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A level economics > Theme one > Flashcards

Theme one Flashcards

1
Q

What is the definition of micro economics

A

Economics concerned with single factors and the effects of individual decisions - buisnesses

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2
Q

What is macro economics

A

Economics concerned with large scale or general economic factors, such as interest rates and productivity - government

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3
Q

What is the definition of demand

A

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

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4
Q

What is the law of demand

A

As price increases, quantity decreases, they have an inversely proportional relationship

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5
Q

What is the opportunity cost

A

The cost of the next best alternative forgone when a choice is made

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6
Q

What is the definition of supply

A

The quantity of a good/ service producers are willing and able to produce at a given price in a given time period

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7
Q

What is the law of supply

A

As price increases, quantity increases, they have a directly proportional relationship

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8
Q

What happens when we increase quantity produced and why

A

The price of the product will increase as increasing price is necessary to maintain profit margins

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9
Q

What can we see from Production possibility curves/ production possibility frontiers

A

Maximum possible production within given factors of production and various combinations of two goods/ services that can be produced

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10
Q

What are the factors that affect demand?

A

Population (directly proportional relationship)
Advertising (directly proportional relationship)
Substitutes price (other businesses increasing price will increase demand)
Income
Fashion/ tastes
Interest rates (If interest rates decrease consumers are more likely to buy luxury goods)
Complements price ( printers + printer ink)

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11
Q

What are normal goods

A

Cars, eating at restaurants

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12
Q

What are inferior goods

A

Fast food or public transport

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13
Q

What are the factors of production

A

Capital (machines and tractors, man made)
Enterprise (entrepreneurs, people at the top)
Land
Labour

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14
Q

What does a linear PPF show

A

Constant opportunity cost

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15
Q

What does a concave PPF show

A

Increasing opportunity cost

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16
Q

What is productive efficiency

A

Using all the factors of production to the maximum availability, this can be seen at any point on the curve

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17
Q

What are some ways businesses could increase production of a product

A

Reallocate factors of production so there is more focus on the desired product
Increase quality/ quantity of factors of production, this will positively affect both goods. They could also do this for just one of the products

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18
Q

What is the term which means all other factors remain unchanged?

A

Ceteris parabus

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19
Q

What is increasing the price known as?

A

Extension of demand

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20
Q

What is decreasing the price known as?

A

Contraction of demand ( due to quantity demanded decreasing )

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21
Q

What is allocative efficiency

A

Whether a product being produced is satisfying to consumers

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22
Q

What is Pareto efficiency?

A

The idea that no one can be made better off without making someone else worse off

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23
Q

What is productive efficiency?

A

Using up all the factors of production to their maximum level

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24
Q

What are the factors which affect supply

A

Productivity (output per worker/ per machine per hour)
Indirect tax (tax on production)
Number of firms (how many of the same business)
Technology
Subsidy (money grant given by the government)
Weather (agricultural businesses)
Cost of production
(oil, raw materials, gas, electricity, rent)

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25
Q

What is the definition of a market?

A

Any place where buyers meet suppliers to exchange goods or services

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26
Q

What is equilibrium

A

Where demand and supply are equal

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27
Q

What does it mean if someone says the market is clear

A

The market is at equilibrium

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28
Q

What is a free market

A

A market without intervention from the government

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29
Q

How does the price mechanism work if the price is too high?

A

A signal is sent to producers that the price is too high, this can be seen through empty tables, fully stocked shelves etc. They are given an incentive to lower their prices, the supply and demand are now at a perfect equilibrium.

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30
Q

How does the price mechanism work if the price is too low

A

A signal is sent to producers, seen by competition between buyers, long queues or huge waiting lists. Producers will raise their price, supply and demand are now at a perfect equilibrium

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31
Q

What are the four functions of the price mechanism

A

Allocate recourses effectively by creating equilibrium, demand is now at the same level as supply (4)
Rationing excess supply/ demand by encouraging or discouraging consumption, raising the price lowers demand, lowering the price raises demand (3)
Sending a signal to producers that prices are too high/ low (1)
Incentivise to change price and increase profit (2)

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32
Q

What is excess supply?

A

If supply is greater than demand, the excess is the amount extra that there is

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33
Q

Where can we see equilibrium on a demand/ supply and price graph

A

At the point where demand and supply are the same

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34
Q

What is consumer surplus?

A

The difference between the price consumers are willing and able to pay for a product and the price they actually pay

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35
Q

How do we calculate consumer surplus

A

The area below the demand curve and above the price line

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36
Q

What happens to consumer surplus as price is decreased?

A

Consumer surplus increases

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37
Q

What is producer surplus?

A

The difference between the price producers are willing and able to produce a good or service for and the price they actually receive

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38
Q

How do we calculate producer surplus?

A

The area above the supply curve and below the price line

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39
Q

What happens to producer surplus as the price is increased?

A

Producer surplus also increases

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40
Q

What is society surplus?

A

The sum of producer and consumer surplus

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41
Q

What happens to the demand of a good if its compliments price increases?

