternative requires the sacrifice of another

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15
Q

Define capital goods and give 2 examples

A

Goods used for the production process
Machinery or factory builidings

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16
Q

Define consumer goods

A

Goods produced for present use

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17
Q

Define economic growth

A

An expansion in the productive capacity of the economy

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18
Q

Define GDP

A

A measure of the economic activity carried out in an economy over a period

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19
Q

Define division of labour

A

A process whereby production is broken down into a sequence of stages
Workers are assigned to a particular stage

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20
Q

Define specialisation

A

The process of focusing production on a specific task or area

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21
Q

Advantages of division of labour

A

Increase in productivity
Decrease in cost of production
Overall output increased

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22
Q

Disadvantages of division of labour

A

Workers find task tedious and become bored and careless
Increase in staff turnover
Team of workers become inflexible (if a worker is ill it is difficult to find cover)

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23
Q

5 functions of money

A

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

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24
Q

Define a free market economy

A

An economy in which market forces are allowed to guide the allocation of resources

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25
Q

Define a command economy

A

An economy in which decisions on resource allocation are made by the state

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26
Q

Define a mixed economy

A

An economy in which resources are allocated partly through price signals and partly by intervention by the state

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27
Q

Define rational consumers

A

Consumers maximising utility

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28
Q

Define rational producers

A

Aiming to maximise profits

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29
Q

Define profit

A

The total revenue a firm receives from selling its product minus the total cost of producing it

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30
Q

Define demand

A

The quantity of a good or service that consumers are willing and able to buy at any given price in a given period of time

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31
Q

Define diminishing marginal utility

A

The situation where an individual gains less additional utility from consuming a product, the more it is consumed

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32
Q

Define the law of demand

A

There is an inverse relationship between quantity demanded and the price of a good or service

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33
Q

Why is the demand curve downward sloping

A

There is an inverse relationship between price and quantity demand

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34
Q

What factors influence demand

A

Price of the good
Price of other goods
Income
Consumer preferences

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35
Q

Movements along vs. Shifts in the demand curve

A

Movement - change in price
Shift - non-price factors

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36
Q

Define normal good and give an example

A

Where the quantity demanded increases in response to an increase in consumer income
Holidays abroad

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37
Q

Define inferior good and give an example

A

Where the quantity demanded decreases in response to an increase in consumer income
Public transport

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38
Q

Define a substitute good

A

Demand for one good increases if the price for the other good rises

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39
Q

Define a complement good

A

An increase in price for one good causes the demand for another good to fall

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40
Q

Define PED and give the formula

A

Measures the sensitivity of quantity demanded to a change in the price of a good or service
% change in QD / % change in price

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41
Q

Define price elastic

A

When a change in price leads to a more than proportionate change in demand
1 <PED< infinity

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42
Q

Define price inelastic

A

When a change in price leads to a less than proportionate change in demand
0 <PED< 1

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43
Q

Define unitary elastic

A

Elasticity = -1

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44
Q

Why may firms be interested to know their price elasticity of demand

A

It shows how a change in price will affect their total revenue

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45
Q

PED = 0

A

Demand is perfectly inelastic

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46
Q

PED is between 0 and -1

A

Demand is price inelastic

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47
Q

PED = -1

A

Demand is unit price elastic

48
Q

PED is between -1 and infinity

A

Demand is price elastic

49
Q

PED = infinity

A

Demand is perfectly elastic

50
Q

4 factors influencing PED

A

Availability of substitutes
Wether an individual regards the good as a necessity or as a luxury item
% of income the good or service takes up
Time period

51
Q

What is the elasticity of demand like in the long run

A

Elastic

52
Q

Define income elasticity of demand and give the formula

A

Measures the sensitivity of quantity demanded to a change in consumer income
% change in Quantity demanded / % change in consumer income

53
Q

Define normal good

A

As income rises, consumers spend proportionally less on the good
0 <YED< 1

54
Q

Define luxury good

A

As income rises, consumers spend proportionally more on the good
1 <YED

55
Q

Define cross elasticity of demand and give the formula

A

Measures the sensitivity of quantity demanded of a good or service to a change in price of another good or service
% change in QD of good X / % change in price of good Y

56
Q

XED is negative

A

Complement good

57
Q

XED is positive

A

Substitute good

58
Q

Define supply

A

The quantity of a good or service that producers are willing and able to sell at any given price in a given period of time

59
Q

4 factors that influence supply

A

Productions costs
Technology of production
Taxes and subsidies
Number of firms operating in the market

60
Q

Movements along vs. Shifts in the supply curve

A

Movement - change in market price
Shift - non-price factors

61
Q

Define price elasticity of supply

A

A measure of the sensitivity of quantity supplied of a good or service to change in the price
PES= % change in QS / % change in price

62
Q

Price elastic supply

A

Where the PES>1

63
Q

Define excess supply

A

A situation in which the quantity that firms are willing and able to supply exceeds the quantity that consumers wish to demand at the going price

64
Q

What causes excess supply

A

Price is set at a level that exceeds the value that most consumers place on a good/service, so they will not buy it

65
Q

Define excess demand

A

A situation in which the quantity that consumers wish to demand at the going price exceeds the quantity that firms are willing and able to supply

66
Q

What causes excess demand

A

Consumers want to buy more of the good/service at the lower price which firms are not willing and able to supply at

67
Q

Define market equilibrium

A

When the price is such that the quantity demanded by consumers is equal to the quantity supplied by firms

68
Q

5 factors that change the market equilibrium
(1 movement, 4 shifts)

