Y1 Microeconomics Flashcards
b What does PED, YED, XED and PES stand for?
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Price elasticity of supply
What is the law of diminishing utility?
Marginal (additional) satisfaction/utility decreases after each use
What does PED represent on a graph
the steepness of demand slope (reciprocal gradient)
PED = 0 –> describe the shape of the graph
vertical demand
PED = -infinity –> describe the shape of the graph
horizontal demand
What is the formula for PED?
Proporionate change in Qty/proportionate change in price
What are the three factors that affect PED?
Luxury vs Necessity
Qty of substitutes
% of income
Describe the characteristics of a good with inelastic demand
Necessity, few substitutes, small % of income
Describe the characteristics of a good with elastic demand
Luxury, many substitutes, large % of income
PED is always…
negative
What is total revenue
price x quantity
A firm is going to increase its prices. Why might into want to ensure its products are inelastic
As this would mean the market is less sensitive to price changes so revenue would increase
What is another word for elasticity?
Sensitivity
What is the formula for YED?
Proportionate change in quantity/ proportionate change
in income
How are YED and XED different from PED with reference to a demand-supply diagram
YED and XED are curve shifts but PED is about gradient on a DEMAND-SUPPLY DIAGRAM
Name of a product with +YED
Normal good (superior if YED>1)
Name of a product with -YED
Inferior good
Name of product YED = 0
Necessity
Formula for XED
Proportionate change in quantity demanded of one good/proportionate change in price of another
Name of two products with +XED
Substitute
Name of two products with -XED
Complements
Name of two goods with XED=0
unrelated
What is an extension?
A shift along a curve increasing quantity
What is a contraction?
Shift along a curve decreasing quantity
What must PES always be?
Positive
What does PES represent
the steepness of the supply curve (reciprocal of the proportionate gradient)
Shape and name for PES>1?
elastic
horizontal
Shape and name for PES = 1?
Unitary
y=x
Shape and name for PES<1?
Inelastic
What determines PES?
Spare capacity
Available stocks
Time (SR or LR)
What does CPPC stand for?
Costs
Price of other goods (joint or competitive supply)
Productivity
Climate
(sometimes new entrants is included but that is fake news)
What are the 7 things that can lead to a shift in the demand curve? (Remember mnemonic PIRATES)
P for Population - more people = more demand
I for Income - more disposable income = more luxury goods
R for Related goods - If price of substitutes increases or complements decreases than the demand for the good increases
A for Advertising - Increase consumer loyalty and increase demand
T for Tastes - goods go in and out of fashion
E for Expectations - If consumers expect price of a good to go up in future they will demand more
S is for Seasons - demand for different goods fluctuate depending on the seasons
What is a supplier’s main objective?
Profit
What is the acronym for the factors of Supply?
PINTSWC
What does PINTSWC mean?
- Productivity
- Indirect taxes - shift supply inwards
- Number of Firms - more firms = more supply (bit sketch, too macro but could be thrown in)
- Technology - Can help supply process
- Subsidies
- Weather- if you’re a farmer
- Costs of Production - External shocks
What does IPPAFEL stand for (its the factors of demand)
Income
Population
Price of other goods (compliments/substitutes)
Advertising
Fashion
Expectations
Legislation
What are the three functions of the price mechanism?
S signal
I incentive
R Ration/allocate
Where is the consumer surplus?
Triangle between demand and equilibrium price line
Where is the producer surplus?
Triangle between supply and equilibrium price line
What is a producer/consumer surplus an indication of?
The consumer/producer welfare
What is a consumer/producer surplus?
Difference between market price and what is bought/supplied
What are the primary functions of money (4)?
a medium of exchange
unit of account
store of value
Method of deferred payment
Name three types of market failure
public goods
Externalities
Asymmetric Information
What is a moral hazard?
When an economically irrational decision is made, knowing that the misfortune will fall on another economic agent.
What is the principal-agent problem?
The agent buys goods on behalf of the principle, misallocating the resources due to the information gap.
Name some ways of reducing the information gaps
Certification, warranties, using unbiased expert advice
What are the characteristics of public goods?
Non-diminishable
Non-excludable
Whats the Free Rider Problem?
People can receive the benefits of some goods without paying for it
What is a PPF?
A diagram to show the maximum output combinations of 2 goods that an economy can produce using its current resources efficiently
Opportunity Cost?
