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micro-economics > year 1 > Flashcards

year 1 Flashcards

1
Q

define demand

A

the amount that consumers are willing and able to buy at each given price point

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2
Q

what is effective demand

A

demand backed by the ability to pay

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3
Q

what is an extension in demand?

A

when quantity demanded increases due to a fall in price

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4
Q

what is a contraction in demand?

A

when quantity demanded falls due to an increase in price

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5
Q

what factors shift the demand curve?
consumer..

A
  • consumer tastes and preferences
  • consumer confidence
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6
Q

what factors shift the demand curve?
(prices)

A
  • prices of substitutes
  • prices of complementary goods and services
  • uncertainty over future prices
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7
Q

what factors shift the demand curve?
(changes)

A
  • income
  • population
  • in quality
  • the law
  • weather conditions
  • interest rates
  • publicity and advertising
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8
Q

what are inferior goods?

A

as incomes rise, demand for goods fall

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9
Q

what are normal goods?

A

as incomes rise demand for the goods rise

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10
Q

what are substitute goods?

A

a good which can replace a similar good

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11
Q

what are complementary goods?

A

a good which is consumed along with another good

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12
Q

what is composite demand?

A

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

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13
Q

what is derived demand?

A

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

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14
Q

how does the demand curve slope?

A

downwards

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15
Q

why does the demand curve slope downwards?

A

utility diminishes with consumption

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16
Q

what is the law of demand?

A

when the price of a good rises, the quantity demanded will fall

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17
Q

does the price of a good shift the curve?

A

no

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18
Q

what is price elasticity of demand?

A

measures the responsiveness of quantity demanded to a change in the price of the good

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19
Q

what is the equation for price elasticity of demand?

A

percentage change in quantity demanded divided percentage change in price

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20
Q

when demand is price elastic what will the number be?

A

less than -1

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21
Q

explain what price elastic demand is

A

a change in price will have a more than proportional change in quantity demanded

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22
Q

when demand is price elastic, what will happen to revenue if price falls?

A

if price falls, total revenue will fall

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23
Q

when demand is price inelastic what will the number be?

A

between 0 and -1

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24
Q

explain what price inelastic demand is

A

when prices fall, quantity demanded increases but by a smaller proportion than the fall in price

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25
Q

when demand is price inelastic, what will happen to revenue if price falls?

A

when price falls, total revenue will fall

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26
Q

explain what happens when price elasticity of demand is 0

A

when price changes there is no effect on quantity demanded

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27
Q

when the price elasticity of demand is 0, it can otherwise be known as…

A

perfectly inelastic

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28
Q

when PeD is 0, what happens to total revenue when prices fall?

A

when prices fall, because quantity demanded doesn’t change at all, total revenue must fall

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29
Q

when the price elasticity of demand is 1, it can otherwise be known as…

A

unitary price elasticity of demand

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30
Q

explain what happens when price elasticity of demand is 1

A

a change in price brings about the same proportional change in demand

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31
Q

when PeD is 1, what happens to total revenue when prices fall?

A

total revenue will remain the same from a price cut

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32
Q

when the price elasticity of demand is infinity, it can otherwise be known as…

A

perfectly elastic demand

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33
Q

describe what is meant when price elasticity of demand is infinite

A

demand is infinite at a specific price
a change in price would eliminate all demand for the product

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34
Q

what factors determine the price elasticity of demand?

A
  • availability of substitutes
  • time
  • whether the good is a luxury or a necessity
  • the proportion of a persons income spent on the good
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35
Q

how is a good being a luxury or a necessity reflect in its price elasticity of demand?

A

luxury = elastic
necessity = inelastic

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36
Q

if a good has many substitutes, what does the PeD curve look like?

A

flatter

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37
Q

define income elasticity of demand

A

measures the responsiveness of quantity demanded to a change in income

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38
Q

what is the equation of income elasticity of demand?

A

YeD = % change in quantity demanded divided by % change in income

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39
Q

describe the conditions if income elasticity of demand is between 0 and 1 or 0 and -1

A
  • demand is income inelastic
  • an increase in income leads to a less than proportional increase in quantity demanded
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40
Q

what numbers show that income elasticity of demand is inelastic?

