year 1 Flashcards
define demand
the amount that consumers are willing and able to buy at each given price point
what is effective demand
demand backed by the ability to pay
what is an extension in demand?
when quantity demanded increases due to a fall in price
what is a contraction in demand?
when quantity demanded falls due to an increase in price
what factors shift the demand curve?
consumer..
- consumer tastes and preferences
- consumer confidence
what factors shift the demand curve?
(prices)
- prices of substitutes
- prices of complementary goods and services
- uncertainty over future prices
what factors shift the demand curve?
(changes)
- income
- population
- in quality
- the law
- weather conditions
- interest rates
- publicity and advertising
what are inferior goods?
as incomes rise, demand for goods fall
what are normal goods?
as incomes rise demand for the goods rise
what are substitute goods?
a good which can replace a similar good
what are complementary goods?
a good which is consumed along with another good
what is composite demand?
a good which is demanded for more than one purpose so that an increase in demand for one purpose reduces supply for the other purpose
what is derived demand?
when the demand for one good or service comes from the demand of another good or service
that is, the good is a component of the other good
how does the demand curve slope?
downwards
why does the demand curve slope downwards?
utility diminishes with consumption
what is the law of demand?
when the price of a good rises, the quantity demanded will fall
does the price of a good shift the curve?
no
what is price elasticity of demand?
measures the responsiveness of quantity demanded to a change in the price of the good
what is the equation for price elasticity of demand?
percentage change in quantity demanded divided percentage change in price
when demand is price elastic what will the number be?
less than -1
explain what price elastic demand is
a change in price will have a more than proportional change in quantity demanded
when demand is price elastic, what will happen to revenue if price falls?
if price falls, total revenue will fall
when demand is price inelastic what will the number be?
between 0 and -1
explain what price inelastic demand is
when prices fall, quantity demanded increases but by a smaller proportion than the fall in price
when demand is price inelastic, what will happen to revenue if price falls?
when price falls, total revenue will fall
explain what happens when price elasticity of demand is 0
when price changes there is no effect on quantity demanded
when the price elasticity of demand is 0, it can otherwise be known as…
perfectly inelastic
when PeD is 0, what happens to total revenue when prices fall?
when prices fall, because quantity demanded doesn’t change at all, total revenue must fall
when the price elasticity of demand is 1, it can otherwise be known as…
unitary price elasticity of demand
explain what happens when price elasticity of demand is 1
a change in price brings about the same proportional change in demand
when PeD is 1, what happens to total revenue when prices fall?
total revenue will remain the same from a price cut
when the price elasticity of demand is infinity, it can otherwise be known as…
perfectly elastic demand
describe what is meant when price elasticity of demand is infinite
demand is infinite at a specific price
a change in price would eliminate all demand for the product
what factors determine the price elasticity of demand?
- availability of substitutes
- time
- whether the good is a luxury or a necessity
- the proportion of a persons income spent on the good
how is a good being a luxury or a necessity reflect in its price elasticity of demand?
luxury = elastic
necessity = inelastic
if a good has many substitutes, what does the PeD curve look like?
flatter
define income elasticity of demand
measures the responsiveness of quantity demanded to a change in income
what is the equation of income elasticity of demand?
YeD = % change in quantity demanded divided by % change in income
describe the conditions if income elasticity of demand is between 0 and 1 or 0 and -1
- demand is income inelastic
- an increase in income leads to a less than proportional increase in quantity demanded
what numbers show that income elasticity of demand is inelastic?
between 0 and 1 or 0 and -1
describe the conditions if income elasticity of demand is above 1 or less than -1
demand is income elastic
what numbers show that income elasticity of demand is elastic?
above 1 or less than -1
if the number is positive, what type of good is it?
normal
if the number is negative, what type of good is it?
inferior
what is the equation of cross price elasticity of demand?
XPeD = %change in the quantity demanded of good A divided by % change in the price of good B
if the good is a substitute, what does the graph look like?
positive gradient
if the good is complementary, what does the graph look like?
negative gradient
define cross price elasticity of demand
a measure of the responsiveness of quantity demanded of one good to a change in price of another good
what type of goods result in XPeD being positive?
substitutes
what type of goods result in XPeD being negative?
complimentary goods
what type of number do weak substitutes produce?
low positive numbers
what type of number do high substitutes produce?
high positive numbers
what type of number do weak compliments produce?
between 0 and -1
what type of number do strong compliments produce?
a number less than -1
define supply
the amount offered for sale by producers at each given price point
what is an extension in supply?
as a result of an increase in price, quantity supplied increases
what shifts the supply curve?