Sacrificed benefits of the next best alternative
What are the factors of production?
Land, Labour, Capital, Enterprise
Disadvantages of a free market (3)?
Monopolies
Income inequality
Externalities (and any market failures)
High risk for citizens
Erratic business cycles
Advantages of a free market (3)?
Effecient (business have to remain competitive)
Political freedom
Choice
Higher quality (competitive)
What’s the opposite of a free market economy?
Command Economy
What are the determinates of PED?
Percentage of income, necessity v luxury, qty of substitutes
Determinates of PES?
Spare capacity
Available Stocks
Time scale
How do you draw a tax? Where are the C and P incidences?
Shift in S curve left, join equilibrium line down to old s curve and then join with price axis.
Note that consumer incidence is above old equilibrium price and producer part is below
What are the three economic legends in Micro?
Adam Smith
Friedrich Hayek
Karl Marx
What did Karl Marx believe in?
Planned economy
Capitalism leads to monopolies leads to exploitation leads to revolutions from the proletariats
What did Hayek believe? (2)
Completely free market for freedom
Government intervention stops market from clearing which prolongs depression
What did Adam Smith believe? (4 key ideas)
Invisible hand (individual self interest leads to the benefit of the community)
Free market (it’s good for allocation)
Need for government to prevent monopolies and enforce property law
Specialisation and the division of labour
What replaces the demand curve on a externalities diagram?
Marginal social benefits and Marginal private benefits
What replaces the supply curve on a externalites diagram?
Marginal private costs and marginal social costs
What are the basic economic questions (3)
What is produced
For whom is it produced
How is it produced
Name some common examples of irrational behaviour (7)
Habitual beheaviour
Inertia (fear of change)
Impulse buying
Poor Computation
Relative v Absolute (people calc propotional savings not real)
Peer Pressure
Overvaluing effect (Consumers struggle to compare stuff they’ve made to other products)
What is a positive statement?
An phrase that can be proved or disproved by evidence
What is a normative statement
value judgement e.g. “should”
What is Hayek’s communication network?
The way a market functions through the price mechanism (SIR) and allocates resources efficiently as a result
Define ceteris paribus
All other things being equal
What is capital?
Capital is a man made resource used for production (like a hammer)
What is the basic economic problem?
Infinite wants and finite resources
Changes in what shift the PPF out?
Quantity or Quality
Wealth =
Capital + money
Investment definition
purchase or production of capital goods
Define depreciation
Loss of value of goods over time
Why is a curved PPF more realistic
As it is unusual for a good’s resources to be a perfect substitute for each other
What is Fiat money
Money that does not have intrisic value (i.e. not gold or silver but paper money)
What is a near money?
An asset that can quickly be liquidated into money
What does specialisation go best with?
TRADE
What are the advantages of specialisation AND trade? (3)
lower costs
imporved skills/productivity
specialist tools can be bought
higher variety for consumers
time is saved
workers can do jobs they are best at
What are the disadvantages of specialisation AND trade (3)
Repeitive work lowers motivation
high tunrover as workers get bored
Potential for structural unemployment
Over specialisation may break if one part fails
small market can’t survive and be specialised
What is the law of diminshing marginal utility?
Decreasing additional satisfaction after each unit is consumed
What is disposable income
income less taxes plus benefits
Discretionary income?
Party money (disposable less necessity costs)
What is signal in price mechanism
Observation
What is incentive?
Process of thinking, judging and evalutating
What is the rationing part of SIR
Allocation of resources
With a tax what four things should be analysed
New price and qty
Increase in price compared tax size
Incidence (proportion) of tax passed on to consumer/producer
Government revenue
What is complete market failure?
A missing market
What is partial market failure?
Underconsumed or overconsumed
Formula for society (social)?
internal + external
All parties
What has negative externalities?
Demerit good
When is social benefit>private benefit?
merit good
What is a quasi-public good
Either excludable and non-diminishable
or diminishable and non-excludable
What is adverse selection also known as?
Principle agent problem
Name six types of government intervention?
Indirect Taxes, trade pollution permits, Subsidies, regulation, Government provision, Buffer stock schemes
What are some common flaws in government intervention? (4)
Cost to taxpayer
Information gap (difficult to quantise market failure)
opportunity costs/conflicitng objectives
admin costss
What should the new equillibrium after an indirect tax be?