A

Movements along the demand and supply curve:
Price adjustments
Shift in the demand and supply curves:
Change in consumer preferences
Change in price of substitute
Improvement in technology
Increase in labour costs

69
Q

Define consumer surplus

A

The value that consumers gain from consuming a good or service over and above the price paid

70
Q

Define marginal social benefit (MSB)

A

The additional benefit society gains from consuming an extra unit of good

71
Q

What will a price increase do to consumer surplus

A

Reduce overall size of consumer surplus
Affect the welfare that society receives from consuming the good

72
Q

Define producer surplus

A

The difference between the price received by firms for a good/service and the price at which they would have been prepared to supply at

73
Q

How will an increase in demand affect the size of consumer surplus

A

Demand increases = extension in supply
Both consumers and producers now receive a higher surplus

74
Q

Define price mechanism

A

Resource allocation is influenced through rationing, incentives and signalling

75
Q

Define price signal

A

The price of a good carries information to producers or consumers that guides the market towards equilibrium and assists resource allocation

76
Q

Define marginal cost

A

The cost of producing an additional unit of output

77
Q

What is the incentive function

A

Through choices consumers send information to producers about their changing nature of wants and needs

78
Q

What is the rationing function

A

When there is a shortage of a product, price will rise and deter some consumers from buying the product

79
Q

What is the signalling function

A

Changes in price provides information to both producers and consumers about changes in market conditions

80
Q

Define indirect tax

A

A tax levied on expenditure on goods or services
E.g VAT
Paid by seller so affects supply curve

81
Q

Define specific tax

A

A sales tax that is set at a constant amount per unit of sales

82
Q

Define incidence of a tax

A

The burden of paying a sales tax is divided between buyers and sellers

83
Q

Define ad valorem tax

A

A sales tax is set at a percentage of the price

84
Q

What factor determines the incidence of the tax

A

Price elasticity of demand
If demand is perfectly inelastic, sellers can pass whole burden of tax on to buyers through an increase in price equal to the value of the tax

85
Q

How is the supply curve affected by an ad valorem tax

A

Supply curve steepens

86
Q

Define subsidy

A

A grant given by the government to producers to encourage production of a good or service

87
Q

Define habitual behaviour

A

Consumers persist in acting in a particular way even when conditions have changed

88
Q

Define herding

A

People take decisions based on actions of others

89
Q

Define market failure

A

The market equilibrium does not lead to socially optimal allocation of resources

90
Q

Define externality

A

A cost or benefit that is external to a market transaction, and is thus not reflected in market prices

91
Q

How does a subsidy create an opportunity cost

A

The economic and social case should be judged carefully on the grounds of efficiency and fairness

92
Q

How does an externality lead to market failure

A

The costs firms face and price they set
Do not fully reflect actual costs and benefits of production and consumption of that good
Price does not = ‘true’ marginal cost

93
Q

How do information gaps lead to market failure

A

Consumers may not fully perceive benefits costs/benefits of consuming a good/service
Cannot truly determine their willingness to consume
Leads to over/under consumption of harmful/beneficial goods/services

94
Q

Examples of information gaps leading to market failure

A

Benefits of education not fully perceived
Harmfulness of smoking tobacco not fully perceived

95
Q

Define private cost

A

Cost incurred by a producer/consumer as part of a good’s production or consumption

96
Q

Define external cost

A

Cost caused by production or consumption
Borne by 3rd party
Not reflected in market prices

97
Q

Define marginal social cost (MSC)

A

Cost to society of producing an extra unit of a good

98
Q

What is represented/similar to the demand curve on an externality diagram

A

Marginal social benefit (MSB)

99
Q

Which two curve’s are upward sloping on an externality diagram

A

Marginal social cost (MSC)
Marginal private cost (MPC)

100
Q

How is global warming/climate change a negative production externality

A

Developed countries with transport and industry produce lot’s of pollution
Poorer countries suffer consequences too
E.g Bangladesh prone to severe flooding every year

101
Q

Application example for correction of externality caused by global warming/climate change

A

In 1997
Almost every country agreed to cut greenhouse gas emissions by 6%
By 2010

102
Q

Give an example of a positive consumption externality and explain

A

Education
Skilled workers can cooperate with each other
Improves productivity
Society gains social benefit

103
Q

Define net welfare loss

A

Excess of social cost over social benefits for a given output

104
Q

Define net welfare gain

A

Excess of social benefits over social costs for a given output

105
Q

Define non-excludable

A

It is not possible to provide a product for one person without allowing others to consume it

106
Q

Define non-rivalrous

A

One person’s consumption does not prevent others from consuming it

107
Q

Define public good

A

A good that is non-excludable and non-rivalrous

108
Q

Define free-rider problem

A

When an individual cannot be excluded from consumption so has no incentive to pay for its provision

109
Q

Define symmetric information

A

All participants in a market have the same information about market conditions

110
Q

Define asymmetric information

A

Some participants in a market have better information than others about market conditions

111
Q

Define moral hazard

A

A person who has taken out insurance is prone to taking more risk

112
Q

Define regulation

A

Intervention to tackle market failure by direct action to command and control behaviour

113
Q

Define tradable pollution permit

A

Controlling pollution based on a market for permits that allow firms to pollute up to a limit

114
Q

Advantages of a tradable pollution permit

A

Firms will have an incentive not to pollute
Overall level of pollution can be controlled by government

115
Q

Disadvantages of a tradable pollution permit

A

Must be sanctions in place for firms who pollute beyond permitted level
Firms who can afford to buy permits can pollute as much as they want

Economics (9 decks)

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