1.
- subsidies
what shifts the supply curve?
1. subsidies
2.
- indirect taxes
what shifts the supply curve?
1. subsidies
2. indirect taxes
3.
- expectations about future prices
what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4.
- number of sellers in a market
what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4. number of sellers in a market
5.
- changes in labour productivity
what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4. number of sellers in a market
5. changes in labour productivity
6.
- joint supply
what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4. number of sellers in a market
5. changes in labour productivity
6. joint supply
7.
- technological improvements
what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4. number of sellers in a market
5. changes in labor productivity
6. joint supply
7. technological improvements
8.
9.
- cost of raw materials
- regulations and bureaucracy
state all the factors that shift the supply curve
- subsidies
- indirect taxes
- expectations about future prices
- number of sellers in a market
- changes in labor productivity
- joint supply
- technological improvements
- cost of raw materials
- regulations and bureaucracy
define joint supply
where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by product
name an example of joint supply
meat and leather
what is the definition of price elasticity of supply?
measures the responsiveness of quantity supplies to changes in price
what number indicates price elastic supply?
a number greater than 1
what is price elastic supply?
an increase in price leads to a greater than proportional increase in quantity supplied
what number indicates price inelastic supply?
a number less than 1
what is price inelastic supply?
an increase in price leads to a less than proportional increase in quantity supplied
what number indicates perfect price inelastic supply?
0
what is perfect price inelastic supply?
an increase in price has no effect on quantity supplied
what does PeS being infinity indicate?
perfect price elasticity
what is perfect price elasticity of supply?
firms will supply an infinite amount at one price
what number indicates PeS being unitary?
1
what is unitary price elasticity of supply?
an increase in price leads to a proportional increase in quantity supplied
what does price shift?
nothing
what factors affect price elastic supply?
- time
- raw materials need to be found, extracted and processed
- availability of stocks or stock piling
- the ease of switching between alternative production
- availability of spare capacity
define equilibrium
the price at which demand is equal to supply and there is no tendency for change
define disequilibrium
- the price at which market supply does not equal demand
- there is likely to be a further change or reaction by buyers or sellers
what happens when demand increases in the short run?
there is a shortage / excess demand
what happens if there is a shortage / excess demand?
leads to an upward pressure on price
what are the functions of price?
- signalling
- incentivising
- rationing
how does signalling work as a function of price?
prices rise and fall to reflect scarcities and surpluses
how does incentivising work as a function of price?
Through choices consumers send information to producers about their changing nature of needs and wants
how does rationing work as a function of price?
Prices ration scarce resources when demand outstrips supply
what is a commodity?
- a good that is traded but usually refers to raw materials or semi manufactured goods that are traded in bulk
- often unbranded goods
what is a consumer surplus?
a measure of the welfare that people gain from consuming goods and services
what is a consumer surplus the difference between?
the total amount that consumers are willing and able to pay for a good or service and the total amount they actually do pay
what is a producer surplus?
a measure of welfare producers gain from producing goods and services
what is a producer surplus the difference between?
the price producers are willing and able to supply a good or service for and the price they actually recieve
what are value judgements?
- statements or opinions expressed that are not testable or cannot be verified
- depend on the views of the individual
what are normative statements?
opinions that require value judgements to be made
what are positive statements?
statements that can be tested against real world data
what are the economic resources?
land
labour
capital
enterprise
what is opportunity cost?
the loss of the next best alternative
what is the basic economic problem?
1.
- resources are scarce, wants are infinite
what is the basic economic problem?
1. resources are scarce, wants are infinite
2.
- economics is the study of the allocation of these resources
what is the basic economic problem?1. resources are scarce, wants are infinite
2. economics is the study of the allocation of these resources
3.
- scarce resources mean trade offs, this leads to opportunity cost
what is the basic economic problem?
1. resources are scarce, wants are infinite
2. economics is the study of the allocation of these resources
3. scarce resources mean trade offs, this leads to opportunity cost
4.
- when decisions are made we assume consumers are rational
what is the basic economic problem?
1. resources are scarce, wants are infinite
2. economics is the study of the allocation of these resources
3. scarce resources mean trade offs, this leads to opportunity cost
4. when decisions are made we assume consumers are rational
5.