A

It decreases

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42
Q

What happens to the demand of a good if the price of its substitute increases?

A

It will increase as more consumers will be willing to buy it

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43
Q

What is derived demand?

A

When the demand for a good or service comes from the demand for something else, aeroplanes are derived from the demand for holidays

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44
Q

What is an example of derived demand

A

Labour is derived from the demand for goods and services

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45
Q

What is composite demand?

A

The idea that two goods need the same input to make them

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46
Q

What is an example of composite demand?

A

Cheese and butter both need milk

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47
Q

What will happen to the quantity production of a good if its composites demand increases?

A

It will decrease

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48
Q

What is joint supply

A

The idea that the increase of the production of one good will also increase the production of another good due to the second good being a byproduct of the first

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49
Q

What is an example of joint supply

A

Honey and beeswax

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50
Q

What is the definition of price elasticity of demand (PED)

A

Measures the responsiveness of quantity demanded given a change in price

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51
Q

What is the equation for PED

A

%change in quantity/ % change in price

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52
Q

What does it mean if the PED is more than one

A

Demand is price elastic

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53
Q

What does it mean if the PED is less than one?

A

Demand is price inelastic

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54
Q

What does it mean if PED is 0?

A

Demand is perfectly inelastic

55
Q

What does it mean if PED is infinity?

A

Demand is perfectly price elastic

56
Q

What does it mean if PED is 1?

A

Demand is unit price elastic

57
Q

What is price inelasticity mean?

A

Quantity changes by proportionally less than price

58
Q

What does price elasticity mean?

A

Quantity changes by proportionally more than price

59
Q

How do we draw price inelasticity?

A

Vertical line

60
Q

How do we draw price elasticity?

A

Horizontal line

61
Q

Price is elastic if there are

A

Substitutes (more of)
Percentage of income (more of)
Luxury (more) necessity (less)
Addictive (inelastic)
Time period (inelastic in the short term, becomes more elastic)

62
Q

What is division of labour?

A

Dividing the production of a product into smaller tasks and allocating labour to each task

63
Q

What are the advantages of specialisation of labour

A
  1. Increased efficiency as workers become more efficient in their small area
  2. Less time/ money spent on training
  3. More specialist tools can be made
  4. Less time moving tools/ moving between jobs so more time efficient
    5.
64
Q

What are the four functions of money?

A
  1. Method of exchange- of goods and services
  2. Store of value - workers can earn their wages and store them for later
  3. Measure of value - money helps us to understand how much things are worth
  4. Measure of deferred payment - banks can loan people money and add interest so that when the money is payed back it still has the same value
65
Q

What is an economy with no money known as?

A

A barter economy

66
Q

What is a positive statement

A

A factual statement

67
Q

What is a normative statement?

A

A value judgement

68
Q

What are constraints?

A

Limits to what we can afford to consume

69
Q

How do we calculate total revenue?

A

Price of a product x quantity sold

70
Q

What is total revenue?

A

Total income

71
Q

What happens to revenue if the price is elastic

A

If we increase the price, revenue will decrease
If we decrease the price, revenue will increase

72
Q

What happens to revenue if the price is inelastic?

A

If we increase the price, revenue will increase
If we decrease the price, revenue will decrease

73
Q

What is PES?

A

Price elasticity of supply

74
Q

What does PES measure?

A

The responsiveness of quantity supplied given a change in price

75
Q

How to calculate PES?

A

Change in quantity supplied/ change in price

76
Q

What type of number is PES?

A

Positive

77
Q

How do we show that supply is price elastic?

A

Horizontal line

78
Q

How do we show that supply is price inelastic?

A

Vertical line

79
Q

What are the factors affecting PES?

A

Production lag - the longer it is the more inelastic price is
Stocks - the more you have the more elastic
Spare capacity- more is more elastic
Substitutability of factors of production- how quickly you can switch to producing more of a different good
Time - inelastic to elastic

80
Q

What is XED?

A

Measures the responsiveness of quantity demanded of a good/ service given a change in the price of another

81
Q

How do you calculate XED?

A

% change in quantity demanded of good A/ % change in price of good B

82
Q

What does it mean if XED is positive?

A

Goods are substitutes

83
Q

What does it mean if XED is negative?

A

Goods are compliments

84
Q

What does it mean if XED is more than one?

A

Demand is price elastic (strongly related)

85
Q

What does it mean if XED is less than one?

A

Demand is price inelastic ( weakly related)

86
Q

What does it mean if XED is 0?

A

Demand is perfectly price inelastic ( no relationship)

87
Q

How do we draw XED> 1

A

Horizontal line

88
Q

How do we draw XED<1?

A

Vertical line

89
Q

What does YED measure?

A

The responsiveness of quantity demanded given a change in income

90
Q

How do we calculate YED?

A

YED = % change in quantity demanded/ % change in income

91
Q

What does it mean if the YED is positive?

A

It is a normal good

92
Q

What does it mean if the YED is negative?

A

It is an inferior good

93
Q

What does it mean if YED is more than one?

