Y1 Microeconomics Flashcards
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 is a supplier’s main objective?
Profit
What does IPPAFEL
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?
Completely free market for freedom
Price mechanism can allocate
Fair
What did Adam Smith believe? (2 key ideas)
Invisible hand
Free market
Need for government to prevent monopolies and enforce propety 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
On a demerit good diagram on which side is the WLT?
The right side of the equilibrium
On a merit good diagram on which side is the WLT
the left side of the equilibrium
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 (3)
Habitual beheaviour
Inertia (fear of change)
Impulse buying
Name some other slightly more wacky examples of consumer behaviour (go on do it I dare you) (4)
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 (2)?
NOT MONEY
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 five types of government intervention?
Tax, trade pollution permits, propety rights, regulation, price setting
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 is regulatory capture?
Monopolists mislead the regulators so they are less harsh with their red tape
What is policy myopia?
Shortsightedness political decisions
