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AQA Economics > Year 1 Micro > Flashcards

Year 1 Micro Flashcards

1
Q

Reasons for the shape of the demand curve

A

Income effect: as price rises, the purchasing power of our income can’t go as far, they can’t buy the same quantity.
Substitution effect: as price rises, other goods are more price competitive, so they switch their consumption

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2
Q

Non-price determinants of demand:

A 
PASIFIC
Population
Advertising
Substitute's price
Income
Fashion/tastes
Interest rates
Complement's price
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3
Q

Reasons for the shape of the supply curve

A
  1. Firms have the objective of profit maximisation so as price rises, there is potential for higher profit if the firm sells more.
  2. As Quantity rises, costs of production rise, so price rises to cover this and this allows maintaining profit margins
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4
Q

Non-price shifters of supply

A

PINTSWC:
Productivity
Indirect Tax (as cop rises supply shifts left)
Number of firms
Technology: causes cop fall shifts s right
Subsidy: cop fall and encourages Q rise, S shifts right
Weather: if good shifts S right
Costs of production: if cop fall, s shifts right

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5
Q

What is the price mechanism?

A

ARSI:
Allocate scarce resources
Rations away excess D/S
Sends signals to producers that P are wrong
Provides incentives for producers to change P so to make more profit

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6
Q

What does the price mechanism lead to?

A

The perfect allocation of scarce resources

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7
Q

What was a famous economist’s name for the price mechanism?

A

Adam Smith called it the invisible hand as there is no government intervention

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8
Q

Compliment goods

A

Goods usually bought together

  1. A contraction in demand for one Causes
  2. A shift left in demand for the other
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9
Q

Substitute goods

A

Goods in competitive demand

Contraction in demand (1) causes shift right in demand (2)

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10
Q

Derived demand

A

Demand for a good or service which comes from the demand for something else
Shift right in demand (1) causes shift right in demand (2)

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11
Q

Composite good

A

Goods that require the same input.

Shift right in demand (1) causes shift left in supply (2)

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12
Q

Joint supply

A

As production for one increases, production for the other increases.
Shift right in demand (1) causes shift right in supply (2)

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13
Q

PED determinants

A 
SPLAT
Substitutability 
Percentage of income
Luxury/Necessity
Addictive
Time period
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14
Q

PED and TR

A 
EOIS
Elastic 
Opposite
Inelastic 
Same
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15
Q

Elasticity along the demand curve

A

Top half: elastic
Bottom half: inelastic
Midpoint: unit elastic

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16
Q

Determinants of PES

A 
PSSST
Production lag
Stocks
Spare capacity 
Substitutability of FOP
Time
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17
Q

Elasticity limitations

A
  1. Elasticity figures are only estimates: often data collected can’t be trusted, not reliable, data can be collected from competitors. Each firms is different, past data may be used but current consumer habits may have changed. Inaccurate. Unreliable. Change over time. Use it as a guide but not just it
  2. Assume ceteris paribus: lots of often factors affect D/S
  3. PED varies along the demand curve: business can’t change prices by some amount and expect the same change in QD
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18
Q

Indirect tax likeability

A

Consumers: have to pay more so don’t like it. Reduces CS, especially when D is price inelastic
Producers: don’t like tax, profits fall, lost PS, prefer when demand is inelastic because can pass on most of the tax to consumers.
Government: great way to gain income, earn revenue, if demand is inelastic may not have an negative impact on jobs

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19
Q

Subsidy market impact

A

Government: big cost to implement, need to work out opportunity cost of decision, where has the money come from? Can the government afford it.
Producers: love it, more revenue.
Consumers: saving money but if all subsidy was passed on to consumers would be paying even lower price so producers are keeping some, so don’t benefit fully from the subsidy

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20
Q

Minimum price

A

Government: intervention buys, high opportunity cost, popularity
Producers: revenues rise
Consumers: higher prices

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21
Q

Maximum price (price ceiling):