A

between 0 and 1 or 0 and -1

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41
Q

describe the conditions if income elasticity of demand is above 1 or less than -1

A

demand is income elastic

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42
Q

what numbers show that income elasticity of demand is elastic?

A

above 1 or less than -1

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43
Q

if the number is positive, what type of good is it?

A

normal

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44
Q

if the number is negative, what type of good is it?

A

inferior

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45
Q

what is the equation of cross price elasticity of demand?

A

XPeD = %change in the quantity demanded of good A divided by % change in the price of good B

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46
Q

if the good is a substitute, what does the graph look like?

A

positive gradient

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47
Q

if the good is complementary, what does the graph look like?

A

negative gradient

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48
Q

define cross price elasticity of demand

A

a measure of the responsiveness of quantity demanded of one good to a change in price of another good

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49
Q

what type of goods result in XPeD being positive?

A

substitutes

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50
Q

what type of goods result in XPeD being negative?

A

complimentary goods

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51
Q

what type of number do weak substitutes produce?

A

low positive numbers

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52
Q

what type of number do high substitutes produce?

A

high positive numbers

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53
Q

what type of number do weak compliments produce?

A

between 0 and -1

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54
Q

what type of number do strong compliments produce?

A

a number less than -1

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55
Q

define supply

A

the amount offered for sale by producers at each given price point

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56
Q

what is an extension in supply?

A

as a result of an increase in price, quantity supplied increases

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57
Q

what shifts the supply curve?
1.

A
  1. subsidies
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58
Q

what shifts the supply curve?
1. subsidies
2.

A
  1. indirect taxes
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59
Q

what shifts the supply curve?
1. subsidies
2. indirect taxes
3.

A
  1. expectations about future prices
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60
Q

what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4.

A
  1. number of sellers in a market
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61
Q

what shifts the supply curve?
1. subsidies
2. indirect taxes
3. expectations about future prices
4. number of sellers in a market
5.

A
  1. changes in labour productivity
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62
Q

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.

A
  1. joint supply
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63
Q

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.

A
  1. technological improvements
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64
Q

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.

A
  1. cost of raw materials
  2. regulations and bureaucracy
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65
Q

state all the factors that shift the supply curve

A
  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. cost of raw materials
  9. regulations and bureaucracy
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66
Q

define joint supply

A

where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by product

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67
Q

name an example of joint supply

A

meat and leather

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68
Q

what is the definition of price elasticity of supply?

A

measures the responsiveness of quantity supplies to changes in price

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69
Q

what number indicates price elastic supply?

A

a number greater than 1

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70
Q

what is price elastic supply?

A

an increase in price leads to a greater than proportional increase in quantity supplied

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71
Q

what number indicates price inelastic supply?

A

a number less than 1

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72
Q

what is price inelastic supply?

A

an increase in price leads to a less than proportional increase in quantity supplied

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73
Q

what number indicates perfect price inelastic supply?

A

0

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74
Q

what is perfect price inelastic supply?

A

an increase in price has no effect on quantity supplied

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75
Q

what does PeS being infinity indicate?

A

perfect price elasticity

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76
Q

what is perfect price elasticity of supply?

A

firms will supply an infinite amount at one price

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77
Q

what number indicates PeS being unitary?

A

1

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78
Q

what is unitary price elasticity of supply?

A

an increase in price leads to a proportional increase in quantity supplied

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79
Q

what does price shift?

A

nothing

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80
Q

what factors affect price elastic supply?

A
  • 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
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81
Q

define equilibrium

A

the price at which demand is equal to supply and there is no tendency for change

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82
Q

define disequilibrium

A
  • the price at which market supply does not equal demand
  • there is likely to be a further change or reaction by buyers or sellers
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83
Q

what happens when demand increases in the short run?

A

there is a shortage / excess demand

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84
Q

what happens if there is a shortage / excess demand?

A

leads to an upward pressure on price

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85
Q

what are the functions of price?

A
  • signalling
  • incentivising
  • rationing
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86
Q

how does signalling work as a function of price?

A

prices rise and fall to reflect scarcities and surpluses

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87
Q

how does incentivising work as a function of price?