It should be at social optimal level
What does an indirect tax do to an externality?
It internalises it
What are the benefits of putting indirect taxes on demerit goods? (2)
- They internalise the externality
- They boost government revenue
What are the disadvantages of an indirect tax on a demerit good? (5)
- Imperfect Information - Government can’t calculate the size of the externality so may struggle to calculate the size of the tax
- Conflict between objectives - Government may set the tax too high as they are too focused on the goal of having a balanced budget
- Create Black Market
- They’re politically unpopular
- Create inequality - they’re regressive
What type of good might you use a maximum price on? (and give an example)
Good with positive externalities such as healthcare or accomodation
What type of good would you would use a minimum price on and give example?
A good with negative externalities such as tobacco
What is there an excess of in a minimum price scheme?
This leads to excess supply because the price is raised to the societal optimal level but private costs mean companies are still willing to produce at that price
What is there an excess of in a maximum price scheme?
There is excess demand because the price is set below the private equillibirum and consumers are still wanting the good at that price
How can minimum/maximum price schemes be used to combat externalities?
They can be set at where the MSB=MSC so the market charges at the socially optimal rate
Maximum price protects consumers and reduce poverty
Minimum price protects producers (maybe even from Monopsony)
What is a buffer stock scheme?
When both maximum and minimum prices are implemented, and whenerever there is more supply the government will buy it up, and then sell it when there is excess supply.
What are the disadvantages of max/min price schemes?
Distortion of the “signalling” price signal as it suggests where there’s a maximum price there is less demand for businesses
Hard for government to know where to set the prices
Both can lead to black markets for goods
What does a buffer stock scheme help to combat?
It combats incredibly volatile prices
What are the disadvantages with buffer stock schemes
They have a large cost to the government
Can cause inefficiency
Farmers can manipulate it by producing food for under the minimum price
What are tradeable pollution permits?
Licences to emit a certain amount of pollution that have to be bought from the government and can be bought and sold in a free market
How are Tradeable pollution permits enforced?
If a company goes over the limit they are fined by the government
What are the advantages of tradeable pollution permits? (4)
- Government sets the cap so guaranteed pollution will fall
- Raises government revenue
- Encourages investment in green technology
- Firms can make their own decisions about whether to increase costs or invest in new capital
What are the disadvantages of tradeable pollution permits?
Expeniseve to monitor
Can raise costs to businesses and these can be passed on to consumer
Firms can just choose to buy large amounts of permits (If the level of permits is set wrong, if they’re too cheap then they can just buy them and eat the cost)
What type of goods would the government provide?
Public goods
Advantages of state provision of public goods?
Corrects market failure by providing goods
Can help equality if goods are basic needs
By outsourcing governments can be efficient
What is the disadvantage of state provision
Expensive (so high opportunity goods)
Government may missallocate resources without the market
Government may be inefficient
Corruption from government
What does provision of information help combat?
Assymetric information
What are the advantages if information provision? (2)
Helps consumers work rationally
Works well alongside other policies to make demand more elastic (indirect taxes)
What are the disadvantages of provision of information?
Very expensive
Won’t produce results instantly
Consumers may not listen
What can government regulation do in a market?
Impose laws to set levels of production
What is an example of government regulation
OFGEM for the energy market or OFCOM for telecomms
What is the adavtange of regulation? (1)
Ensure consideration of externalities, provide information and correct all market failure
What is the disadvantage of regulation?
Expensive so opportunity cost
Don’t take into account the cost to firms of following the regulation so it could damage firms
Firms may pass on costs
Excessive regulation leads to increasing bureaucracy and reducing competiton
What is regulatory capture?
Monopolists mislead the regulators so they are less harsh with their red tape
How can government distort price signals affect allocative efficiency?
By changing the price it distorts the signalling price mechanism and so can lead to under over production which decreases allocative efficiency
What is policy myopia?
Shortsightedness political decisions
How can government intervention affect firms decisions about shut downs?
Subsidies can help firms stay afloat longer when their uncompetitiveness should lead to a decision to shut down
What is an example of an unintended consequence for a buffer stock scheme
The CAP (Common Argicultural Policy) was meant to smooth out price fluctuations but lead to overproduction and a fall in agricultural prices in other part of the world as the goods were dumped by EU farmers
How does Information gaps affect governement policy?
Can lead to incorrect levels of subsidies due to incorrect predictions of the economy