- rationality means maximising their own welfare
what does the production possibility boundary indicate?
the maximum possible output that can be achieved given a fixed set of resources and technology in a particular time period
what factors shift PPB to the right?
new..
new / more tech
new recources
what factors shift PPB to the right?
increased…
increased supply of labour through increased population and migration
increased production
what factors shift PPB to the right?
improvements..
improvements in human capital through education and training
what factors shift PPB to the right?
encouraging..
encouraging entrepreneurship
what factors shift PPB to the left?
drought, disease, disaster, war
what are capital goods?
goods which aid the production process
goods which make other goods
what is productive efficiency?
achievable in an economy where its not possible to make someone better off without making someone worse off
producing at highest capacity with lowest average costs
what is allocative efficiency?
the available economic resources are used to produce the combination of goods and services that best matches peoples tastes and preferences
what is excess supply?
when quantity supplied at a particular price is greater than quantity demanded
there is disequilibrium
when is the ONLY time to use/refer to excess supply?
with price control or the short run before a new equilibrium is reached
what is minimum price?
a price floor below which the price of a good or service is not allowed to decrease
evaluate the effectiveness of price floors
- excess supply of Qs to Qd
- govt would need to buy up the excess; often leads to dumping (selling at a lower price often to less developed countries)
- black market
- waste of scarce resources
- PED?
what are two methods of price control?
price ceiling
price floor
evaluate the PED effectiveness of a price ceiling
elastic - greater demand - bigger trade off and excess demand
when does market failure occur?
when the free market, left alone fails to deliver an efficient allocation of resources
what is a missing market?
a situation where there is no market because the functions of prices have broken down
what does complete market failure result in?
a missing market
what is partial market failure?
where a market exists but contributes to the misallocation of resources
what are the main causes of market failure?
- positive and negative externalities
- merit and demerit goods
- public goods
- monopoly and other market imperfections
- inequalities in the distribution of income and wealth
- factor immobility causing unemployment
- imperfect information
what are public goods?
a good that possesses the characteristics of non-excludability, non rivalry in consumption and is non-rejectable
define non-excludability
once provided, no person can be excluded from benefiting
what are non-payers?
those who enjoy the benefits of consumption at no financial cost to them
what are free riders?
a person or organisation which receives benefits that others have paid for without making any contribution themselves
define non-rivalry
consumption of the good by one person does not reduce the amount available for consumption by another person
define non-rejectable
if a public good is provided, we cannot avoid it
what is a quasi-public good?
a good that has some qualities of a public good but does not fully possess the three characteristics of non rivalry, non excludability and non rejectability
what are externalities?
costs or benefits that spill over to third parties external to a market transaction
what are positive externalities?
a positive spill over effect to third parties of a market transaction
social benefits exceed private benefits
what are negative externalities?
a negative spill over effect to third parties of a market transaction
social costs exceed private costs
define marginal private cost
the cost to an individual or firm of an economic transaction
define marginal external costs
the spill over cost to third parties of an economic tansaction
define marginal social costs
the full cost to society of an economic transaction, including private and external costs
marginal social cost =
marginal private cost + marginal external costs
who is the marginal private cost the cost to?
cost to the producer
who pays tax on goods?
suppliers
what is the aim of a subsidy on a consumer?
get them to consume more
what is the point Qfm?
free market
no government intervention
what are merit goods?
a good that would be under consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption
ought to be subsidised or provided free at the point of use and funded by the government
what externalities do merit goods genergate?
positive
what does society value and judge about merit goods?
that everyone should have them regardless of whether an individual wants them
social benefits exceed private benefits
what are demerit goods?
consumers may be unaware of the negative externalities that these goods create
they should be taxed
what does society value and judge about demerit goods?
social cost of consumption are greater than the private costs
analysis paragraph:
how could the government intervene with a good with a negative externality?
- indirect tax on producers
- draw diagram + explain
- this would increase cost of production
- firms would internalise the external cost of the good shifting supply left
- prices would rise
- consumers would ration their consumption
- consumption would fall to Qso
evaluation paragraph:
evaluate the effectiveness of taxes on cigarette consumption
- depends upon the PED
- cigarettes - likely inelastic for addicted smokers
- rise in price leads to a less than proportional fall in consumption
evaluate the effectiveness of taxes
- black market
- inequality (not for cigarettes or alcohol) eg. petrol
- limited if PED is inelastic
- imperfect information - near impossible to calculate MEC
- costly to implement
- needs effective consequences
what is the incidence of tax?
the proportion of tax that is passes onto the consumer
when is the incidence of tax high?
when most of the tax is passed onto the consumer
when demand is price inelastic
on a graph, the Y axis reads
P1
P
P2
what area is payed by the producer
P to P2
on a graph, the Y axis reads
P1
P
P2
what area is payed by the consumer?
