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Economics > Unit 2 > Flashcards

Unit 2 Flashcards

1
Q

What is a market?

A

An arrangement which brings buyers into contact with sellers.

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2
Q

What are the three fundamental economic questions to consider when deciding how to allocate resources?

A

-What to produce?
-How to produce?
-Who to produce for?
The answers can vary, depending on the economic system in the country.

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3
Q

What is market equilibrium?

A

Market equilibrium is a situation where demand and supply are equal at the current price.

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4
Q

What is market disequilibrium?

A

Market disequilibrium is a situation where demand and supply are not equal at the current price.

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5
Q

What are the three economic systems?

A

-Market
-Mixed
-planned

The difference between them depends on the respective roles and importance of government and the price mechanisms.

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6
Q

What is price mechanism?

A

The system by which the market forces of demand and supply determine prices.

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7
Q

What is effective demand?

A

Effective demand is the willingness and ability to purchase a product.

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8
Q

What is an extension? (movement) (change in price) - demand.

A

An extension is when the price of a good decreases, causing the quantity demanded to increase since more people are now able to afford the product.

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9
Q

What is a contraction? (movement) (change in price). - demand.

A

A contraction is when the price of a good increases, causing the quantity demanded to decrease since less people are now able to afford the product.

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10
Q

What is the relationship between demand and price?

A

Demand and price are inversely related. This means that when price increases, demand decreases and when price decreases, demand increases.

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11
Q

What is individual demand?

A

Individual demand is a consumer’s demand for a product. (those willing and able).

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12
Q

What is market demand?

A

Market demand is the total (aggregate) demand for a product. The aggregation of the demand.

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13
Q

What causes changes in demand?

A

-Price of the product.
-Income level.
-Prices of substitutes and complements.
-Availability of substitutes.
-Advertising.
-Change in population structure and size.
-Taste and fashion.
-Reduced taxes.

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14
Q

What is a substitute?

A

A substitute is a product that can be used in place of another.

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15
Q

What is a complement?

A

A complement is a product that is used together with another product.

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16
Q

What are normal goods?

A

Normal goods are products whose demand increases when income increases and decreases when income falls.
-Phones.

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17
Q

What are inferior goods?

A

Inferior goods are products whose demand decreases when income increases and increases when income falls.
-Instant noodles, frozen food.

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18
Q

What is a shift to the right? - demand.

A

A shift to the right signifies a rise in demand at any given price.

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19
Q

What is a shift to the left? - demand.

A

A shift to the left signifies a fall in demand at any given price.

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20
Q

What is effective supply?

A

Effective supply is the willingness and ability to sell a product.

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21
Q

What is an extension? (movement) (change in price) - supply.

A

An extension in supply is when there is an increase in the quantity produced/supplied caused by a rise in the products price.

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22
Q

What is a contraction? (movement) (change in price) - supply.

A

A contraction in supply is when there is a decrease in the quantity produced/supplied caused by a fall in the products price.

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23
Q

What is the relationship between price and supply?

A

Price and supply are positively related. This means that when price rises, so will the quantity supplied and when price falls, so will the quantity supplied.

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24
Q

What is individual supply?

A

Individual supply is the supply of one firm.

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25
Q

What is market supply?

A

Market supply is the total supply of a product supplied/produced by all firms in the industry. - aggregation of supply from all producers.

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26
Q

What causes changes in supply?

A

-Improvements in technology.
-Cost of production.
-Taxes.
-Subsidies.
-Prices of other products, competitive pricing.
-Weather conditions.

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27
Q

What is a shift to the right? - supply?

A

A shift to the right in supply signifies that a larger quantity is being produced at any given price.

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28
Q

What is a shift to the left? - supply?

A

A shift to the left in supply signifies that a smaller quantity is being produced at any given price.

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29
Q

How are prices determined?

A

Consumers are willing to buy more of a product if the price is low, while producers are willing to supply more if the prices are high. Eventually though, a middle ground is found. This is known as the equilibrium price.

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30
Q

What is equilibrium price?

A

Equilibrium price is the price where demand and supply are equal. At the equilibrium, the allocation of goods is most efficient because the amount of goods being demanded is the same as the amount of goods being supplied. This means that everyone is satisfied.

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31
Q

What is a surplus?

A

A surplus is when there is excess supply.
This occurs when prices are set too high leading to the products not being consumed. This means that there is allocative inefficiency .

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32
Q

What is a shortage?

A

A shortage is when there is excess demand. This occurs when the price is set too low and demand is very high (many consumers want the good) while the producers are not supplying enough of the good.

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33
Q

What is PED?

A

PED is a measure of the responsiveness of demand relative to a change in price.

34
Q

What is the formula for PED?

A

% change in Q.D. / % change in Price.