A

Demand is price elastic and the good is a normal luxury

94
Q

What does it mean if YED is less than one?

A

Demand is inelastic normal necessity

95
Q

What is PED useful for?

A

Useful for pricing decisions to increase total revenue, if price is elastic and they know it is going to fall in the near future, they need to increase employment, output and stocks

96
Q

What is the use of PES?

A

Find ways to make supply price elastic by increasing the effectiveness of the PSSST factors

97
Q

Why is XED useful?

A

Pricing decisions- if there are two compliment goods for example printers and printer ink, reduce the price of printers so people buy one, they will need printer ink so increase the price of that and make more profit
Substitutes - cut the price of your substitute, if they cut their price follow their lead. Compete on non price factors to make yours and your substitutes good less similar- avoid price wars. Be prepared to increase output if substitutes raises price, have less output if substitute lowers price

98
Q

Why is YED useful?

A

Useful for planning for recessions and booms e.g if producing a normal good and there is a boom increase price, employment, output and stocks

99
Q

What are the limitations of using price elasticity to make decisions?

A

These figures are only estimates based off data collected through surveys
Some businesses base these figures off data based off competitors and past data which is assuming cetris parabus which is inaccurate
PED varies along the demand curve

100
Q

What are the uses of indirect tax?

A

Raise government revenue
Solve the market Chris is of goods such as cigerettes/ alcohol/ fuel ( reduce the consumption of goods which do harm to society)

101
Q

What is direct tax?

A

Tax on income that can’t be transferred such as income tax or national insurance

102
Q

What is indirect tax?

A

Tax on income that increases cost of production but can be transferred to consumers via higher prices

103
Q

What is a specific tax?

A

A tax per unit

104
Q

How do we draw a specific tax on a graph?

A

Can be drawn as a parallel line to the original tax - supply curve shifts upwards

105
Q

What is AD valorem??

A

Tax as a % of price

106
Q

How do we draw specific tax on a graph?

A

The supply curve will pivot

107
Q

How do we work out government revenue from a specific tax diagram?

A

Go to the new equilibrium
Work out the vertical difference between the two supply curves
Multiply by the quantity sold at this point

108
Q

How to work out consumer burden?

A

Quantity of new equilibrium X the point from the original price to where it matches equilibrium in quantity

109
Q

How to calculate producer burden?

A

Original price to where it matches equilibrium in quantity down to the same point on the original supply curve X quantity sold

110
Q

How to calculate producer revenue after indirect tax?

A

Go down from the new equilibrium to the same point on the original supply curve, the price X quantity of this product is the new producer revenue

111
Q

Dead weight loss?

A

The triangle of original equilibrium, new equilibrium, and the same point on the original supply curve from the new equilibrium

112
Q

What is the burden for consumers if demand is price elastic?

A

Lower

113
Q

What is the producer burden if demand is price elastic?

A

Higher

114
Q

What is the government revenue if demand is price elastic after indirect tax

A

Lower

115
Q

What is the consumer burden if demand is price inelastic?

A

Higher

116
Q

What is the producer burden if demand is price inelastic?

A

Lower

117
Q

What is the government revenue if demand is price inelastic?

A

Higher

118
Q

What happens if demand is perfectly price elastic?

A

Producers take the entire burden and gov rev is at the lowest

119
Q

What happens if demand is perfectly price inelastic after indirect tax

A

Consumers take the entire burden and government revenue is at the highest

120
Q

What is the consumer burden when supply is price elastic after indirect tax

A

Higher

121
Q

What is the producer burden when supply is elastic?

A

Lower

122
Q

What is the consumer burden when supply is price inelastic?

A

Lower

123
Q

What is the producer burden when supply is price inelastic?

A

Higher

124
Q

Who takes all the burden when supply is perfectly price elastic?

A

Consumer

125
Q

Who takes all the burden when supply is perfectly inelastic?

A

Producer

126
Q

What is a subsidy?

A

Money grant given to firms by the government to reduce costs in production aims encourage an increase in demand

127
Q

What are the uses of a subsidy?

A

Solve market failures by making goods such as vaccinations, public transport and education ( things that benefit society as a whole)
Increase affordability of necessities

128
Q

What does subsidy do to the supply curve?

A

Shifts it downwards

129
Q

What does subsidy do to price/ quantity

A

Decreases price and increases quantity

130
Q

How do you work out the cost of subsidy to the government?

A

Go to the new equilibrium, find the difference between the two supply curves at this point, multiply by the quantity sold at this point

131
Q

How do we work out producer revenue after subsidy?

A

Go to the new equilibrium and find the same point on the original supply curve X the quantity sold at this point

132
Q

How to work out dead weight loss of a subsidy?

A

Triangle of old equilibrium, new equilibrium, go to new equilibrium up to the same point on the original supply curve

133
Q

How to calculate consumer savings with a subsidy?

A

Quantity at old equilibrium X go to price of new equilibrium, go across until it meets quantity of old equilibrium

A level economics (1 decks)

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