P to P1 (aka the indidence of tax)
what are subsidies?
government support (financial) offered to producers and consumers
evaluate subsidies on producers
- effectiveness is limited by PED
- imperfect information (hard to quantify the externality)
- costly to implement, monitor and police - opportunity cost
- politically unpopular
- encourages inefficiency
when are subsidies on producers especially politically unpopular?
if its a private profit making firm
why might subsidies encourage inefficiency?
now lack the incentive to keep costs low
evaluate the effectiveness of subsidies on consumers
- limited in the short run but better in the long run - PES
- imperfect information
- opportunity cost - costly to implement
- unintended consequences of the price increase
what are monopolies?
restrict supply and raise price
leads to a loss of welfare
what are market imperfections ?
- asymmetric information and imperfect information
- monopolies
- immobilities of factors of production
- inequalities in the distribution of income and wealth
what is the reason for government intervention?
market failure
what is occupational immobility of labour?
as patterns of demand and employment change many workers may find it difficult to secure new jobs since they lack the necessary skills
what are the problems with state provision?
- expensive,
- opportunity cost, - pressures on the govt taxes,
- places burden on taxes
- already a deficit
- conflicting objectives
what are direct taxes on?
income, earnings
complete the sentence:
another way the government can intervene in the cigarette market is by…
closing the information gap
using advertising to get us to consume less of a good
evaluate advertising
- people are used to adverts - we become desensitised to them
- can be costly
- question effectiveness - how far does it reach the socially optimum level
- is it best if combined with another intervention
- prevention rather than quitting (smoking)
what is regulation?
organisations which make sure the industry complies with legislation
the government can also issue…
regulation and laws eg bans
to legislate the market
evaluate government intervention of regulation and legislation
- costly to police and implement
- black market
-opportunity cost - legislation is only effective if there are consequences eg fines and must be likely and substantial
what is government failure?
when government intervention to correct market failure does not improve the allocation of resources or leads to the to a worsening of the situation
what are the reasons for government failure?
- imperfect information
- conflicting objectives
- administrative costs
- unintended consequences
explain how imperfect information causes government failure?
- eg for taxes and subsidies govt has to calculate externalities
- amount of MEC and MEB
- regulations
- govt provisions of goods and services
^^^^ all depends on adequate information
explain how conflicting objectives causes government failure?
- caused by political self interest
- can lead to policy myopia
- tendency of politicians to look for short term solutions
- disincentives
when analysing conflicting objectives, describe why politicians may cause govt failure?
- 4 year political cycles
- taxes are politically unpopular
- in the run up to election the govt doesn’t want to raise tax
explain how administrative costs causes government failure?
or value for money
- govt struggles from bureaucracy
- inefficiency of a large govt
explain how unintended consequences cause government failure?
smoking outside pubs - heaters outside ,, not environmentally friendly
what are the three types of year 12 exam Qs?
- should the govt intervene
- how should the govt intervene
- should the govt intervene more
which of the two year 12 exam questions are similar?
- how should the govt intervene
- should the govt intervene more
what is production?
output
what is productivity?
out put per ________
what factors affect labour productivity?
higher wages
training
technology
infrastructure
what is the division of labour?
breaking the production process down into a sequence of tasks, with workers assigned to particular tasks
what are the benefits of the division of labour?
- workers become specialised in their tasks
- increased productivity
- wage costs lower - avg costs
- allows for the use of specialised machinery
why do we have money?
- medium for exchange
- store of wealth
- unit of account
- standard of deferred payment
how do we make decisions in economics?
based decisions on rationality, perfect information, which maximises utility
what is rational behaviour?
pursuit of self interest, assuming perfect information to maximise ones own welfare
how do we measure welfare?
- GDP per capita *
- HDI *
- happiness index
- consumer surplus
what is utility?
the satisfaction or economic welfare an individual gains from consuming a good or service
what is marginal utility?
the addition to the total additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good
what is marginal cost?
the addition to the total additional cost from consuming one extra unit of a good
when is total utility maximised?
when marginal = 0
what is the law of diminishing marginal returns?
as a variable factor of production (labour) is added to a fixed factor (premesis)
eventually both the marginal and average returns to the variable factor will begin to fall
what type of law is the law of diminishing marginal returns?
short term
simply, what is the law of diminishing marginal returns?
total output rises but by a falling amount
what is behavioural economics?