35
Q

What is inelastic demand?

A

Inelastic demand is when a change in price has little effect on the quantity demanded.
The necessity of the product is high. It is either an essential or habitual.

36
Q

What is the PED digit of inelastic demand?

A

Inelastic demand has a PED lower than 1.

37
Q

What does the graph for inelastic demand look like?

A

It tends to be more vertical.

38
Q

What is elastic demand?

A

Elastic demand is when demand responds quickly and more drastically to a change in price.
The necessity of the product is relatively low.

39
Q

What is the PED digit for elastic demand?

A

Elastic demand has a PED greater than 1.

40
Q

What does the graph for elastic demand look like?

A

The graph for elastic demand tends to be more horizontal.

41
Q

What happens if demand for a product is price inelastic? to revenue

A

If demand for a product if price inelastic and there is an increase in price, the revenue of producers would increase. This is because the necessity of the product is very high because it is either an essential of habitual, so a change in price has a small effect on the demand. An increase in revenue is only if there aren’t other factors affecting producers such as inflation (which makes their raw materials more expensive too).

42
Q

What happens if demand for a product is price elastic? to revenue

A

If demand for a product is price elastic and there is an increase in price, the revenue of producers will decrease. This is because the demand is elastic meaning the products are not essential or habitual. A rise in price will disincentivise consumers from purchasing them.

43
Q

What are the determinants of PED?

A

-Availability of substitutes.
-Proportion of income spent on the product.
-Necessary or luxury?
-Can the purchase be postponed?
-How the market is defined.
-Time period.
-Is the good addictive? e.g. iPhones are a luxury for addictive constituents.

44
Q

What is PES?

A

PES is a measure of the responsiveness of the quantity supplied relative to a change in price.

45
Q

What is the formula for PES?

A

Percentage change in quantity / Percentage change in price.

46
Q

What is inelastic supply?

A

Inelastic supply is when a large change in the price of a product has little effect on the quantity supplied.

47
Q

What is the PES digit for inelastic supply?

A

Inelastic supply has a PES digit of below 1.

48
Q

What is elastic supply?

A

Elastic supply is when a large change in the price of a product has a large effect on the quantity supplied.

49
Q

What is the PES digit for elastic supply?

A

Elastic supply has a PES digit of greater than 1.

50
Q

What are the factors that affect PES?

A

-Stock availability.
-Time taken to produce the product.
-Spare capacity.
-Costs of altering supply.

51
Q

What is a market economic system?

A

A market economic system is when most resources are owned and controlled by individuals and business and are allocated through market forces. - A system where demand and supply regulate the economy,

52
Q

What is the private sector?

A

The private sector is the part of the economy where businesses are owned by individuals or shareholders.

53
Q

What is the public sector?

A

The public sector is the part of the economy controlled by the government.

54
Q

What are advantages of a market economic system?

A

Advantages of a market economic system:
-Very responsive to changes in consumer demand (reflects cd).
-Price mechanism is an efficient way of allocating resources.
-Competition promotes efficiency and low prices.
-Quality of products is high
-Innovation and enterprise are encouraged.

55
Q

What are disadvantages of a market economic system?

A

Disadvantages of a market economic system:
-Market failure occurs when market forces are not efficient and do not work well.
-A lack of government regulations can have external costs such as environmental damage.
-Income inequality are likely to widen over time since no income redistribution by government.
-Less social policies to protect the more vulnerable groups - minorities. eg. disabled. Those that are mistreated in the workplace.

56
Q

What is market failure?

A

Market failure is when the market mechanism fails to allocate resources efficiently.
-Market forces = demand and supply.

57
Q

What are private costs?

A

Private costs are costs borne by those directly consuming or producing a product.

58
Q

What are external costs?

A

External costs are costs imposed on those who are not directly involved in the consumption and production activities of others. e.g. Consumer throws trash onto street and the govt has to hire cleaners to collect the litter.

59
Q

What are social costs?

A

Social costs are the total costs to a society of an economic activity. Social costs = private cost + external cost.

60
Q

What are private benefits?

A

Private benefits are benefits received by those directly consuming or producing a product. E.g. a bee farm gains the private benefit of the income from selling their honey

61
Q

What are external benefits?

A

External benefits are benefits enjoyed by those who are not directly involved in the consumption and production activities of others.

62
Q

What are social benefits?

A

Social benefits are the total benefits to a society of an economic activity.
social benefits = private benefit + external benefit.

63
Q

What are third parties?

A

Third parties are those not directly involved in producing or consuming a product.

64
Q

What are the causes of market failure?

A

Causes of market failure:
-Demerit goods.
-Merit goods.
-Public goods.
-Abuse of monopoly power.
-Factor immobility.
-External costs and benefits

65
Q

What are merit goods? How do these cause market failure?

