Unit 1 Economics Flashcards
what are positive and normative statements
Positive statement - is a statement made by an individual that is based on facts and can be verified
Normative statement - is a statement made by an individual that is based on personal opinion and cant be verified
specialization
is when a firm or a region in the economy focuses in making a narrow range of goods / services
Adv and dis of specialization
Adv - Workers will be more specialized in doing one task - Productivity increases - Greater output of quantity/quality
Firms will have an incentive to sell a larger range of goods and services in order to reduce chances of business failure as if one product fails they can always rely on the more successful product, this will also allow them to achieve economies of scale
Economic growth trade and FDI
Fewer resources needed - costs decrease - economies of scale
Dis - finite resources -Scarcity, in the long run
Over-reliance on good weather
Deindustrialization - to cut long-term costs
Demotivating in the long run
Rational decsion making
Is when consumers aim to maximize their utility (satisfaction /benefit ). however, they may find it hard to do so in the long run due to irrational behavior that prevents rational thinking
factors that affect consumers rational thinking
HI POOR PEOPLE NEED TO FEEL VALUED BY HABITUAL BEHAVIOUR
Poor computational skills - when individuals cannot make calculations with potential benefits
The need to feel valued
Inertia - Tendacy not to change/switch due to laziness behavior
Herding - Following majority, thinking that’s its the right decision
Habitual behavior - When habits prevent a consumer from thinking rationally
4 factors of pes (tsss)
PES < 1 - INELASTIC IF THEYRE LESS OF THESE
PES > 1 - ELASTIC IF THEYRE A LOT OF THESE
Time and prodcution : how quickly and efficently they can supply products
Substitution : how quickly can firms mange resources from one part to another
Stocks : having spare finished products if demand rises
Spare capacity : having extra space of storage without the need to rent warehouses that would increase cost
cross-price elasticity of demand
measures the responsiveness of quantity demanded for a product after a change in price for another product.
XED: “+” - Substitue
XED: “- “ - complemantrey
% change in QD for good “A” / % change in P for good “B”
4 functions of price mechanism (SIRA) to solve disequilibrium in a free market
Signaling - The signaling function, alerts suppliers to change there level of output or to switch production to a new good/service.
Furthermore, it indicates consumers to buy more or sell assets depending on the prices to maximize utility in the long run
Incentives - firms respond by changing their prices or supply accordingly, depending on there PES
Rationing -This price mechanism rations to those who can only afford it, moreover excess demand/ excess supply is rationed away in the and there will be a new equilibrium point.
With these 3 functions acting together, resources are reallocated to where they need to be.
consumer surplus ( Below the demand curve above the price line)
the difference between the price consumers are willing and able to pay for a good/service and the price they actually pay
If prices increase, there’s a contraction in demand and consumer surplus shrinks
producer surplus (Above the supply curve below the price line)
the difference between the price suppliers are willing and able to supply their product for and the market price/ profit they actually receive.
If prices decrease than producer surplus shrinks
indirect taxes
Is any tax on spending/ expenditure such as VAT, Duties, etc
Impact of indirect taxes on consumer, firms, and governments
Consumers : Money leaves the household without notice - Less disposable income - People will save more and spend less - Opp cost as consumers are not maximizing their economic benefit.
Firms : Added business cost - Firms will increase prices for there products, to cover up costs and maximize profit - However demand decreases and profits also decrease depending on the elasticity of the product
Governments: Total revenue increases and can spend on the economy leading to economic growth-
Additionally, Consumption of demerit goods decrease thus there are less external costs on society and the government can focus on other sectors, potential economic growth
Unemployment could increase in the long run
Black Markets may occur
Subsidy
A grant given by the goverment with the aims to lower the price of the product, to motivate consumption or production of the good/ service to increase
Impact of subsidies on consumer, firms, and governments
Consumers - Maximise benefit- more disposable income and consumers save less and spend more
Firms - Reduces cost of production - firms lower prices for goods/ services - More profit- Economies of scale
Govs - unemployment decreases, economic growth in the long run
Could face an opp cost - firms could also become over-reliant and lazy - Subsidy isn’t effective with price inelastic demand
2 Features of public goods
Private goods are opp of this
Non-rivalry: Quantity of the good does not change based on consumption
Non-Excludabiltiy: Once provided, it is impossible to prevent an economic agent from consuming the good
Free rider problem
This is the idea of a market failure that allows individuals to consume more than their fair share of the shared resource or not pay for the shared resource but still enjoy its benefits
2 types of Info gaps
Merit - School, healthcare, etc
(De-merit - Alchohol, drugs, etc)
Symmetric ( merit and demerit goods ): Sufficient info available in the market that tells consumers how good or bad the product is
Asymmetric info: Information available in a market but not being shared equally between both parties. This is a type of market failure as one party can exploit the other ( Labour market, Second-hand market, etc)
Private benefit
People benefiting from there own transactions
Private costs (activity)
The cost of an activity for an individual economic agent such as a firm or consumer
external costs
An external cost occurs when producing or consuming a good/service imposes a negative impact upon a third party outside the transaction.
