Topic 2 Flashcards
What is specialisation?
When a firm/country focuses on the production of a few goods to increase efficiency
What are the advantages of specialisation?
-higher output
- higher quality
- increased efficiency
- more opportunity for economies of scale
What are the disadvantages of specialisation?
- countries could become overly dependent on the export of one good
- workers could become unmotivated
- structural unemployment
What is comparative advantage?
When a firm/country can produce a good at a lower opportunity cost than another
What is absolute advantage?
When a firm/ country can produce more of a good with the same resources
What are the functions of money?
- a medium of exchange
- a store of value
- a measure of value
- a method of deferred payment
What is a sub-market?
A smaller market within a market
What is demand?
The total number of goods and services that consumers are willing and able to buy at a given price level over a period of time
What is marginal utility?
The extra satisfaction derived from consuming one extra unit of a good/service
What is the substitution effect?
As price rises, demand falls as people switch to cheaper substitutes
What is the income effect?
As peoples income falls, they spend less on goods and services so demand falls.
What is derived demand?
The demand comes from the demand for something else. Eg the demand for bricklayers and the demand for new homes
What is composite demand?
The good demanded has multiple uses
What is joint demand?
The two goods are purchased together.( eg video games and games consoles)
What is joint supply?
Increasing the supply of one good increases/decreases the supply of another
What is composite supply?
The good can be obtained from multiple sources
What is competitive supply?
The goods being supplied are substitutes
What factors cause a shift in the supply curve?
- a change in direct taxes
- a change in productivity
- the number of firms
- technology
- weather
- costa of production
What is consumer surplus?
The different between the price the consumer is willing and able to pay and the price they actually pay.
(Area above market price and below demand curve)
What is producer surplus?
The difference between the price the producer is willing to charge and the price they actually charge
What effect does PED have on consumer surplus?
A PED elastic good usually has a lower consumer surplus
What is the market clearing price?
The price at market equilibrium
What is PED?
The responsiveness of a change in demand to a change in price
% change D / % change P
What is the PED of a relatively elastic good?
PED > 1
What is the PED of a relatively inelastic good?
PED < 1
What is the PED of a good with unitary elasticity?
PED = 1
What is the PED of a perfectly inelastic good?
PED = 0
What is the PED of a perfectly elastic good?
PED = infinity
What are the effects of the PED on tax revenue?
Inelastic good - majority of tax burden falls on consumer / most effective for gaining revenue
Elastic good - majority of tax burden falls on producer / most effective for reducing consumption
What is YED?
The responsiveness of a change in demand to a change in income
% change demand / % change income
What is the YED of a normal good?
0 <YED < 1
What is the YED of an inferior good?
YED < 0
What is the YED of a luxury good?
YED > 1
What is XED?
The responsiveness of a change in demand of one good to a change in price of another good
% change D(x) / % change P (y)
What is the XED of a complementary good?
XED < 0
What is the XED of a substitute?
XED > 0
What is the XED of two unrelated goods?
XED = 0
What is PES?
The responsiveness of a change in supply to a change in price
What is the PES of an elastic good?
PES > 1
What is the PES of an inelastic good?
PES < 1
What factors influence PED?
- necessity
- substitutes
- addictive/habitual consumption
-proportion of income spent on good - durability if good
- peak/off peak demand
What factors influence YED?
- Nature of good (luxury etc)
What factors influence PES?
- Spare capacity
- level of stock
- how suitable FOP are
- barriers to entry
What is the margin?
The effect of an additional action
What is the formula for marginal utility?
Total utility (Xn +1) - Total utility (Xn)
What is market failure?
The inefficient allocation of scarce resources
What is an externality?
The cost or benefit to a third party which goes unpaid for in an economic transaction
What is a merit good?
A good with a positive externality
What is the marginal private cost?
The cost to a form of producing an extra good?
How many supply curves does a production externality graph have?
2
What is symmetric information?
When consumers and producers have the same level of market information to make their decisions
What is asymmetric information?
When producers and consumers have a different level of information to make market decisions
What is the principal agent problem?
The anger makes a decision on behalf of the principal, but the agent is inclined to act in their own best interest
What is moral hazard?
When an individual takes on more risk than normal because they don’t bear the full cost of the risk.
What are public goods?
Goods which are non-excludable , non-rivalrous and are under provided in the free market
What are private goods?
Goods which are excludable and rivalrous
What are quasi-public goods?
Goods which have characteristics of both public and private goods
What is the free-rider problem?
People use a good which someone else has paid for without paying for it.
Why do governments intervene?
To correct market failure
What are the some of the forms of government intervention?
-indirect taxes
- subsidies
- maximum and minimum prices
- buffer stock systems
- regulation
- tradable pollution permits
- state provision of public goods
- provision of information
What are indirect taxes?
Taxes on expenditure ( such as VAT)
How can indirect taxes be used to correct market failure?
It reduces the demand for demerit goods which leads to a fall in consumption
What are the disadvantages of using a subsidy to correct market failure?
The opportunity cost as it could lead to a rise in taxes
Firms could become inefficient if they rely on the subsidy
What is the advantage of using buffer stock systems to correct market failure?
- farmer income remains stable
- increases consumer welfare through stable prices
What are the disadvantages of buffer stock systems?
- governments may not have the resources to buy up stock
- farmers may overproduce as they are guaranteed a minimum price
What are the causes of government failure?
- distortion of price signals
- unintended consequences
- excessive administrative costs
- information gaps