A

Government: deal with excess demand by shifting supply right, opportunity cost of subsidies, black markets may form so government failure.
Producers: prices fall, quantities fall, jobs fall
Consumers: price fall so happy

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22
Q

Allocative efficiency

A

Maximisations of society surplus: D = S
Maximisation of net social benefit: MSB = MSC
Resources perfectly follow consumer demand: D = S

23
Q

Allocative efficiency: assumptions

A 
Many buyers/sellers
Perfect information
No barriers to entry 
Firms profit maximise 
Consumers utility maximise
24
Q

Types of market failure

A
  1. Externalities
  2. Merit/demerit goods
  3. Public goods
  4. Common access resources (tragedy of the commons)
  5. Income inequality
  6. Monopoly power
  7. Factor immobility
25
Q

Merit goods

A

Goods deemed more beneficial to consumers than they realiseD imperfect information. Information failure and asymmetric information. Positive externalities in consumption
Healthcare, education and exercise are examples
Under-consumed/produced

26
Q

Demerit goods

A

Goods deemed more harmful to consumers than they realise. Imperfect information. Information failure and assymetric information
Negative externalities in consumption
Cigarettes, alcohol, gambling
Over-consumed/produced

27
Q

Public goods

A

Non-excludable: no price can be charged for the good (the benefits of consuming the good can’t be confined to the individual that had paid, also there is no cost efficient way to price)
Non-rival: the quantity of good doesn’t diminish upon consumption

Flood defences, road signs, street lights, roads, beaches

Free rider problem and missing market

Quasi public goods e.g. Roads and beaches

Roads could be excludable through toll booths and rival during peak times.

Beaches can be excludable if owned by a hotel and access only to them. Can be rival if heavily congested

28
Q

Common access resources - tragedy of the commons

A

Common access resources: natural resources over which bi private ownership has been established
E.g forests, seas, air
Lack of private ownership leads to the tragedy of the commons
Self interest & resource depletion.

29
Q

Government failure

A

When the costs of intervention outweigh the benefits of intervention

The end result is a worsening of the allocation of scarce resources harming social welfare

Information failure: valuing externalities, the right level of policy required
Admin and enforcements costs very high: regulation, subsidies, state provision, price controls
Regulatory capture: when regulating monopoly power
Unintended consequences: black markets, impact on poor, impact on firms, employment, firms dependent on subsidies and wasteful, state provision unintended consequences of excess demand

30
Q

Indirect tax and market failure

A

Indirect tax increases a firms’ costs of production but can be transferred

Increases costs of production, internalised externality (polluter pays), solves overconsumption/production, promoted allocative efficiency whilst generating government revenue

31
Q

Indirect tax evaluation

A
  1. Price inelastic demand
  2. Setting tax at right level
  3. Regressive
  4. Black markets
  5. May impend on freedom of choice when no market failures action needed
32
Q

Subsidy

A

Money grant given to producers by the government to Lowe costs of production and encourage an increase in output

Lower costs of production, lowers price and raises quantity, solves underconsumption/production which gives allocative efficiency and a welfare gain

33
Q

Subsidy evaluation

A
  1. Cost (opportunity cost, debt may be needed, future tax rises).
  2. Setting subsidy at the right level
  3. How will firms use subsidy? May deleverage, save, greater dividends, greater wages.
  4. Price inelastic demand
  5. LR dependency on subsidies
34
Q

Regulation

A

Rule/law enacted by the government that must be followed by economic agents to encourage a change in behaviour

Non market based approach
Command/control approach: commands; bans (public smoking ban), limits (age limits on buying alcohol), caps (emission caps, fishermen capped on number of fish they’re allowed to take out of the sea), compulsory (graphical imagery on cigarettes, vaccinations), innovative regulations (deposit recycling scheme, where we pay a little bit more for buying a plastic bottle, only get money back if we recycle. Beijing road space rationing policies before 2008 Beijing controls).
Controls: enforcement (otherwise no one will follow), punishment (fine, bad publicity, jail term etc incentive to follow it).
If both command and control strong
Incentive to change behaviour
Solve issues in free market
Allocative efficiency & welfare gain