Maximum pricing -
CSR studies Cbs(E)
Maximum price; Is when the gov sets a price ceiling that firms cannot sell above.
Adv - Consumption of merit goods increase - external benefits increase, standards of living improve,
Lower crime rate - relative poverty decreases
Dis -high setup costs, black-market, Shortage(excess demand)
minimum pricing
Pick a red/ blue fish
Minimum price: Is when the government sets a price limit that firms cannot sell below,
Adv - Consumption of demerit goods decreases governments can focus on other parts of the economy .additionally, there will be less external costs on society standards of living improve
Primary sector workers can get more disposable income and improving standards of living and increasing productivty
Dis - Price inelastic demand, Regressive: income inequality increases, black market, an excess supply of goods. services lead to wastage of resources
pollution permits
Are permits that firms have to purchase in order to produce more without being fined
Adv - Reduces pollution - Improves standards of living
Governments get revenue and can subsidies consumers and firms to switch to more renewable resources
Firms become more efficient
Dis - Monopolies form
Unemployment increases
High setup costs
Very hard to measure the pollution level therefore its a very long process
State provision - adv and dis
Goods/services provided by the gov for free
Adv - Correction of market failure
Standards of living improve
Unemployment decreases in the short run
Overall crime rates decrease
Dis - opp cost
lots of resources are wasted
Costly
Regulation - adv and dis
Rule/law enacted by the government that must be followed by all economic agents to encourage a change in behavior
Adv - reduces negative externalities
gov can focus on other parts of the economy
changes consumer behavior
Dis - Black market
Costly
Goverment failure
occurs when goverment intervention leads to a misallocation of resources/ net welfare loss
4 government failure ( RIAU)
Regulatory capture: Bargaining/ persuading policy regulators to reduce the impacts on firms
Info gaps: some gov individuals may not know enough to regulate policies
Admin/ Enforcement costs: Regulation, subsidies, state provision, and price controls
Unintended consequences: Black market, unemployment, impact on poor
Market bubbles
A bubble exists when the market price of assets is overinflated above there usual price due to herd behavior of consumers/ investors, this is an example of market failure
Speculation
This is when an induvial buys and sells assets with the expectation of future prices to increase in order to generate more profit, usually occurs in the short run and could lead to market bubbles
Moral Hazard
Moral hazards occur when an economic agent makes a decision on how much risk to take. Knowing if a bad decision is made, the other economic agent also partly bears the costs
External benefits
An external benefit occurs when producing or consuming a good/service imposes a positve effect upon a third party outside the transaction.
2 types of indirect tax
Ad valorem tax : This is a type of indirect tax that is charged as a percentage of the value of the good
Incidence of Tax : The tax burden on the taxpayers
Law of diminishing marginal utility
This law illustrates that as consumption for a good/service increases the avg utility gained keeps decreasing
2 types of goods
Economic good : Goods that are scarce because their use has an opp cost,
Free good: Goods that are unlimited in supply and therefore have no opp cost
2 types of resources
Non-renewable: Resources such as coal and oil, which once used cannot be exploited again
Renewable: Resources such as fish stocks or forests, that can be exploited over and over again as they have the potential to renew themselves
PPf shifts
PPC shows how resources are allocated within an economy and illustrates the idea of opp cost
Outwards - Better education Advancements in technology Trade Better management of resources Migration
Inwards - Natural disasters
Recession
War
Yed
Measure the responsiveness of quantity demanded for a product after a change in income.
Yed “+” 0 - Normal
Yed “-“ 0 - inferior
0 - 1: Inelastic demand, where demand changes proportionately by smaller amounts than income
Yed > 1: Elastic demand, where demand changes proportionately more than income
division of labor
is the breakdown of the production process into smaller parts with each worker is assigned to a specific task
Adv: Productivity increases due to repetitive tasks, therefore firms can be more productive - fewer resources needed - reduces costs - lower prices - demand and profits increase
Moreover, production time decreases - allowing supply to be more elastic - reducing chances of business
failure
DIs: Demovationg in the long run - productivity decreases - Output is affected - higher prices and lower demand- less profit
Cetris Paribus
stands for “all things being equal”, is an assumption that illustrates the concept of one variable being investigated while other variables remain constant
Substitute
Goods that serve the same need and can be replaced with one another. Substitutes also have a positive cross-price elasticity of demand
