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MICRO > Topic 2 > Flashcards

Topic 2 Flashcards

1
Q

What is specialisation?

A

When a firm/country focuses on the production of a few goods to increase efficiency

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2
Q

What are the advantages of specialisation?

A

-higher output
- higher quality
- increased efficiency
- more opportunity for economies of scale

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3
Q

What are the disadvantages of specialisation?

A
  • countries could become overly dependent on the export of one good
  • workers could become unmotivated
  • structural unemployment
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4
Q

What is comparative advantage?

A

When a firm/country can produce a good at a lower opportunity cost than another

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5
Q

What is absolute advantage?

A

When a firm/ country can produce more of a good with the same resources

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6
Q

What are the functions of money?

A
  • a medium of exchange
  • a store of value
  • a measure of value
  • a method of deferred payment
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7
Q

What is a sub-market?

A

A smaller market within a market

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8
Q

What is demand?

A

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

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9
Q

What is marginal utility?

A

The extra satisfaction derived from consuming one extra unit of a good/service

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10
Q

What is the substitution effect?

A

As price rises, demand falls as people switch to cheaper substitutes

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11
Q

What is the income effect?

A

As peoples income falls, they spend less on goods and services so demand falls.

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12
Q

What is derived demand?

A

The demand comes from the demand for something else. Eg the demand for bricklayers and the demand for new homes

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13
Q

What is composite demand?

A

The good demanded has multiple uses

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14
Q

What is joint demand?

A

The two goods are purchased together.( eg video games and games consoles)

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15
Q

What is joint supply?

A

Increasing the supply of one good increases/decreases the supply of another

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16
Q

What is composite supply?

A

The good can be obtained from multiple sources

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17
Q

What is competitive supply?

A

The goods being supplied are substitutes

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18
Q

What factors cause a shift in the supply curve?

A
  • a change in direct taxes
  • a change in productivity
  • the number of firms
  • technology
  • weather
  • costa of production
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19
Q

What is consumer surplus?

A

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)

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20
Q

What is producer surplus?

A

The difference between the price the producer is willing to charge and the price they actually charge

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21
Q

What effect does PED have on consumer surplus?

A

A PED elastic good usually has a lower consumer surplus

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22
Q

What is the market clearing price?

A

The price at market equilibrium

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23
Q

What is PED?

A

The responsiveness of a change in demand to a change in price

% change D / % change P

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24
Q

What is the PED of a relatively elastic good?

A

PED > 1

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25
Q

What is the PED of a relatively inelastic good?

A

PED < 1

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26
Q

What is the PED of a good with unitary elasticity?

A

PED = 1

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27
Q

What is the PED of a perfectly inelastic good?

A

PED = 0

28
Q

What is the PED of a perfectly elastic good?

A

PED = infinity

29
Q

What are the effects of the PED on tax revenue?

A

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

30
Q

What is YED?

A

The responsiveness of a change in demand to a change in income

% change demand / % change income

31
Q

What is the YED of a normal good?

A

0 <YED < 1

32
Q

What is the YED of an inferior good?

A

YED < 0

33
Q

What is the YED of a luxury good?

A

YED > 1

34
Q

What is XED?

A

The responsiveness of a change in demand of one good to a change in price of another good

% change D(x) / % change P (y)

35
Q

What is the XED of a complementary good?

A

XED < 0

36
Q

What is the XED of a substitute?

A

XED > 0

37
Q

What is the XED of two unrelated goods?

A

XED = 0

38
Q

What is PES?

A

The responsiveness of a change in supply to a change in price

39
Q

What is the PES of an elastic good?

A

PES > 1

40
Q

What is the PES of an inelastic good?

A

PES < 1

41
Q

What factors influence PED?

A
  • necessity
  • substitutes
  • addictive/habitual consumption
    -proportion of income spent on good
  • durability if good
  • peak/off peak demand
42
Q

What factors influence YED?

A
  • Nature of good (luxury etc)
43
Q

What factors influence PES?

A
  • Spare capacity
  • level of stock
  • how suitable FOP are
  • barriers to entry
44
Q

What is the margin?

A

The effect of an additional action

45
Q

What is the formula for marginal utility?

A

Total utility (Xn +1) - Total utility (Xn)

46
Q

What is market failure?

A

The inefficient allocation of scarce resources

47
Q

What is an externality?

A

The cost or benefit to a third party which goes unpaid for in an economic transaction

48
Q

What is a merit good?

A

A good with a positive externality

49
Q

What is the marginal private cost?

A

The cost to a form of producing an extra good?

50
Q

How many supply curves does a production externality graph have?

A

2

51
Q

What is symmetric information?

A

When consumers and producers have the same level of market information to make their decisions

52
Q

What is asymmetric information?

A

When producers and consumers have a different level of information to make market decisions

53
Q

What is the principal agent problem?

A

The anger makes a decision on behalf of the principal, but the agent is inclined to act in their own best interest

54
Q

What is moral hazard?

A

When an individual takes on more risk than normal because they don’t bear the full cost of the risk.

55
Q

What are public goods?

A

Goods which are non-excludable , non-rivalrous and are under provided in the free market

56
Q

What are private goods?

A

Goods which are excludable and rivalrous

57
Q

What are quasi-public goods?

A

Goods which have characteristics of both public and private goods

58
Q

What is the free-rider problem?

A

People use a good which someone else has paid for without paying for it.

59
Q

Why do governments intervene?

A

To correct market failure

60
Q

What are the some of the forms of government intervention?

A

-indirect taxes
- subsidies
- maximum and minimum prices
- buffer stock systems
- regulation
- tradable pollution permits
- state provision of public goods
- provision of information

61
Q

What are indirect taxes?

A

Taxes on expenditure ( such as VAT)

62
Q

How can indirect taxes be used to correct market failure?

A

It reduces the demand for demerit goods which leads to a fall in consumption

63
Q

What are the disadvantages of using a subsidy to correct market failure?

A

The opportunity cost as it could lead to a rise in taxes

Firms could become inefficient if they rely on the subsidy

64
Q

What is the advantage of using buffer stock systems to correct market failure?

A
  • farmer income remains stable
  • increases consumer welfare through stable prices
65
Q

What are the disadvantages of buffer stock systems?

A
  • governments may not have the resources to buy up stock
  • farmers may overproduce as they are guaranteed a minimum price
66
Q

What are the causes of government failure?

A
  • distortion of price signals
  • unintended consequences
  • excessive administrative costs
  • information gaps

MICRO (5 decks)

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