A

Through choices consumers send information to producers about their changing nature of needs and wants

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88
Q

how does rationing work as a function of price?

A

Prices ration scarce resources when demand outstrips supply

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89
Q

what is a commodity?

A
  • a good that is traded but usually refers to raw materials or semi manufactured goods that are traded in bulk
  • often unbranded goods
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90
Q

what is a consumer surplus?

A

a measure of the welfare that people gain from consuming goods and services

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91
Q

what is a consumer surplus the difference between?

A

the total amount that consumers are willing and able to pay for a good or service and the total amount they actually do pay

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92
Q

what is a producer surplus?

A

a measure of welfare producers gain from producing goods and services

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93
Q

what is a producer surplus the difference between?

A

the price producers are willing and able to supply a good or service for and the price they actually recieve

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94
Q

what are value judgements?

A
  • statements or opinions expressed that are not testable or cannot be verified
  • depend on the views of the individual
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95
Q

what are normative statements?

A

opinions that require value judgements to be made

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96
Q

what are positive statements?

A

statements that can be tested against real world data

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97
Q

what are the economic resources?

A

land
labour
capital
enterprise

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98
Q

what is opportunity cost?

A

the loss of the next best alternative

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99
Q

what is the basic economic problem?
1.

A
  1. resources are scarce, wants are infinite
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100
Q

what is the basic economic problem?
1. resources are scarce, wants are infinite
2.

A
  1. economics is the study of the allocation of these resources
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101
Q

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.

A
  1. scarce resources mean trade offs, this leads to opportunity cost
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102
Q

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.

A
  1. when decisions are made we assume consumers are rational
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103
Q

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.

A
  1. rationality means maximising their own welfare
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104
Q

what does the production possibility boundary indicate?

A

the maximum possible output that can be achieved given a fixed set of resources and technology in a particular time period

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105
Q

what factors shift PPB to the right?
new..

A

new / more tech
new recources

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106
Q

what factors shift PPB to the right?
increased…

A

increased supply of labour through increased population and migration
increased production

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107
Q

what factors shift PPB to the right?
improvements..

A

improvements in human capital through education and training

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108
Q

what factors shift PPB to the right?
encouraging..

A

encouraging entrepreneurship

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109
Q

what factors shift PPB to the left?

A

drought, disease, disaster, war

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110
Q

what are capital goods?

A

goods which aid the production process
goods which make other goods

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111
Q

what is productive efficiency?

A

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

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112
Q

what is allocative efficiency?

A

the available economic resources are used to produce the combination of goods and services that best matches peoples tastes and preferences

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113
Q

what is excess supply?

A

when quantity supplied at a particular price is greater than quantity demanded
there is disequilibrium

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114
Q

when is the ONLY time to use/refer to excess supply?

A

with price control or the short run before a new equilibrium is reached

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115
Q

what is minimum price?

A

a price floor below which the price of a good or service is not allowed to decrease

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116
Q

evaluate the effectiveness of price floors

A
  • 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?
How well did you know this?
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2
3
4
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117
Q

what are two methods of price control?

A

price ceiling
price floor

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2
3
4
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118
Q

evaluate the PED effectiveness of a price ceiling

A

elastic - greater demand - bigger trade off and excess demand

119
Q

when does market failure occur?

A

when the free market, left alone fails to deliver an efficient allocation of resources

120
Q

what is a missing market?

A

a situation where there is no market because the functions of prices have broken down

121
Q

what does complete market failure result in?

A

a missing market

122
Q

what is partial market failure?

A

where a market exists but contributes to the misallocation of resources

123
Q

what are the main causes of market failure?

A
  • 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
124
Q

what are public goods?

A

a good that possesses the characteristics of non-excludability, non rivalry in consumption and is non-rejectable

125
Q

define non-excludability

A

once provided, no person can be excluded from benefiting

126
Q

what are non-payers?

A

those who enjoy the benefits of consumption at no financial cost to them

127
Q

what are free riders?

A

a person or organisation which receives benefits that others have paid for without making any contribution themselves

128
Q

define non-rivalry

A

consumption of the good by one person does not reduce the amount available for consumption by another person

129
Q

define non-rejectable

A

if a public good is provided, we cannot avoid it

130
Q

what is a quasi-public good?