35
Q

Regulation evaluation

A
  1. Cost: administration and enforcement
  2. Setting the right regulation: too strict: increasing costs, reducing profitability which causes firms to leave country, reduce production and so UE, maybe shutdown
  3. Black markets & unintended consequences: if strict on consumers look for alternative S or smuggle, loss of tax revenue and need policing. Also firms try to cheat regulation if too strict. If too relaxed won’t be enough incentive to see change to solve market failure
  4. Equity: pollution caps may be unfair as hard to reduce pollution. Maybe tradable pollution scheme better
  5. Very forceful by the government, lack of freedom, choice and liberty. Especially if market failure not significant
36
Q

State (direct provision)

Benefits

A
  1. Resource allocation improves
  2. No price exclusion (as free)
  3. All social benefits are likely to be considered
37
Q

State (direct) provision costs

A
  1. Huge opportunity cost
  2. State run organisations tend to be wasteful
  3. Ignores the private sector (could reduce quality, innovate, improve quality).
38
Q

State (direct) provision evaluation

A
  1. How do we ration excess D? Normative judgement. Waiting list, first come first serve, severity of condition (if healthcare). Maybe bring in the private sector, reduce the issue.
  2. The level of Q provided: does the government know the socially optimum level of production.
  3. Costs high, are benefits really >?
  4. If excess demand still exists, are you really doing a good job?
  5. Some healthcare services maybe provided by private sector e.g. Cosmetic surgery, dental implants.
39
Q

Tradable pollution permits

A

Government sets level of pollution allowed
Permits are issued to match this level
If permits aren’t used, they can be sold
If a firm breaks the pollution limit they’re fined

40
Q

Tradable pollution permits pros

A
  1. Incentive to reduce pollution (can sell permits for profit).
  2. Reduces level of pollution to socially optimum level. Welfare increases, allocative efficiency increases. Q = Q*
  3. Market based solution
  4. Efficient & equitable for firms
41
Q

Tradable pollution permits cons

A
  1. Deciding level of pollution allowed
  2. High admin costs & difficult to enforce
  3. Finds may not be strict enough
  4. Geographical distribution (e.g Kyoto protocol concentrated in USA)
  5. New for international cooperation (otherwise market failure won’t be solved).
42
Q

Tradable pollution permits evaluation:

A
  1. Level of information (if it doesn’t know the socially optimum of pollution is).
  2. Number of firms who are able to reduce pollution (if not enough permits allocated; inefficient. Firms find it too costly and hard to reduce pollution, so not many spare permits sold on, costs may be so high that may drive firms out of business or move elsewhere which may cause government failure).
43
Q

Minimum prices (price floors)

A

Used to discourage negative externalities in consumption, e.g minimum price of alcohol in Scotland. Causes q fall, externality internalised, allocative efficiency

44
Q

Min price cons

A
  1. Price inelastic demand (so P goes up Q doesn’t fall much and doesn’t solve market failure). Producers will see an increase in revenue and won’t be punished (eval)
  2. Regressive (burdens the poor and can widen income inequality).
  3. Black markets (if individuals suffering from P high. Could find alternative suppliers in the black market. Dangerous. Who knows about the quality of what they’re buying?) may make situation worse. E.g Scotland may go buy from England (smuggling) tax revenue may also be lost as buying from illegal sources
  4. Set at right level? If too high and going further than internalising the externality, firms may leave country or shutdown, may cause UE. If too low then quantity may not decrease to the socially optimum level and may not internalise the externality
    Can’t talk about excess supply, as producers won’t produce extra thinking the government will buy it. So produce level of Q demanded
45
Q

Maximum price (price ceiling)

A

For merit goods to encourage consumption

Encourages equity and more consumption e.g rented accommodation in New York and Berlin

