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Economics A level Edexcel > Y1 Microeconomics > Flashcards

Y1 Microeconomics Flashcards

1
Q

b What does PED, YED, XED and PES stand for?

A

Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Price elasticity of supply

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2
Q

What is the law of diminishing utility?

A

Marginal (additional) satisfaction/utility decreases after each use

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3
Q

What does PED represent on a graph

A

the steepness of demand slope (reciprocal gradient)

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4
Q

PED = 0 –> describe the shape of the graph

A

vertical demand

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5
Q

PED = -infinity –> describe the shape of the graph

A

horizontal demand

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6
Q

What is the formula for PED?

A

Proporionate change in Qty/proportionate change in price

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7
Q

What are the three factors that affect PED?

A

Luxury vs Necessity
Qty of substitutes
% of income

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8
Q

Describe the characteristics of a good with inelastic demand

A

Necessity, few substitutes, small % of income

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9
Q

Describe the characteristics of a good with elastic demand

A

Luxury, many substitutes, large % of income

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10
Q

PED is always…

A

negative

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11
Q

What is total revenue

A

price x quantity

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12
Q

A firm is going to increase its prices. Why might into want to ensure its products are inelastic

A

As this would mean the market is less sensitive to price changes so revenue would increase

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13
Q

What is another word for elasticity?

A

Sensitivity

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14
Q

What is the formula for YED?

A

Proportionate change in quantity/ proportionate change
in income

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15
Q

How are YED and XED different from PED with reference to a demand-supply diagram

A

YED and XED are curve shifts but PED is about gradient on a DEMAND-SUPPLY DIAGRAM

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16
Q

Name of a product with +YED

A

Normal good (superior if YED>1)

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17
Q

Name of a product with -YED

A

Inferior good

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18
Q

Name of product YED = 0

A

Necessity

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19
Q

Formula for XED

A

Proportionate change in quantity demanded of one good/proportionate change in price of another

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20
Q

Name of two products with +XED

A

Substitute

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21
Q

Name of two products with -XED

A

Complements

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22
Q

Name of two goods with XED=0

A

unrelated

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23
Q

What is an extension?

A

A shift along a curve increasing quantity

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24
Q

What is a contraction?

A

Shift along a curve decreasing quantity

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25
Q

What must PES always be?

A

Positive

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26
Q

What does PES represent

A

the steepness of the supply curve (reciprocal of the proportionate gradient)

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27
Q

Shape and name for PES>1?

A

elastic
horizontal

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28
Q

Shape and name for PES = 1?

A

Unitary
y=x

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29
Q

Shape and name for PES<1?

A

Inelastic

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30
Q

What determines PES?

A

Spare capacity
Available stocks
Time (SR or LR)

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31
Q

What does CPPC stand for?

A

Costs
Price of other goods (joint or competitive supply)
Productivity
Climate
(sometimes new entrants is included but that is fake news)

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32
Q

What are the 7 things that can lead to a shift in the demand curve? (Remember mnemonic PIRATES)

A

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

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33
Q

What is a supplier’s main objective?

A

Profit

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34
Q

What is the acronym for the factors of Supply?

A

PINTSWC

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35
Q

What does PINTSWC mean?

A
  • 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
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36
Q

What does IPPAFEL stand for (its the factors of demand)

A

Income
Population
Price of other goods (compliments/substitutes)
Advertising
Fashion
Expectations
Legislation

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37
Q

What are the three functions of the price mechanism?

A

S signal
I incentive
R Ration/allocate

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38
Q

Where is the consumer surplus?

A

Triangle between demand and equilibrium price line

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39
Q

Where is the producer surplus?

A

Triangle between supply and equilibrium price line

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40
Q

What is a producer/consumer surplus an indication of?

A

The consumer/producer welfare

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41
Q

What is a consumer/producer surplus?

A

Difference between market price and what is bought/supplied

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42
Q

What are the primary functions of money (4)?

A

a medium of exchange
unit of account
store of value
Method of deferred payment

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43
Q

Name three types of market failure

A

public goods
Externalities
Asymmetric Information

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44
Q

What is a moral hazard?

A

When an economically irrational decision is made, knowing that the misfortune will fall on another economic agent.

