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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
Q

What is cross price elasticity of demand

A

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

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26
Q

What is the PES

A

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

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27
Q

What are the determinants of PES

A

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

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28
Q

Formula for profit

A

=total revenue - total cost

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29
Q

Total revenue =

A

price x quantity

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30
Q

What are explicit and implicit costs

A

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

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31
Q

What is the short run and long run

A

Short run - some factors of production fixed and cannot be changed
Long run - all factors of production are variable and can be altered

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32
Q

What is the production function

A

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

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33
Q

What is total physical product

A

labour is total output produced by the units of labour

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34
Q

What is average product

A

units of output produced per unit of input, if its higher more productive an input is

35
Q

What is marginal product

A

the increase as a result of an additional unit input = change in total product/change in quantity

36
Q

What is the link between the production function, average product and marginal product

A

Slope of production function measures marginal product of an input
When MP declines, the slope decreases and production function becomes flatter

37
Q

What is diminishing marginal product

A

Marginal product declines as quantity of input increases

38
Q

What are the different types of costs

A

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
Q

What is the relationship between MC and ATC/AVC

A

When MC<ATC, average total cost is falling
When MC>ATC, average total cost is rising
MC<AVC, AVC is falling
MC>AVC, AVC is rising

39
Q

Characteristics of AC and MC curves

A

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
Q

What is LRAC curve characteristics

A

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
Q

How does economies of scale work

A

Higher production levels allows specialisation and increased possibility of technology that can be used
Negotiate more favourable borrowing rates or lower supply costs

42
Q

What are the two problems of diseconomies of scale

A

coordination and communication problems

43
Q

What is average revenue

A

TR/Q
In competitive markets = MR = P

44
Q

What is marginal revenue

A

extra revenue of selling one more unit of output = Change in TR/ Change in quantity
not = P or AR in competitive markets

45
Q

Where is the profit max

A

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
Q

What is shutdown and when should a firm shutdown

A

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<AVC

47
Q

What is difference in terms of exit and shutdown between short run and long run

A

No sunk costs in long run
Firms can enter and exit freely in the long run - no fixed number of firms

48
Q

What is exit in a market

A

Exit is a long run decision to leave the market
If TR<TC in LR if P<ATC>ATC 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</ATC>

49
Q

What happens to profit in the long run

A

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
Q

What is welfare economics

A

How the allocation of resources affects economic wellbeing

51
Q

What is consumer surplus and producer surplus

A

difference between what consumer is willing to pay and what they do pay
amount a seller sold a good for minus variable cost

52
Q

What happens when the allocation of resources is determined by markets

A

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
Q

What are the limitations of consumer surplus

A

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
Q

How do you define efficiency

A

Allocation is efficient if it maximises total surplus: consumer surplus + producer surplus

55
Q

What is pareto efficiency and pareto improvement

A

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
Q

Government intervention for efficiency

A

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
Q

What are the types of externalities

A

Negative Production - Air pollution
Negative Consumption - Smoking
Positive Production - New technology
Positive Consumption - Education/ Immunisation

58
Q

What are social cost and social benefits

A

Social cost is the sum of private costs and external costs
Social benefit is the sum of private benefits and external benefits

59
Q

What does the market do in the presence of negative externalities

A

markets produce a larger quantity than socially optimal - price does not cover all cost of producing/consuming

60
Q

What does the market do in the presence of positive externalities

A

markets produce a lower quantity than socially optimal - do not capture extra value of production

61
Q

What is the socially optimal level of production

A

where marginal social cost = marginal social benefit

62
Q

How can you correct an externality

A

well chosen tax which internalises the externality

63
Q

What is a pigovian tax

A

taxes enacted to correct the effects of a negative externality, well chosen ones do not create deadweight loss

64
Q

Characteristics of a public good

A

non excludable and non rivalrous

64
Q

Positive externality solutions

A

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
Q

4 types of goods including public good

A

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
Q

What is the free rider problem

A

People cannot be excluded from enjoying public goods without paying
Receive benefit of the good without paying for it

67
Q

What is the solution to the free rider problem

A

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
Q

What are common resources

A

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
Q

What causes tragedy of the commons

A

Social and private incentives differ (MSB<MPB)
Tragedy is due to an externality and people neglect this external cost

70
Q

How do you fix tragedy of the commons

A

Regulate or tax the use of common resources
Turn common resources into a private good
Privatise goods such as elephants to stop poaching

71
Q

Property Rights

A

Market fails to allocate resources efficiently when property rights are not well established
Causes market failure

71
Q

What are merit goods

A

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
Q

What are demerit goods

A

generate private or social costs not full taken into account by the consumers of those goods
Tend to be overconsumed

72
Q

What are the characteristics of a monopoly

A

Firm is the only seller of a product
No close competitors
Price Maker
Arise due to high barriers to entry

73
Q

What is the diagram characteristics for a monopoly

A

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
Q

How do policy makers solve monopolies

A

Try to make the industry more competitive
Regulate monopoly behaviour
Turning some private monopolies into public enterprises

75
Q

What are the characteristics of imperfect competition

A

Most firms:
Do compete
Have some sort of market power

76
Q

What are the characteristics of monopolistic competition

A

Many sellers competing to sell their goods
Products are differentiated
Seller can influence price
Free entry/exit

77
Q

What are the graphical characteristics of monopolistic competition

A

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
Q

What is the difference between monopolistic competition and perfect competition in the long run

A

With monopolistic competition, there is a markup for price
Quantity produced by each firm is below the efficient scale

79
Q

What are the characteristics of an oligopoly

A

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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