46
Q

Max price cons

A
  1. Shortage (e.g bad Venezuela. So if rented accommodation massive excess demand, government failure).
  2. Black markets (may be exploited by landlords in black market who exploit in terms of price and quality).
  3. Enforcement (in Berlin big issue)
  4. Setting the right level (if too low excess demand massive if too high then no promotion of equity and greater consumption).
  5. Cost (if governments not happy with shortage and want to increase S, can be costly may subsidise, may produce own housing).
    Also contraction in S bad as likely to see more producers building luxury apartments instead of cheap rented accommodation knowing P is too low, just drives out lower income households in a city
47
Q

Property right and market failure

A

As nobody owns them Incentive to exploit common access resources.

So if private producer owns part of the forest, now has incentive not to exploit as they’ll suffer). Also if trespassing can sue.

Negative externalities internalised

If enforced, will reduce quantity to the socially optimum level. No depletion of resources!!

48
Q

Property rights cons

A
  1. Can property rights be efficiently distributed? (If air or sea can’t cut them up).
  2. Enforcement needed. Cost (what if government can’t afford. Mass trespassing, scheme breaks down).
  3. Equity, who gets the rights? E.g chemical producer and villagers want river. If villagers get it and chemical producer wants to use river then has to pay, may not be good as may be employing them. May be paying a lot of tax revenue to local council to help the villagers. If chemical producer gets vice versa and villagers may not be able to afford). Whoever gets the rights has the power. Maybe a third party e.g government agency that maintains the river’s quality can issue the rights and maintain equity
49
Q

Specialisation

A

The concentration of a worker, firm, region or country to produce a narrow range of goods and services.

E.g Champagne region specialised in champagne. U.K. In services.

Requires trade to be successful (as can trade in stuff we don’t specialise in). We also need monetary payments between agents.

This reduces the problem of scarcity because use the scarce resources available to them. Don’t worry about not producing imports

50
Q

Specialisation pros

A
  1. Larger range of goods and services available: if lots of firms specialise in an economy, altogether lots produced. E.g Dyson specialised in vacuums but produces a big range of them.
  2. Greater output and greater quality
  3. Trade and growth: as economies specialise, they’ll benefit. Trade rises, more will be exported. As trade more, grows, meaning living standards grow.
51
Q

Specialisation cons

A
  1. Finite resources: if a country specialises heavily on a resource, what happens if it runs out? Nothing to produce
  2. Over-reliance on good weather: if specialise in tourism sector, bad weather bad. Also food producer the same.
  3. Change in tastes and fashions
  4. National interdependence: as countries specialise, countries become more closely linked. What if relations break down? What if a war prevents imports? Political problems so trade restricted
  5. De-industrialisation: UK specialised in manufacturing, what if another country can do it better e.g China. UK manufacturing slump. Unemployed resources and labour. Cost to economy.
52
Q

Division of labour

A

Occurs when specialisation has taken place where the production process is broken down into separate tasks

Firms split the labour into different production lines, different workers will be allocated to them. Instead of producing a football, produce a bit of the football.

53
Q

Division of labour pros

A
  1. Workers get good at their job, they improve and feel valued: knowing how important they are and how good they are at their job
  2. Production increase; as workers get good produce more in a time period, productivity rises.
  3. Time savings - production lines
  4. Cost effective capital for workers: using capital good idea to productive workers
  5. Consumers will benefit via lower prices: as productivity rises, S rises, COP reduces. P falls
54
Q

Division of labour cons

A
  1. Boredom: in long-term. Workers feel De-valued. Not gaining promotions or having more responsibilities. Quality suffers
  2. Payments are low: workers treated poorly
  3. Working conditions are poor and hours worked are long: slightly exploited
  4. Too much reliance on other countries: maybe in terms of getting in labour and need labour from a certain country may want low-skilled labour. Heavily reliant on their labour force. What if forced to leave. If producing a product that you export, what if relations between importers breaks down? Labour unemployed! How will they find another job??

AQA Economics (6 decks)

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