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45
Q

What is the principal-agent problem?

A

The agent buys goods on behalf of the principle, misallocating the resources due to the information gap.

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46
Q

Name some ways of reducing the information gaps

A

Certification, warranties, using unbiased expert advice

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47
Q

What are the characteristics of public goods?

A

Non-diminishable
Non-excludable

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48
Q

Whats the Free Rider Problem?

A

People can receive the benefits of some goods without paying for it

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49
Q

What is a PPF?

A

A diagram to show the maximum output combinations of 2 goods that an economy can produce using its current resources efficiently

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50
Q

Opportunity Cost?

A

Sacrificed benefits of the next best alternative

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51
Q

What are the factors of production?

A

Land, Labour, Capital, Enterprise

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52
Q

Disadvantages of a free market (3)?

A

Monopolies
Income inequality
Externalities (and any market failures)
High risk for citizens
Erratic business cycles

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53
Q

Advantages of a free market (3)?

A

Effecient (business have to remain competitive)
Political freedom
Choice
Higher quality (competitive)

54
Q

What’s the opposite of a free market economy?

A

Command Economy

55
Q

What are the determinates of PED?

A

Percentage of income, necessity v luxury, qty of substitutes

56
Q

Determinates of PES?

A

Spare capacity
Available Stocks
Time scale

57
Q

How do you draw a tax? Where are the C and P incidences?

A

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

58
Q

What are the three economic legends in Micro?

A

Adam Smith
Friedrich Hayek
Karl Marx

59
Q

What did Karl Marx believe in?

A

Planned economy
Capitalism leads to monopolies leads to exploitation leads to revolutions from the proletariats

60
Q

What did Hayek believe? (2)

A

Completely free market for freedom
Government intervention stops market from clearing which prolongs depression

61
Q

What did Adam Smith believe? (4 key ideas)

A

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

62
Q

What replaces the demand curve on a externalities diagram?

A

Marginal social benefits and Marginal private benefits

63
Q

What replaces the supply curve on a externalites diagram?

A

Marginal private costs and marginal social costs

64
Q

What are the basic economic questions (3)

A

What is produced
For whom is it produced
How is it produced

65
Q

Name some common examples of irrational behaviour (7)

A

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)

66
Q

What is a positive statement?

A

An phrase that can be proved or disproved by evidence

67
Q

What is a normative statement

A

value judgement e.g. “should”

68
Q

What is Hayek’s communication network?

A

The way a market functions through the price mechanism (SIR) and allocates resources efficiently as a result

69
Q

Define ceteris paribus

A

All other things being equal

70
Q

What is capital?

A

Capital is a man made resource used for production (like a hammer)

71
Q

What is the basic economic problem?

A

Infinite wants and finite resources

72
Q

Changes in what shift the PPF out?

A

Quantity or Quality

73
Q

Wealth =

A

Capital + money

74
Q

Investment definition

A

purchase or production of capital goods

75
Q

Define depreciation

A

Loss of value of goods over time

76
Q

Why is a curved PPF more realistic

A

As it is unusual for a good’s resources to be a perfect substitute for each other

77
Q

What is Fiat money

A

Money that does not have intrisic value (i.e. not gold or silver but paper money)

78
Q

What is a near money?

A

An asset that can quickly be liquidated into money

79
Q

What does specialisation go best with?

A

TRADE

80
Q

What are the advantages of specialisation AND trade? (3)

A

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

81
Q

What are the disadvantages of specialisation AND trade (3)

A

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

82
Q

What is the law of diminshing marginal utility?

A

Decreasing additional satisfaction after each unit is consumed

83
Q

What is disposable income

A

income less taxes plus benefits

84
Q

Discretionary income?

A

Party money (disposable less necessity costs)

85
Q

What is signal in price mechanism

A

Observation

86
Q

What is incentive?

A

Process of thinking, judging and evalutating

87
Q

What is the rationing part of SIR

A

Allocation of resources

88
Q

With a tax what four things should be analysed

A

New price and qty
Increase in price compared tax size
Incidence (proportion) of tax passed on to consumer/producer
Government revenue

89
Q

What is complete market failure?

A

A missing market

90
Q

What is partial market failure?