A

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

131
Q

what are externalities?

A

costs or benefits that spill over to third parties external to a market transaction

132
Q

what are positive externalities?

A

a positive spill over effect to third parties of a market transaction
social benefits exceed private benefits

133
Q

what are negative externalities?

A

a negative spill over effect to third parties of a market transaction
social costs exceed private costs

134
Q

define marginal private cost

A

the cost to an individual or firm of an economic transaction

135
Q

define marginal external costs

A

the spill over cost to third parties of an economic tansaction

136
Q

define marginal social costs

A

the full cost to society of an economic transaction, including private and external costs

137
Q

marginal social cost =

A

marginal private cost + marginal external costs

138
Q

who is the marginal private cost the cost to?

A

cost to the producer

139
Q

who pays tax on goods?

A

suppliers

140
Q

what is the aim of a subsidy on a consumer?

A

get them to consume more

141
Q

what is the point Qfm?

A

free market
no government intervention

142
Q

what are merit goods?

A

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

143
Q

what externalities do merit goods genergate?

A

positive

144
Q

what does society value and judge about merit goods?

A

that everyone should have them regardless of whether an individual wants them
social benefits exceed private benefits

145
Q

what are demerit goods?

A

consumers may be unaware of the negative externalities that these goods create
they should be taxed

146
Q

what does society value and judge about demerit goods?

A

social cost of consumption are greater than the private costs

147
Q

analysis paragraph:
how could the government intervene with a good with a negative externality?

A
  • 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
148
Q

evaluation paragraph:
evaluate the effectiveness of taxes on cigarette consumption

A
  • depends upon the PED
  • cigarettes - likely inelastic for addicted smokers
  • rise in price leads to a less than proportional fall in consumption
149
Q

evaluate the effectiveness of taxes

A
  • 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
150
Q

what is the incidence of tax?

A

the proportion of tax that is passes onto the consumer

151
Q

when is the incidence of tax high?

A

when most of the tax is passed onto the consumer
when demand is price inelastic

152
Q

on a graph, the Y axis reads
P1
P
P2
what area is payed by the producer

A

P to P2

153
Q

on a graph, the Y axis reads
P1
P
P2
what area is payed by the consumer?

A

P to P1 (aka the indidence of tax)

154
Q

what are subsidies?

A

government support (financial) offered to producers and consumers

155
Q

evaluate subsidies on producers

A
  • effectiveness is limited by PED
  • imperfect information (hard to quantify the externality)
  • costly to implement, monitor and police - opportunity cost
  • politically unpopular
  • encourages inefficiency
156
Q

when are subsidies on producers especially politically unpopular?

A

if its a private profit making firm

157
Q

why might subsidies encourage inefficiency?

A

now lack the incentive to keep costs low

158
Q

evaluate the effectiveness of subsidies on consumers

A
  • 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
159
Q

what are monopolies?

A

restrict supply and raise price
leads to a loss of welfare

160
Q

what are market imperfections ?

A
  • asymmetric information and imperfect information
  • monopolies
  • immobilities of factors of production
  • inequalities in the distribution of income and wealth
161
Q

what is the reason for government intervention?

A

market failure

162
Q

what is occupational immobility of labour?

A

as patterns of demand and employment change many workers may find it difficult to secure new jobs since they lack the necessary skills

163
Q

what are the problems with state provision?

A
  • expensive,
  • opportunity cost, - pressures on the govt taxes,
  • places burden on taxes
  • already a deficit
  • conflicting objectives
164
Q

what are direct taxes on?

A

income, earnings

165
Q

complete the sentence:
another way the government can intervene in the cigarette market is by…

A

closing the information gap
using advertising to get us to consume less of a good

166
Q

evaluate advertising

A
  • 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)
167
Q

what is regulation?

A

organisations which make sure the industry complies with legislation

168
Q

the government can also issue…

A

regulation and laws eg bans
to legislate the market

169
Q

evaluate government intervention of regulation and legislation

A
  • 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
170
Q

what is government failure?

A

when government intervention to correct market failure does not improve the allocation of resources or leads to the to a worsening of the situation

171
Q

what are the reasons for government failure?

