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The Leisure Market > Y1 S2 > Flashcards

Y1 S2 Flashcards

1
Q

What are the basic economic principles

A

Unlimited needs and desires and scarce resources leads to decisions
Cost of something is what you give up to get it
Rational people think at the margin
Trade makes people better off
Markets are a good way to organise economic activity

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2
Q

How do people make decisions

A

Opportunity cost of the next best valued alternative
Shown by a PPF
Assume consumers and producers behave rationally
Rational decision maker takes action if marginal benefit is larger than the marginal cost

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3
Q

What does trade allow

A

Specialisation
Lower cost of goods
Greater variety of goods and services

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4
Q

What is a market economy

A

economy that allocates resources through decentralised decisions of many firms as they interact in markets
Includes Adam Smiths invisible hand

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5
Q

What is Market failure

A

Market fails to efficiently allocate goods
Leads to government intervention and governments promote efficiency

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6
Q

What is an externality

A

impact of a person or firm on wellbeing of a bystander

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7
Q

What is market power

A

ability of person or firm to influence market price

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8
Q

What does a competitive market and perfectly competitive market mean

A

Competitive market means there are many buyers and sellers and therefore each has a negligible impact on market price e.g. milk
Non Competitive market leads to each provider being able to affect market price
Perfect Competition: Goods are identical and buyers are numerous (price takers)

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9
Q

What is individual demand and market demand

A

Individual Demand - Amount of good an individual is willing and able to purchase in a time period
Market Demand - Amount of good all buyers are willing and able to purchase in time period

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10
Q

What factors affect individual demand

A

Price
Income (normal or inferior good?)
Price of related goods (substitute or complement)
Tastes
Expectation
Advertising

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11
Q

What factors affect market demand

A

Factors which determine individual demand
Number of buyers

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12
Q

What is demand schedule

A

relationship between price and quantity when all other variables are held constant

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13
Q

What is market supply and individual supply

A

Quantity of a good that sellers are willing and able to sell
Individual - amount one particular firm is willing and able to sell
Market Supply - sum of all individual supplies for particular good or service

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14
Q

What factors affect individual supply

A

Price
Input price
Technology
Expectations
Natural/social factors
Profitability of other goods and prices of goods in joint supply

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15
Q

What factors affect market supply

A

Factors that determine individual supply
Number of sellers

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16
Q

What are excess supply and demand

A

Excess supply - Surplus of a good on the market
Excess demand - Shortage of a good on the market

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17
Q

What is the law of supply and demand

A

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

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18
Q

How do you analyse an equilibrium

A

1.Decide whether the event shifts the supply or the demand curve (or perhaps both)
2.Decide in which direction the curve shifts
3.Use the supply-and-demand graph to see how the shift changes the equilibrium (i.e., how the equilibrium quantity and price change)

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19
Q

What is PED

A

How much quantity demanded of a good responds to a change in price of that good
%change demand/%change price
(use as positive)

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20
Q

What values are elastic/inelastic for PED

A

Elastic >1, Unit elasticity = 1, inelastic <1
Perfectly elastic = infinity, perfectly inelastic =0

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21
Q

What happens to revenue dependent on a shift in price for different PED

A

When demand is inelastic, increase in price increases total revenue
When demand is elastic, increase in price decreases revenue

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22
Q

What are the four determinants of PED

A

ØAvailability of close substitutes: goods with close substitutes have more elastic demand (if there is a small price increase, buyers will switch to the alternatives)
ØNecessities versus luxuries: necessities have more inelastic demand (if price rises for an essential good, buyers must continue to buy it)
ØProportion of income spent on good: goods for which a higher proportion of income is spent have more elastic demand
ØTime horizon: demand over longer time horizons is more elastic (it is easier to substitute away from a product in the long run than in the short run).

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23
Q

What is IED

A

How much quantity demanded responds to a change in consumers income
=%change demand / %change income

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24
Q

What values determine the different IED

A

Normal goods are those with a positive IED
Necessities 0<Y<1
Luxuries Y>1
Inferior Goods have a negative income elasticity of demand