A

Underconsumed or overconsumed

91
Q

Formula for society (social)?

A

internal + external
All parties

92
Q

What has negative externalities?

A

Demerit good

93
Q

When is social benefit>private benefit?

A

merit good

94
Q

What is a quasi-public good

A

Either excludable and non-diminishable
or diminishable and non-excludable

95
Q

What is adverse selection also known as?

A

Principle agent problem

96
Q

Name six types of government intervention?

A

Indirect Taxes, trade pollution permits, Subsidies, regulation, Government provision, Buffer stock schemes

97
Q

What are some common flaws in government intervention? (4)

A

Cost to taxpayer
Information gap (difficult to quantise market failure)
opportunity costs/conflicitng objectives
admin costss

98
Q

What should the new equillibrium after an indirect tax be?

A

It should be at social optimal level

99
Q

What does an indirect tax do to an externality?

A

It internalises it

100
Q

What are the benefits of putting indirect taxes on demerit goods? (2)

A
  • They internalise the externality
  • They boost government revenue
101
Q

What are the disadvantages of an indirect tax on a demerit good? (5)

A
  • 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
102
Q

What type of good might you use a maximum price on? (and give an example)

A

Good with positive externalities such as healthcare or accomodation

103
Q

What type of good would you would use a minimum price on and give example?

A

A good with negative externalities such as tobacco

104
Q

What is there an excess of in a minimum price scheme?

A

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

105
Q

What is there an excess of in a maximum price scheme?

A

There is excess demand because the price is set below the private equillibirum and consumers are still wanting the good at that price

106
Q

How can minimum/maximum price schemes be used to combat externalities?

A

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)

107
Q

What is a buffer stock scheme?

A

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.

108
Q

What are the disadvantages of max/min price schemes?

A

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

109
Q

What does a buffer stock scheme help to combat?

A

It combats incredibly volatile prices

110
Q

What are the disadvantages with buffer stock schemes

A

They have a large cost to the government

Can cause inefficiency

Farmers can manipulate it by producing food for under the minimum price

111
Q

What are tradeable pollution permits?

A

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

112
Q

How are Tradeable pollution permits enforced?

A

If a company goes over the limit they are fined by the government

113
Q

What are the advantages of tradeable pollution permits? (4)

A
  • 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
114
Q

What are the disadvantages of tradeable pollution permits?

A

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)

115
Q

What type of goods would the government provide?

A

Public goods

116
Q

Advantages of state provision of public goods?

A

Corrects market failure by providing goods

Can help equality if goods are basic needs

By outsourcing governments can be efficient

117
Q

What is the disadvantage of state provision

A

Expensive (so high opportunity goods)

Government may missallocate resources without the market

Government may be inefficient

Corruption from government

118
Q

What does provision of information help combat?

A

Assymetric information

119
Q

What are the advantages if information provision? (2)

A

Helps consumers work rationally

Works well alongside other policies to make demand more elastic (indirect taxes)

120
Q

What are the disadvantages of provision of information?

A

Very expensive

Won’t produce results instantly

Consumers may not listen

121
Q

What can government regulation do in a market?

A

Impose laws to set levels of production

122
Q

What is an example of government regulation

A

OFGEM for the energy market or OFCOM for telecomms

123
Q

What is the adavtange of regulation? (1)

A

Ensure consideration of externalities, provide information and correct all market failure

124
Q

What is the disadvantage of regulation?

A

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

125
Q

What is regulatory capture?

A

Monopolists mislead the regulators so they are less harsh with their red tape

126
Q

How can government distort price signals affect allocative efficiency?

A

By changing the price it distorts the signalling price mechanism and so can lead to under over production which decreases allocative efficiency

127
Q

What is policy myopia?

A

Shortsightedness political decisions

128
Q

How can government intervention affect firms decisions about shut downs?

A

Subsidies can help firms stay afloat longer when their uncompetitiveness should lead to a decision to shut down

129
Q

What is an example of an unintended consequence for a buffer stock scheme

A

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

130
Q

How does Information gaps affect governement policy?

A

Can lead to incorrect levels of subsidies due to incorrect predictions of the economy

Economics A level Edexcel (18 decks)

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