- a method of economic analysis
- applies psychological insights into human behaviour
- to explain how individuals make choices and decisions
when should we use behavioural economics?
to evaluate and question traditional economics
what are the reasons consumers are irrational?
- bounded rationality
- bounded self control
- cognitive bias
- altruism and perception of fairness
what is bounded rationality?
(reasons consumers are irrational)
when making decisions, an individuals rationality is limited by:
- the information they have,
- the limitations of their minds
- the finite time available to make decisions
what does bounded rationality lead to?
satisficing
what is satisficing?
achieving a satisfactory outcome rather than the best possible outcome
what is bounded self control?
(reasons consumers are irrational)
individuals lack the self control to act in what they see as their self interest
what are the subsections of cognitive bias?
(reasons consumers are irrational)
- rules of thumb
- anchoring
- availability
- social norms
describe rules of thumb as a subsection of cognitive bias
- based on practice not theory,
- not strictly accurate or reliable for situations
- a rough guide
describe anchoring as a subsection of cognitive bias
the human tendency to rely too heavily on the first piece of information offered
describe availability as a subsection of cognitive bias
individuals tend to make judgements according to how easy it is to recall examples of similar events
describe social norms as a subsection of cognitive bias
forms or patterns of behaviour considered acceptable by a society or group within that society
what anchoring example does the exam board provide?
the previous price that the person paid for the product acts as an anchor
what is altruism and perception of fairness?
(reasons consumers are irrational)
charitableness - economics says charity is irrational
what is choice architecture?
- different ways in which choices can be presented to consumers
- and the impact of that presentation on consumer decision making
what are the types of choice architecture?
- framing
- loss aversion
- nudges
- default choice
- mandated choices
- restricted choices
what is framing?
(choice architecture)
how something is presented
influences the choices people make
what is loss aversion?
(choice architecture)
peoples tendency to prefer to avoid making losses to acquire potential gains
explain an example of loss aversion (choice architecture)
people prefer to put their money into a safe but low yielding investment,
rather than one that is a more risky but has the prospects of very high returns
what are nudges?
(choice architecture)
try to alter peoples behaviour in a predictable way
without significantly changing economic incentives
- not a legal requirement
- must be open and transparent
- still allow choice
what is default choice?
(choice architecture)
an option that is automatically selected unless an alternative is specified
what is mandate choice?
(choice architecture)
people are required by law to make a decision
give an example of a mandate choice
terms and conditions
what is restricted choice?
(choice architecture)
offering people a limited number of options so that they are not overwhelmed
what might happen if consumers have too much choice?
may make poorly thought out decisions or not make any decisions
what are fixed costs?
doesnt vary with output
what are variable costs?
varies directly with output
what are semi variable goods?
possess characteristics of both FC and VC
what is the equation for the average?
total divided by quantity
what is the equation for the marginal?
addition to the total X of an additional unit
what is the short term?
at least one factor of production is fixed
what is the long term?
no factors of productions are fixed
how can output be increased in the short run?
to employ more labour
how can output be increased in the long run?
expanding the premisses
define the total returns of labour
the number of goods you get from the labour
define the average returns of labour
total output divided by the total number of workers employed
define the marginal returns of labour
the addition to the total of an additional worker
when is the total highest?
when marginal is 0
what are the assumptions of the law of diminishing returns?
- each unit of variable factor is the same (eg each worker is trained equally)
- in the short run at least one factor is fixed (usually land)
define economies of scale
as the scale of production (output) of a firm increases, the long run average costs fall
define internal economies of scale
cost saving resulting from growth within the firm itself
define external economies of scale
cost saving resulting from the growth of the economy or market / industry of which the firm is a part of
what is the mnemonic for the types of internal economies of scale?
Really Fun Mums Try Making Pies
what are the types of internal economies of scale?
- Research and development
- Financial (banks and
lending) - Marketing
- Technical (machinery)
- Managerial
- Purchasing (bulk buying)
complete the gap:
average costs per unit are ______________ for larger firms
spread out more
what are the types of external economies of scale?
- education
- technology
- research and development
- infrastructure (transport and health)
on a graph, what side of Q productive efficiency is diseconomies of scale?
right
on a graph, what side of Q productive efficiency is economies of scale?
left
on a graph showing external economies of scale, if you were to draw the point Q, what would that represent?