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25
What is cross price elasticity of demand
Change in quantity demanded of a good due to change in price of a related good %change demand A / % change price B Substitutes have a positive CED Complements have a Negative CED
26
What is the PES
How much quantity of good supplied responds to a change in price of the good % change in supply / % change in price Dependent on flexibility of sellers Elastic >1, inelastic <1
27
What are the determinants of PES
ØTime period: ØOver short periods of time, firms cannot easily change the size of their factories to make more or less of a good. ØOver longer periods, firms can build new factories or close factories. New firms can enter the market and old firms can shut down. Quantity supplied can respond substantially to the price. ØAs a result, supply is usually more elastic in the long run than in the short run. ØProductive capacity: It is easier to expand output when a firm is not operating at full capacity (period of strong economic growth versus period of slow economic growth) ØSize of the firm/industry: The response of supply to changes in price in large firms/industries is may be less elastic than in smaller firms/industries. Mobility of Factors of Production - High mobility means more elastic supply Ease of Storing Inventory - When inventory build up is easy and cheap, supply is more price elastic
28
Formula for profit
=total revenue - total cost
29
Total revenue =
price x quantity
30
What are explicit and implicit costs
Explicit - Input costs that require payment by the firm Implicit - Input costs that do not require a payment by the firm economists track both therefore economic profit < accounting profit
31
What is the short run and long run
Short run - some factors of production fixed and cannot be changed Long run - all factors of production are variable and can be altered
32
What is the production function
Relationship between quantity of inputs used to produce a good and quantity of output of that good Q (output) = f(KL), k=capital, L=labour Short run labour is variable and capital fixed
33
What is total physical product
labour is total output produced by the units of labour
34
What is average product
units of output produced per unit of input, if its higher more productive an input is
35
What is marginal product
the increase as a result of an additional unit input = change in total product/change in quantity
36
What is the link between the production function, average product and marginal product
Slope of production function measures marginal product of an input When MP declines, the slope decreases and production function becomes flatter
37
What is diminishing marginal product
Marginal product declines as quantity of input increases
38
What are the different types of costs
Variable costs - costs that vary with output FIxed Costs - costs that do not vary with output Total Cost = FIxed Costs + Variable costs Average cost = Total costs/ units produced Marginal cost is the increase in total cost from an extra unit of production
38
What is the relationship between MC and ATC/AVC
When MCATC, average total cost is rising MCAVC, AVC is rising
39
Characteristics of AC and MC curves
Marginal cost eventually rises with quantity of output Average cost is U shaped Bottom of average cost is the efficient scale AC + ATC curve cross mc at their lowest point
40
What is LRAC curve characteristics
LRAC traces out lowest average cost for each level of output Made up of a lot of SRAC curves LRAC is downsloping showing economies of scale (LRATC falls as output increases) Flat shows constant costs and constant returns (costs stay the same) Upward sloping shows diseconomies of scal
41
How does economies of scale work
Higher production levels allows specialisation and increased possibility of technology that can be used Negotiate more favourable borrowing rates or lower supply costs
42
What are the two problems of diseconomies of scale
coordination and communication problems
43
What is average revenue
TR/Q In competitive markets = MR = P
44
What is marginal revenue
extra revenue of selling one more unit of output = Change in TR/ Change in quantity not = P or AR in competitive markets
45
Where is the profit max
Production should increased as long as MR>MC Production should stop where MR=MC (profit max point) So in perfect competition a firm maximises profit where P=MC *MR curve is the demand curve, supply = MC
46
What is shutdown and when should a firm shutdown
Shutdown is a short run decision to stop production due to bad market conditions Sunk costs are costs already been committed and unrecoverable but should be ignored for shutdown as they won’t be affected Shutdown still pays there fixed costs just not variable Shutdown if TR - VC < 0 or if P
47
What is difference in terms of exit and shutdown between short run and long run
No sunk costs in long run Firms can enter and exit freely in the long run - no fixed number of firms
48
What is exit in a market
Exit is a long run decision to leave the market If TRATC or TR>TC The competitive firm’s long-run supply curve is the portion of its marginal cost curve that lies above average total cost
49
What happens to profit in the long run
Firms enter if profit is being made and firms leave if loss being made Converges towards P=ATC in the Long Run Long Run equilibrium of an efficient market must have firms operating at their efficient scale
50
What is welfare economics
How the allocation of resources affects economic wellbeing
51
What is consumer surplus and producer surplus
difference between what consumer is willing to pay and what they do pay amount a seller sold a good for minus variable cost
52
What happens when the allocation of resources is determined by markets
Goods are consumed by buyers with highest willingness to pay Goods are produced by sellers with the lowest costs Quantity of goods produced maximises sum of consumer and producer surplus
53
What are the limitations of consumer surplus
