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A Level Economics > Unit 1 > Flashcards

Unit 1 Flashcards

1
Q

What are the factors of production?

A
  • Labour
  • Land
  • Capital
  • Entreneurship
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2
Q

What is the economic problem?

A
  • People have infinite wants but have finite resources as they are scarce.
  • This means that individuals, businesses and governments have to make choices and have to give up something
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3
Q

What is opportunity cost?

A

The value of the next best alternative forgone when making a choice

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4
Q

What are production possibility curves?

A

PPCs are diagrams that illustrate the principals of scarcity and opportunity cost

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5
Q

How do PPCs show scarcity?

A

Only all of one product can be produced as the resources will have been used up

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6
Q

What do the points represent on the curve?

A
  • Any point on the curve is efficient as all of the resources are being used. (max output)
  • X is inefficient as not all of the resources are being used up as more of one product can be produced without comprimising the other product
  • Y in not possible as there are not enough resources to achieve that production number
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7
Q

What is effective demand?

A

When an individual is ABLE and WILLING to purchase something at a given price

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8
Q

What are the factors that affect demand?

A
  • The price of the product
  • The price of substitutes
  • Price of complements
  • Change in income
  • Trends/ fashion
  • Seasons
  • Legislation
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9
Q

How does the price of the product affect demand?

A

If the price falls then demand rises. Movement along the demand curve

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10
Q

How does the price of substitutes affect demand?

A

If the price of a substitute falls then demand for the original product will fall at a given price.

It is a shift in demand

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11
Q

How does the price of complements affect demand?

A

A complementary product is a product that you have to buy with another product.

If the price of the product rises (x box) then the demand for xbox will fall so fewer contollers will be sold.

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12
Q

How does a change in income affect demand?

A

Generally, if incomes rise then demand also rises (normal goods) as people are more willing and able to purchase at a given price.

Sometimes if incomes rise demand for certain products falls (Lidl) as they are inferior goods so fewer people are willing to spend there

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13
Q

How do fashion/ trends affect demand?

A

If a product is in fashion then it is desireable so demand will increase at a given price

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14
Q

How do seasons affect demand?

A

At certain times, certain products are in demand e.g- christmas trees at christmas

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15
Q

How does legislation affect demand?

A

A change in law affects demand. e.g- Banning high powered vacuums decreases demand at a given price.

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16
Q

What does a supply diagram show?

A

It shows how willing and able a firm is to supply at a given price.

If prices rise then a firm will be more willing to supply at a given price as there is more profit incentive.

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17
Q

What factors affect supply?

A
  • The price of the product
  • The cost of raw materials
  • Government Subsidies
  • Tax on business
  • Number of producers in the market
  • Change in technology
  • Seasons/ Weather
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18
Q

How does the cost of raw materials affect supply?

A

A fall in the costs of raw materials acts like a cut in costs and so a a given price firms will be more willing to supply as there will be more profit.

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19
Q

How does a government subsidy affect supply?

A

A subsidy acts like a cut in costs and so a a given price firms will be more willing to supply as there will be more profit.

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20
Q

How does tax affect supply?

A

A tax acts like a rise in costs and so a a given price firms will be less willing to supply as there will be less profit.

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21
Q

How does the number of producers in the market affect supply?

A

The higher the number of producers, the less likely firms will be able to supply at a given price as there will be less profit to be made

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22
Q

How does a change in technology affect supply?

A

A change in technology acts like a cut in costs and so a a given price firms will be more willing to supply as there will be more profit on every unit

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23
Q

How do seasons/ weather affect supply?

A

In some seasons the ability to supply at a given price is hard as you can’t produce

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24
Q

What is a market equilibrium?

A

It is where supply and demand are equal

If the price is too low then demand is high but supply is low which leads to a shortage

If the price is too high then demand is low and supply is high which leads to a surplus

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25
Q

What is price discrimination?

A

Deliberatley charging different sub groups of society a different price in order to extract the maximum out of each sub group to maximise revenue

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26
Q

What is consumer surplus?

A

The amount of benefit a consumer recieves when the market price is lower than they are willing to pay

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27
Q

What is producer surplus?