A

Merit goods are goods that are more beneficial to consumers than they realise and these are under consumed and underproduced. Merit goods generate private or external benefits. There will be information failure since consumers do not understand the benefits. Merit goods are underprovided in a market despite their consumption generating private and/or external benefits. This leads to governments having to subsidise these goods in order to lower the price and/or increase the quantities consumed.
-Education, vaccinations and renewable energy

66
Q

What are demerit goods? How does this cause market failure?

A

Demerit goods are goods that are more harmful to consumers than they realise and may generate negative externalities. These are overproduced and over consumed. This means there is information failure since consumers are not fully aware of the benefits or costs of consumption.
Demerit goods are over-provided in a market despite their consumption generating external costs. This leads to governments often having to regulate these goods in such a way that they raise the prices and/or limit the quantities consumed.
-Alcohol and drugs.

67
Q

What are public goods?

A

Public goods are products which are non-rival and non-excludable and hence need to be financed by tax revenue.
-National defence, parks and libraries.

68
Q

How do public goods cause market failure?

A

Public goods are very beneficial to society but could be under-provided by a free market as there is little opportunity for sellers to make profits from providing goods and services that are non-excludable and non-rivalrous in consumption.
This leads to governments having to provide these beneficial goods themselves - using tax revenue.

69
Q

What are private goods?

A

Private goods are products that are both rival and excludable.
-Phones and takeaway food.

70
Q

How can the abuse of monopoly power cause market failure?

A

The development of monopoly markets is a natural outcome of a market system. This is because with less competition, firms can raise prices and thus reduce the consumer choice and availability of subsidies (control the supply) to force consumers to pay their high prices. Goods and services are purposely under provided in order to raise prices and profits. Firms can eliminate competition by buying out competitors and increasing their ownership of F.O.P.
Governments often intervene to ensure that there is healthy competition is markets and sufficient provision of goods and services.

71
Q

What is factor immobility?

A

Factor immobility occurs when it is difficult for F.O.P to move or switch between different uses/ locations. There are two main types:
-Geographical
-Occupational

72
Q

How does factor immobility result in market failure?

A

Factor immobility results in an inefficient allocation of resources in a market. This causes governments to have to implement programs to reduce the factor immobility in order to raise production and output;

73
Q

How do externalities cause market failure?

A

A positive externality of consumption occurs when there is a positive external benefit in consumption, such as when electric vehicles are consumed CO2 emissions fall
A positive externality of production occurs when there is a positive external benefit in production, such as when managed pine forests produce timber but also increase CO2 absorption
A negative externality of consumption occurs when there is an external cost in consumption such as when the consumption of alcohol increases anti social behaviour
A negative externality of production occurs when there is an external cost in production such as when the production of electricity increases air pollution

74
Q

What is a mixed economic system?

A

A mixed economic system is an economy in which both the private and public sector plays an important role. - blend of a market and planned economy.
The higher the level of government intervention, the more the economy leans towards a planned economy.

75
Q

How can governments intervene?

A

-Subsidy - a payment by government to encourage production or consumption.
-Indirect tax - applied on goods and services to reduce their consumption and thus production.
-Regulation - various means by which the governments seek to control the production and consumption.
-Privatisation - the sale of public sector assets to the private sector.
-Nationalisation - moving the ownership and control of an industry from the private to public sector/govt.
-Direct provision - a government provides essential goods and services.

76
Q

What are the reasons for government intervention in markets?

A

-To correct market failure.
-To support firms.
-To support poorer households.
-To promote equity.
-To collect government revenue.

77
Q

Why go governments intervene to correct market failure?

A

In many markets, there is a less than optimal allocation of resources from society’s point of view. Firms and individuals are focused on their self-interest (objectives such as profit) and will thus not self-correct this misallocation of resources. So, governments intervene by influencing the levels of production or consumption.

78
Q

Why do governments intervene to earn govt revenue?

A

Governments need funding to provide essential goods such as public and merit goods. This funding is provided through intervention such as taxation, privatisation, sale of licenses and the sale of goods and services.

79
Q

Why go governments intervene to promote equity?

A

Governments intervene to promote equity to reduce the opportunity gap between the rich and poor.

80
Q

Why do governments intervene to support firms?

A

In the global economy that has been developed and is still developing by globalisation, govt support key industries to help them remain competitive. They can also support start-ups to increase the local competition and to increase economic growth or other macro economic objectives such as low unemployment.

81
Q

Why do governments intervene to support poorer households?

A

Governments intervene to support poorer households because poverty has multiple impacts on both the individual and the economy. Governments can intervene to redistribute income by taxing the rich and giving to the poor (regressive taxes).

Economics (3 decks)

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