A
  • imperfect information
  • conflicting objectives
  • administrative costs
  • unintended consequences
172
Q

explain how imperfect information causes government failure?

A
  • 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
173
Q

explain how conflicting objectives causes government failure?

A
  • caused by political self interest
  • can lead to policy myopia
  • tendency of politicians to look for short term solutions
  • disincentives
174
Q

when analysing conflicting objectives, describe why politicians may cause govt failure?

A
  • 4 year political cycles
  • taxes are politically unpopular
  • in the run up to election the govt doesn’t want to raise tax
175
Q

explain how administrative costs causes government failure?

A

or value for money
- govt struggles from bureaucracy
- inefficiency of a large govt

176
Q

explain how unintended consequences cause government failure?

A

smoking outside pubs - heaters outside ,, not environmentally friendly

177
Q

what are the three types of year 12 exam Qs?

A
  • should the govt intervene
  • how should the govt intervene
  • should the govt intervene more
178
Q

which of the two year 12 exam questions are similar?

A
  • how should the govt intervene
  • should the govt intervene more
179
Q

what is production?

A

output

180
Q

what is productivity?

A

out put per ________

181
Q

what factors affect labour productivity?

A

higher wages
training
technology
infrastructure

182
Q

what is the division of labour?

A

breaking the production process down into a sequence of tasks, with workers assigned to particular tasks

183
Q

what are the benefits of the division of labour?

A
  • workers become specialised in their tasks
  • increased productivity
  • wage costs lower - avg costs
  • allows for the use of specialised machinery
184
Q

why do we have money?

A
  • medium for exchange
  • store of wealth
  • unit of account
  • standard of deferred payment
185
Q

how do we make decisions in economics?

A

based decisions on rationality, perfect information, which maximises utility

186
Q

what is rational behaviour?

A

pursuit of self interest, assuming perfect information to maximise ones own welfare

187
Q

how do we measure welfare?

A
  • GDP per capita *
  • HDI *
  • happiness index
  • consumer surplus
188
Q

what is utility?

A

the satisfaction or economic welfare an individual gains from consuming a good or service

189
Q

what is marginal utility?

A

the addition to the total additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good

190
Q

what is marginal cost?

A

the addition to the total additional cost from consuming one extra unit of a good

191
Q

when is total utility maximised?

A

when marginal = 0

192
Q

what is the law of diminishing marginal returns?

A

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

193
Q

what type of law is the law of diminishing marginal returns?

A

short term

194
Q

simply, what is the law of diminishing marginal returns?

A

total output rises but by a falling amount

195
Q

what is behavioural economics?

A
  • a method of economic analysis
  • applies psychological insights into human behaviour
  • to explain how individuals make choices and decisions
196
Q

when should we use behavioural economics?

A

to evaluate and question traditional economics

197
Q

what are the reasons consumers are irrational?

A
  1. bounded rationality
  2. bounded self control
  3. cognitive bias
  4. altruism and perception of fairness
198
Q

what is bounded rationality?
(reasons consumers are irrational)

A

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

199
Q

what does bounded rationality lead to?

A

satisficing

200
Q

what is satisficing?

A

achieving a satisfactory outcome rather than the best possible outcome

201
Q

what is bounded self control?
(reasons consumers are irrational)

A

individuals lack the self control to act in what they see as their self interest

202
Q

what are the subsections of cognitive bias?
(reasons consumers are irrational)

A
  1. rules of thumb
  2. anchoring
  3. availability
  4. social norms
203
Q

describe rules of thumb as a subsection of cognitive bias

A
  • based on practice not theory,
  • not strictly accurate or reliable for situations
  • a rough guide
204
Q

describe anchoring as a subsection of cognitive bias

A

the human tendency to rely too heavily on the first piece of information offered

205
Q

describe availability as a subsection of cognitive bias

A

individuals tend to make judgements according to how easy it is to recall examples of similar events

206
Q

describe social norms as a subsection of cognitive bias

A

forms or patterns of behaviour considered acceptable by a society or group within that society

207
Q

what anchoring example does the exam board provide?

A

the previous price that the person paid for the product acts as an anchor

208
Q

what is altruism and perception of fairness?
(reasons consumers are irrational)

A

charitableness - economics says charity is irrational

209
Q

what is choice architecture?