Drug addicts have a high willingness to pay, wellbeing??, Very poor willing to pay a lot less for food than very rich; wellbeing is lower?, sometimes willing to pay a lot for things we do not use - high wellbeing?
54
How do you define efficiency
Allocation is efficient if it maximises total surplus: consumer surplus + producer surplus
55
What is pareto efficiency and pareto improvement
Occurs when it is not possible to reallocate resources to make at least one person better off without making anyone else worse off Pareto Improvement - when an action makes at least one economic agent better off without harming another economic agent Market allocation is generally pareto efficient
56
Government intervention for efficiency
Pareto optimality is not restored by government but rather by individuals actions all seeking their own self interest (Laissez Faire) Markets might fail to lead to social efficiency and this is where governments may intervene Markets do not achieve equity possibly leading to market intervention
57
What are the types of externalities
Negative Production - Air pollution Negative Consumption - Smoking Positive Production - New technology Positive Consumption - Education/ Immunisation
58
What are social cost and social benefits
Social cost is the sum of private costs and external costs Social benefit is the sum of private benefits and external benefits
59
What does the market do in the presence of negative externalities
markets produce a larger quantity than socially optimal - price does not cover all cost of producing/consuming
60
What does the market do in the presence of positive externalities
markets produce a lower quantity than socially optimal - do not capture extra value of production
61
What is the socially optimal level of production
where marginal social cost = marginal social benefit
62
How can you correct an externality
well chosen tax which internalises the externality
63
What is a pigovian tax
taxes enacted to correct the effects of a negative externality, well chosen ones do not create deadweight loss
64
Characteristics of a public good
non excludable and non rivalrous
64
Positive externality solutions
Market equilibrium too low compared to optimal quantity for society Solution is to subsidise the good and would increase social welfare towards socially optimal level Other Policies: Regulations e.g. forbid drink driving Private Solutions - social norms and charities
65
4 types of goods including public good
Private Goods - excludable and rival e.g. clothes Public Goods - Neither excludable nor rival e.g. street lights Common Resources - Rival but not excludable e.g. Fish in ocean Club Goods - excludable but not rival e.g. Netflix
66
What is the free rider problem
People cannot be excluded from enjoying public goods without paying Receive benefit of the good without paying for it
67
What is the solution to the free rider problem
Government can provide public good - if total benefits for society > total costs for society To finance it, they can require a tax Use cost benefit analysis optimal quantity is such that MSB=MC and maximise total welfare
68
What are common resources
Rival but not excludable If the use is unregulated and individuals act in self interest, common resources will tend to be overused - “tragedy of the common” “What is common to many is least taken care of”
69
What causes tragedy of the commons
Social and private incentives differ (MSB
70
How do you fix tragedy of the commons
Regulate or tax the use of common resources Turn common resources into a private good Privatise goods such as elephants to stop poaching
71
Property Rights
Market fails to allocate resources efficiently when property rights are not well established Causes market failure
71
What are merit goods
The actual benefit of a good is higher than the value attached by the customer Can be provided by private sector but may be under consumed because actual value is higher than what willing to pay Governments may subsidies them in order to make up for this price difference e.g. Education
71
What are demerit goods
generate private or social costs not full taken into account by the consumers of those goods Tend to be overconsumed
72
What are the characteristics of a monopoly
Firm is the only seller of a product No close competitors Price Maker Arise due to high barriers to entry
73
What is the diagram characteristics for a monopoly
Monopoly demand curve reflects industry demand curve not perfectly elastic Profit Max where MR=MC Large profit The difference between the socially optimum surplus and the surplus obtained with a monopoly is the welfare cost of the monopoly, or the monopoly deadweight loss.
74
How do policy makers solve monopolies
Try to make the industry more competitive Regulate monopoly behaviour Turning some private monopolies into public enterprises
75
What are the characteristics of imperfect competition
Most firms: Do compete Have some sort of market power
76
What are the characteristics of monopolistic competition
Many sellers competing to sell their goods Products are differentiated Seller can influence price Free entry/exit
77
What are the graphical characteristics of monopolistic competition
Downward sloping demand Profit Max where MR = MC Where more firms join, demand for each decreases and fluctuates until firms make zero economic profit
78
What is the difference between monopolistic competition and perfect competition in the long run
With monopolistic competition, there is a markup for price Quantity produced by each firm is below the efficient scale
79
What are the characteristics of an oligopoly
Few competing firms Behaviour is strategic Only a few firms that dominate but can still have a few small sellers E.g. UK Supermarkets Firms are interdependent Compete in quantity and price - leads to lower profits so may prefer to collude Collusion - firms joining together could take actions that jointly maximise industry profit

The Leisure Market (1 decks)

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