Theme 1 (textbook) Flashcards
(115 cards)
1
Q
Define ceteris paribus
A
All other things being equal
2
Q
What is a positive statement
A
A statement that is about facts and is testable
3
Q
What is a normative statement
A
A statement that involves a value judgement about what ought to be
4
Q
Define scarcity
A
A situation that arises when people have unlimited wants in the face of limited resources
5
Q
Define free goods
A
Goods such as the earth’s atmosphere that are not normally regarded as being scarce
6
Q
Define economic goods
A
Goods that are scarce
7
Q
Define opportunity cost
A
The value of the next-best alternative forgone
8
Q
Who are the 3 key economic agents
A
Consumers
Producers
Government
9
Q
What are the 4 factors of production
A
Land
Labour
Capital
Enterprise
10
Q
What are the rewards for each factor of production
A
Land - rent
Labour - wages
Capital - interest
Enterprise - profit
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
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
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
14
Q
Define a trade-off
A
A situation in which the choice of one alternative requires the sacrifice of another
15
Q
Define capital goods and give 2 examples
A
Goods used for the production process
Machinery or factory builidings
16
Q
Define consumer goods
A
Goods produced for present use
17
Q
Define economic growth
A
An expansion in the productive capacity of the economy
18
Q
Define GDP
A
A measure of the economic activity carried out in an economy over a period
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
20
Q
Define specialisation
A
The process of focusing production on a specific task or area
21
Q
Advantages of division of labour
A
Increase in productivity
Decrease in cost of production
Overall output increased
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)
23
Q
5 functions of money
A
Medium of exchange
Unit of account
Store of value
Measure of value
Method of deferred payment
24
Q
Define a free market economy
A
An economy in which market forces are allowed to guide the allocation of resources
25
Define a command economy
An economy in which decisions on resource allocation are made by the state
26
Define a mixed economy
An economy in which resources are allocated partly through price signals and partly by intervention by the state
27
Define rational consumers
Consumers maximising utility
28
Define rational producers
Aiming to maximise profits
29
Define profit
The total revenue a firm receives from selling its product minus the total cost of producing it
30
Define demand
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
31
Define diminishing marginal utility
The situation where an individual gains less additional utility from consuming a product, the more it is consumed
32
Define the law of demand
There is an inverse relationship between quantity demanded and the price of a good or service
33
Why is the demand curve downward sloping
There is an inverse relationship between price and quantity demand
34
What factors influence demand
Price of the good
Price of other goods
Income
Consumer preferences
35
Movements along vs. Shifts in the demand curve
Movement - change in price
Shift - non-price factors
36
Define normal good and give an example
Where the quantity demanded increases in response to an increase in consumer income
Holidays abroad
37
Define inferior good and give an example
Where the quantity demanded decreases in response to an increase in consumer income
Public transport
38
Define a substitute good
Demand for one good increases if the price for the other good rises
39
Define a complement good
An increase in price for one good causes the demand for another good to fall
40
Define PED and give the formula
Measures the sensitivity of quantity demanded to a change in the price of a good or service
% change in QD / % change in price
41
Define price elastic
When a change in price leads to a more than proportionate change in demand
1
42
Define price inelastic
When a change in price leads to a less than proportionate change in demand
0
43
Define unitary elastic
Elasticity = -1
44
Why may firms be interested to know their price elasticity of demand
It shows how a change in price will affect their total revenue
45
PED = 0
Demand is perfectly inelastic
46
PED is between 0 and -1
Demand is price inelastic
47
PED = -1
Demand is unit price elastic
48
PED is between -1 and infinity
Demand is price elastic
49
PED = infinity
Demand is perfectly elastic
50
4 factors influencing PED
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
What is the elasticity of demand like in the long run
Elastic
52
Define income elasticity of demand and give the formula
Measures the sensitivity of quantity demanded to a change in consumer income
% change in Quantity demanded / % change in consumer income
53
Define normal good
As income rises, consumers spend proportionally less on the good
0
54
Define luxury good
As income rises, consumers spend proportionally more on the good
1
55
Define cross elasticity of demand and give the formula
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
XED is negative
Complement good
57
XED is positive
Substitute good
58
Define supply
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
4 factors that influence supply
Productions costs
Technology of production
Taxes and subsidies
Number of firms operating in the market
60
Movements along vs. Shifts in the supply curve
Movement - change in market price
Shift - non-price factors
61
Define price elasticity of supply
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
Price elastic supply
Where the PES>1
63
Define excess supply
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
What causes excess supply
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
Define excess demand
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