A
  • different ways in which choices can be presented to consumers
  • and the impact of that presentation on consumer decision making
210
Q

what are the types of choice architecture?

A
  1. framing
  2. loss aversion
  3. nudges
  4. default choice
  5. mandated choices
  6. restricted choices
211
Q

what is framing?
(choice architecture)

A

how something is presented
influences the choices people make

212
Q

what is loss aversion?
(choice architecture)

A

peoples tendency to prefer to avoid making losses to acquire potential gains

213
Q

explain an example of loss aversion (choice architecture)

A

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

214
Q

what are nudges?
(choice architecture)

A

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

215
Q

what is default choice?
(choice architecture)

A

an option that is automatically selected unless an alternative is specified

216
Q

what is mandate choice?
(choice architecture)

A

people are required by law to make a decision

217
Q

give an example of a mandate choice

A

terms and conditions

218
Q

what is restricted choice?
(choice architecture)

A

offering people a limited number of options so that they are not overwhelmed

219
Q

what might happen if consumers have too much choice?

A

may make poorly thought out decisions or not make any decisions

220
Q

what are fixed costs?

A

doesnt vary with output

221
Q

what are variable costs?

A

varies directly with output

222
Q

what are semi variable goods?

A

possess characteristics of both FC and VC

223
Q

what is the equation for the average?

A

total divided by quantity

224
Q

what is the equation for the marginal?

A

addition to the total X of an additional unit

225
Q

what is the short term?

A

at least one factor of production is fixed

226
Q

what is the long term?

A

no factors of productions are fixed

227
Q

how can output be increased in the short run?

A

to employ more labour

228
Q

how can output be increased in the long run?

A

expanding the premisses

229
Q

define the total returns of labour

A

the number of goods you get from the labour

230
Q

define the average returns of labour

A

total output divided by the total number of workers employed

231
Q

define the marginal returns of labour

A

the addition to the total of an additional worker

232
Q

when is the total highest?

A

when marginal is 0

233
Q

what are the assumptions of the law of diminishing returns?

A
  • 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)
234
Q

define economies of scale

A

as the scale of production (output) of a firm increases, the long run average costs fall

235
Q

define internal economies of scale

A

cost saving resulting from growth within the firm itself

236
Q

define external economies of scale

A

cost saving resulting from the growth of the economy or market / industry of which the firm is a part of

237
Q

what is the mnemonic for the types of internal economies of scale?

A

Really Fun Mums Try Making Pies

238
Q

what are the types of internal economies of scale?

A
  • Research and development
  • Financial (banks and
    lending)
  • Marketing
  • Technical (machinery)
  • Managerial
  • Purchasing (bulk buying)
239
Q

complete the gap:
average costs per unit are ______________ for larger firms

A

spread out more

240
Q

what are the types of external economies of scale?

A
  • education
  • technology
  • research and development
  • infrastructure (transport and health)
241
Q

on a graph, what side of Q productive efficiency is diseconomies of scale?

A

right

242
Q

on a graph, what side of Q productive efficiency is economies of scale?

A

left

243
Q

on a graph showing external economies of scale, if you were to draw the point Q, what would that represent?

A
  • at the same output, costs have fallen
  • the firm is not producing more or less
  • its a result of the market / industry
244
Q

define diseconomies of scale

A

as the scale of production of a firm increases beyond productive efficiency, long run average costs rise

245
Q

what assumptions are made surrounding economies of scale?

A
  • the firm operates in the short run
  • all firms are rational
246
Q

what does it mean for firms to be rational?

A

they aim to maximise profits

247
Q

what kind of process is short run profit maximisation?

A

a two stage process

248
Q

what is step one of short run profit maximisation?

A

using marginal curves to arrive at the profit maximising output

249
Q

what is the simple profit maximising rule?

A

if profits are to be maximised, MR must be MC

250
Q

what is step two of short run profit maximisation?

A

using average curves to measure the size of the profit

251
Q

what is total revenue?

A

price x Q
= average revenue x Q

252
Q

what is total profit?

A

average profit x Q

253
Q

what are the causes of diseconomies of scale?