A

When a producer is willing to sell lower than the market price and recieves the benefit for it

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28
Q

What is price elasticity of demand?

A

The responsiveness of demand to a change in price

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29
Q

Why are some products inelastic?

A
  • Habit forming goods
  • Lack of availability of close substitues so people are forced to absorb the price increase
  • If it is a neccessity
  • Loyalty of customers to a brand
  • The percentage of income that the price of the product relates to
30
Q

How is PED measured?

A

% change in quantity

% change in price

If

If it is between -1 and 0 then it is inelastic

31
Q

What is the relevance of PED?

A

Helps businesses with pricing decisions

If PED was inelastic then firms may increase the price of the product as deman would not be very responsive

32
Q

Is PED accurate?

A
  • Can be predicted from market research
  • Can calculate the PED from changing the price
  • We assume CETERIS PARIBUS
  • Only accurate if it is up to date as demand for a product can naturally change over time
33
Q

What is Income Elasticity of Demand?

A

The responsiveness of demand to a change in in income

34
Q

How is YED calculated?

A

% change in Demand

% Change in Income

Inferior product is

Normal product between 0 and 1

Luxury Good >1

35
Q

What is the relevance of YED?

A

Firms can stock the correct number of normal, inferior and luxury goods

If incomes rise then more resources could be put into producing normal and luxury goods

36
Q

What is cross price elasticity?

A

The responsiveness of demand for good A to a change in price of product B

37
Q

How is XPED calculated?

A

% Change in Demand of A

% Change In Price of B

Complement if it is

Substitute if it is >0

38
Q

What is price elasticity of supply?

A

The responsiveness of supply to a change in price

39
Q

How is PES calculated?

A

% Change in Supply

% Change in Price

If

If >1 then it is elastic

40
Q

Why is PES ineleastic?

A
  • The climate of a certain country will disrupt a harvest
  • Disease of crops
  • Shortage of labour
  • A shortage of technological developments
41
Q

What are negative externalities?

A

Actions of an individual that have costs that are not as great as the total cost to society

42
Q

How do negative externalities cause market failure?

A

Individuals will consume Q1 units but society wants Q2 to be consunmed which is less than Q2. This means that the difference between Q1 and Q2 is the number of units that have been over produced eventhough society did not want them to be produced. Therefore there has been a mis-allocation of resources which results in market failure.

43
Q

What are positive externalities?

A

When the actions of an individual inflicts a greater benefit on society than to the individual

44
Q

How do positive externalities cause market failure?

A

Individuals will consume Q1 of the product but society wants them to consume Q2 as this is where MSC=MSB. Individuals will not consume Q2 as their MPC are higher than their MPB. This means that the product is underconsumed so there is a mis-allocation of resources that individuals are overconsuming. This leads to market failure

45
Q

What are merit goods?

A

Positive externalities

Individuals don’t fully understand their true private benefits as a result of consuming

46
Q

How do merit goods cause market failure?

A

Before individuals became aware of the benefits of consumption they consumed Q1 and were willing to pay P1 for it as MPC=MPB

After the individual becomes aware of the benefits of consumption they are willing to consume Q2 and pay P2 as it is better for them.

This shows an underconsumption due to a lack of info which leads to market failure. However society wants Q3 to be consumed which is higher than Q2 as MSC=MSB which will not be consumed even if people have info. This means that resources are mis-allocated which leads to more market failure

47
Q

What are de-merit goods?

A

Negative externalities

Individuals consuming them don’t fully understand their private costs

48
Q

How do de-merit goods cause market failure?

A

To start with, individuals don’t understand their own private benefits. This means they consume Q1 . When they find out that they find out that they actually recieve less benefits then they consume Q2 which is less than Q1. This means that there was over consumption and a mis-allocation of resources which leads to market failure.

There may be ‘double’ market faliure because when the externality is taken into account, there is a MSC line which wants individuals to consume Q3 which is less than they will consume even with info. This means that there is further over consumption and market failure.

49
Q

What are public goods?

A
  • Non excludable- You can still use the good even if you haven’t paid for it
  • Non-rivalrous- If one person consumes the good, it does not affect another persons ability to consume it
50
Q

Why does a public good cause market failure?