What causes excess demand
Consumers want to buy more of the good/service at the lower price which firms are not willing and able to supply at
67
Define market equilibrium
When the price is such that the quantity demanded by consumers is equal to the quantity supplied by firms
68
5 factors that change the market equilibrium
(1 movement, 4 shifts)
**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
Define consumer surplus
The value that consumers gain from consuming a good or service over and above the price paid
70
Define marginal social benefit (MSB)
The additional benefit society gains from consuming an extra unit of good
71
What will a price increase do to consumer surplus
Reduce overall size of consumer surplus
Affect the welfare that society receives from consuming the good
72
Define producer surplus
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
How will an increase in demand affect the size of consumer surplus
Demand increases = extension in supply
Both consumers and producers now receive a higher surplus
74
Define price mechanism
Resource allocation is influenced through rationing, incentives and signalling
75
Define price signal
The price of a good carries information to producers or consumers that guides the market towards equilibrium and assists resource allocation
76
Define marginal cost
The cost of producing an additional unit of output
77
What is the incentive function
Through choices consumers send information to producers about their changing nature of wants and needs
78
What is the rationing function
When there is a shortage of a product, price will rise and deter some consumers from buying the product
79
What is the signalling function
Changes in price provides information to both producers and consumers about changes in market conditions
80
Define indirect tax
A tax levied on expenditure on goods or services
E.g VAT
Paid by seller so affects supply curve
81
Define specific tax
A sales tax that is set at a constant amount per unit of sales
82
Define incidence of a tax
The burden of paying a sales tax is divided between buyers and sellers
83
Define ad valorem tax
A sales tax is set at a percentage of the price
84
What factor determines the incidence of the tax
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
How is the supply curve affected by an ad valorem tax
Supply curve steepens
86
Define subsidy
A grant given by the government to producers to encourage production of a good or service
87
Define habitual behaviour
Consumers persist in acting in a particular way even when conditions have changed
88
Define herding
People take decisions based on actions of others
89
Define market failure
The market equilibrium does not lead to socially optimal allocation of resources
90
Define externality
A cost or benefit that is external to a market transaction, and is thus not reflected in market prices
91
How does a subsidy create an opportunity cost
The economic and social case should be judged carefully on the grounds of efficiency and fairness
92
How does an externality lead to market failure
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
How do information gaps lead to market failure
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
Examples of information gaps leading to market failure
Benefits of education not fully perceived
Harmfulness of smoking tobacco not fully perceived
95
Define private cost
Cost incurred by a producer/consumer as part of a good’s production or consumption
96
Define external cost
Cost caused by production or consumption
Borne by 3rd party
Not reflected in market prices
97
Define marginal social cost (MSC)
Cost to society of producing an extra unit of a good
98
What is represented/similar to the demand curve on an externality diagram
Marginal social benefit (MSB)
99
Which two curve’s are upward sloping on an externality diagram
Marginal social cost (MSC)
Marginal private cost (MPC)
100
How is global warming/climate change a negative production externality
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
Application example for correction of externality caused by global warming/climate change
In 1997
Almost every country agreed to cut greenhouse gas emissions by 6%
By 2010
102
Give an example of a positive consumption externality and explain
Education
Skilled workers can cooperate with each other
Improves productivity
Society gains social benefit
103
Define net welfare loss
Excess of social cost over social benefits for a given output
104
Define net welfare gain
Excess of social benefits over social costs for a given output
105
Define non-excludable
It is not possible to provide a product for one person without allowing others to consume it
106
Define non-rivalrous
One person's consumption does not prevent others from consuming it
107
Define public good
A good that is non-excludable and non-rivalrous
108
Define free-rider problem
When an individual cannot be excluded from consumption so has no incentive to pay for its provision
109
Define symmetric information
All participants in a market have the same information about market conditions
110
Define asymmetric information
Some participants in a market have better information than others about market conditions
111
Define moral hazard
A person who has taken out insurance is prone to taking more risk
112
Define regulation
Intervention to tackle market failure by direct action to command and control behaviour
113
Define tradable pollution permit
Controlling pollution based on a market for permits that allow firms to pollute up to a limit
114
Advantages of a tradable pollution permit
Firms will have an incentive not to pollute
Overall level of pollution can be controlled by government
115
Disadvantages of a tradable pollution permit
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
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