A
  • communication
  • control
  • coordination
254
Q

what firms wont have a ‘U’ shaped LRAC curve?

A

natural monopolies - extremely large firms

255
Q

what is an example of natural monopoly?

A

national grid

256
Q

describe a non ‘U’ shaped LRAC curve

A

the fixed costs are so large productive efficiency and diseconomies of scale wont be met

257
Q

define the minimum efficient scale (MES)

A

the lowest output which the firm is able to produce at the minimum achievable LRAC

258
Q

how does a high MES act as a barrier to entry?

A
  • 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
259
Q

what does MES stand for?

A

minimum efficiency scale

260
Q

complete the sentence :
natural monopolies ______ reach _______

A

never reach MES

261
Q

on a returns to scale graph,
what is on the left side of constant returns to scale?

A

increasing returns to scale

262
Q

on a returns to scale graph,
what is on the righ side of constant returns to scale?

A

decreasing returns to scale

263
Q

define increasing returns to scale

A

where an increase in factor inputs leads to a more than proportional increase in output

264
Q

define decreasing returns to scale

A

where an increase in factor inputs leads to a less than proportional increase in output

265
Q

what is the difference between increasing returns to scale and economies of scale?

A
  • economies of scale is about cost saving that arise from factor inputs
266
Q

what does the cost curve envelope show?

A

diminishing returns in the short run and economies of scale in the long run

267
Q

describe a cost curve envelope

A
  • the red curves represent a different premisses
  • the LRAC curve is made up of the points of productive efficiency of the SRAC curves
268
Q

what is technological change otherwise known as?

A

dynamic efficiency

269
Q

describe dynamic efficiency / technological change

A
  • long run concept
  • requires a supernormal profit
270
Q

what are the terms technological change / dynamic efficiency used to describe

A
  • the overall effect of invention or innovation
  • and the diffusion or spread of technology in the economy
271
Q

what are the effects of technological change on methods of production?

A
  • a movement of job production towards batch and flow
  • specialisation
  • movement away from skilled labour (labour v capital intensive)
272
Q

evaluate the effects of technological change on methods of production
: movement away from skilled labour (labour v capital intensive)

A
  • skill and labour is still required
  • the more mechanised factories - more skilled labour
273
Q

what are the effects off technological change on the cost of production?

A
  • 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
274
Q

evaluate the effects of technological change on costs of production
: may lower the variable cost of labour

A

may be more skilled so cost more

275
Q

evaluate the effects of technological change on costs of production
: in the short run AFC rise (buy machines)

A
  • long run costs fall
  • firms benefit from tech econ of scale
276
Q

what is static efficiency?

A

stationary, still

277
Q

what are the types of static efficiency?

A
  • productive efficiency
  • allocative efficiency
278
Q

describe dynamic efficiency

A
  • requires supernormal profit
  • long run
279
Q

what does dynamic efficiency lead to?

A
  • the development of new products and processes
  • that improve productive efficiency
280
Q

what are the different types of efficiency?

A
  • static
  • dynamic
  • X
281
Q

define creative destruction

A
  • capitalism evolving and renewing itself overtime
  • through new technologies and innovations
  • replacing older ones
282
Q

revenue =

A

sales x price

283
Q

total revenue =

A

output x price

284
Q

average revenue =

A

revenue per unit

285
Q

marginal revenue =

A

addition to the total revenue of selling another unit

286
Q

what are the different types of profit?

A
  • normal
  • subnormal
  • supernormal
287
Q

define normal profit

A
  • the minimum profit a firm must make to stay in business
  • which is insufficient to attract new firms into the market
288
Q

what would economists include when working out a firms normal profit?

A

opportunity costs

289
Q

when does normal profit occur?

A

when AC = AR

290
Q

what profit occurs when AC > AR?

A

subnormal

291
Q

what profit occurs when AR > AC?

A

supernormal

292
Q

define supernormal profits

A

profits over normal profit

293
Q

in what ways can the government intervene in market failure?

A
  • taxes and subsidies
  • price control
  • advertising
  • legislation
  • do nothing
294
Q

what are indirect taxes?

A
  • expenditure tax
  • increases cost of production for a firm but can be passed on to consumers via higher prices

micro-economics (1 decks)

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