A

As public goods are non excludable, there is a FREE RIDER PROBLEM which is when people consume a good without paying for it. This means that business are less willing to supply as there is little profit. There is a mis- allocation of resources and so market failure

51
Q

What are the solutions to market failure?

A
  • Tax
  • Subsidy
  • Providing Information
  • Regulation
  • Tradeable Permits
52
Q

What is tax?

A

Indirect Tax- tax on consumption or production

Direct Tax- Tax on individuals income or businesses profits

53
Q

How does tax solve market failure?

A

A tax makes the product more expensive so it reduces individuals ability to demand the product. This results in a movement UP the MPB line. They pay the social cost (MPC+TAX). Individuals will now consume less which erradicates the deadweight loss and resources are correctly allocated

54
Q

What are the problems with tax?

A
  • Tax avoidance
  • Price inelastic goods
  • May decrease profits due to less demand
  • People substitute negative externalities
  • The value of the externality is hard to calculate
55
Q

What are subsidies?

A

Can be paid to businesses or individuals

Work with positive externalities

56
Q

How do subsidies solve market failure?

A

Individuals consume Q1 as MPC = MPB. Society wants more (Q2) to be consumed but it costs more so the value between Q1 and Q2 is the subsidy. Market failure is solved.

57
Q

What are the problems with a subsidy?

A
  • Costly to government
  • Large opportunity cost
  • Demand for substitutes will decrease
  • Value of externality is difficult to calculate
  • The value of subsidy must increase as consumption increases
  • Inelastic goods
  • May take a while for demand to increase
  • Firms may not pass the benefit onto the customer
58
Q

What is providing information?

A

The UK government spend money to advertise about- strokes, drink driving, vaccines…

59
Q

How does providing information solve market failure?

A

It impacts peoples private benefits as a result of having recieved information. They choose to drive slower or get vaccinated

60
Q

What are the problems with providing information?

A
  • Not guarenteed to have an impact
  • Expensive so high opportunity cost
  • People may over react and stop consuming which may mean that there is negative consequences
61
Q

What is legislation?

A

Rules set out by government that force people to do something or put a limit on something

62
Q

How does regulation solve market failure?

A

Negative Externalities

  • The Q reg is the value of Q2 which is what society wants people to consume and individuals cannot consume any more than that

Positive Externalities

  • The Q reg is the value of Q2 which is what society wants individuals to consume and they cannot consume any less

Both stop the mis- allocation of resources so the market failure is solved

63
Q

What are the problems with regulation?

A
  • Only works if there is no law breaking so the punishment must be large
  • The chance of getting caught must be high
  • Cost of enforcement is high
  • High opportunity cost
  • May impact pooer people
  • Tax is a better solution
64
Q

What are tradeable permits?

A

A piece of paper that allows a business to carry out an activity with negative externalities

Used for pollution

65
Q

How do tradeable permits solve market failure?

A

They incentivise businesses to reduce their own negative externalities as it is reduced most where it costs the least to reduce. This means that is has a low opportunity cost as the fewest resources have been used. Also the business can make more profits.

66
Q

What are the problems with tradeable permits?

A
  • If businesses are competitors then it is not in their best interest to sell to each other
  • Hard for the government to calculate the number fo permits needed
  • The government has to set up a market that allows businesses to buy and sell permits
67
Q

What is allocative efficiency?

A
  • When resources are used to produce goods and services that people want to consume
  • When firms provide a good or service that people demand at a price that reflects the cost of supply
68
Q

How can a market become allocatively efficient?

A
  • Resources have been taken out of the product that people did not demand and have been re-allocated into the product that is in demand
69
Q

How can allocative inefficiency lead to market failure?

A
  • Resources have not been allocated correctly and so they have been used to produce things that society did not want or need
70
Q

What is specialisation?

A
  • Where a firm or country chooses one product to produce that they have a comparative advantage in
71
Q

What are the advantages of specialisation?

A
  • Saves time
  • Reduces the cost of production to firms
  • Firms will use the fewest resources to produce the product and so allocative efficiency is maximised
  • Increases the productivity of the firm

A Level Economics (3 decks)

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