- at the same output, costs have fallen
- the firm is not producing more or less
- its a result of the market / industry
define diseconomies of scale
as the scale of production of a firm increases beyond productive efficiency, long run average costs rise
what assumptions are made surrounding economies of scale?
- the firm operates in the short run
- all firms are rational
what does it mean for firms to be rational?
they aim to maximise profits
what kind of process is short run profit maximisation?
a two stage process
what is step one of short run profit maximisation?
using marginal curves to arrive at the profit maximising output
what is the simple profit maximising rule?
if profits are to be maximised, MR must be MC
what is step two of short run profit maximisation?
using average curves to measure the size of the profit
what is total revenue?
price x Q
= average revenue x Q
what is total profit?
average profit x Q
what are the causes of diseconomies of scale?
- communication
- control
- coordination
what firms wont have a ‘U’ shaped LRAC curve?
natural monopolies - extremely large firms
what is an example of natural monopoly?
national grid
describe a non ‘U’ shaped LRAC curve
the fixed costs are so large productive efficiency and diseconomies of scale wont be met
define the minimum efficient scale (MES)
the lowest output which the firm is able to produce at the minimum achievable LRAC
how does a high MES act as a barrier to entry?
- there is already an established firm in the market,
- a small firm will have fewer customers
- and so had to try harder to get MES
what does MES stand for?
minimum efficiency scale
complete the sentence :
natural monopolies ______ reach _______
never reach MES
on a returns to scale graph,
what is on the left side of constant returns to scale?
increasing returns to scale
on a returns to scale graph,
what is on the righ side of constant returns to scale?
decreasing returns to scale
define increasing returns to scale
where an increase in factor inputs leads to a more than proportional increase in output
define decreasing returns to scale
where an increase in factor inputs leads to a less than proportional increase in output
what is the difference between increasing returns to scale and economies of scale?
- economies of scale is about cost saving that arise from factor inputs
what does the cost curve envelope show?
diminishing returns in the short run and economies of scale in the long run
describe a cost curve envelope
- the red curves represent a different premisses
- the LRAC curve is made up of the points of productive efficiency of the SRAC curves
what is technological change otherwise known as?
dynamic efficiency
describe dynamic efficiency / technological change
- long run concept
- requires a supernormal profit
what are the terms technological change / dynamic efficiency used to describe
- the overall effect of invention or innovation
- and the diffusion or spread of technology in the economy
what are the effects of technological change on methods of production?
- a movement of job production towards batch and flow
- specialisation
- movement away from skilled labour (labour v capital intensive)
evaluate the effects of technological change on methods of production
: movement away from skilled labour (labour v capital intensive)
- skill and labour is still required
- the more mechanised factories - more skilled labour
what are the effects off technological change on the cost of production?
- may lower the variable cost of labour
- labour cost fall - AC fall
- in the short run AFC rise (buy machines)
- increases productivity - fall in AC
evaluate the effects of technological change on costs of production
: may lower the variable cost of labour
may be more skilled so cost more
evaluate the effects of technological change on costs of production
: in the short run AFC rise (buy machines)
- long run costs fall
- firms benefit from tech econ of scale
what is static efficiency?
stationary, still
what are the types of static efficiency?
- productive efficiency
- allocative efficiency
describe dynamic efficiency
- requires supernormal profit
- long run
what does dynamic efficiency lead to?
- the development of new products and processes
- that improve productive efficiency
what are the different types of efficiency?
- static
- dynamic
- X
define creative destruction
- capitalism evolving and renewing itself overtime
- through new technologies and innovations
- replacing older ones
revenue =
sales x price
total revenue =
output x price
average revenue =
revenue per unit
marginal revenue =
addition to the total revenue of selling another unit
what are the different types of profit?
- normal
- subnormal
- supernormal
define normal profit
- the minimum profit a firm must make to stay in business
- which is insufficient to attract new firms into the market
what would economists include when working out a firms normal profit?
opportunity costs
when does normal profit occur?
when AC = AR
what profit occurs when AC > AR?
subnormal
what profit occurs when AR > AC?
supernormal
define supernormal profits
profits over normal profit
in what ways can the government intervene in market failure?
- taxes and subsidies
- price control
- advertising
- legislation
- do nothing
what are indirect taxes?
- expenditure tax
- increases cost of production for a firm but can be passed on to consumers via higher prices
