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Year 12 Microeconomics Flashcards

1
Q

What is a public good?

A

A good that leads to market failure, and this depends on whether it is non-excludable, non-rejectable or non-rivalrous

(e,g a good that is non-excludable and non-rivalrous)

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2
Q

What’s the difference between traditional economic theory and behavioural economic theory?

A

Behavioural:
-> Many factors which restrict consumers’ ability to be rational.
-> e.g. asymmetric informatin, processing data, time available.
Traditional:
-> Economic agents are utility maximisers and are rational.

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3
Q

Some biases of behavioural economics…

A
  • Rules of thumb
  • Anchoring
  • Social norms
  • Bounded rationality
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4
Q

How can governments use behavioural economic theory within their policies?

(Choice architecture)

A

Default option - Individuals more likely to select the ‘default option’, e.g. automatic enrolment into a scheme
Framing - Presenting a choice to make it seem more appealing e.g. £1 daily as opposed to £7 weekly.
Nudges - Nudge people into decisions e.g. smoking areas do not ban smoking completely, but can nudge people into quitting.
Restricted choice - People’s choices being restricted e.g. less options
Mandated choice - People have to and must make a decision.

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5
Q

Define behavioural economics:

A

This looks at social, psychological and emotional factors made involved decision-making to try and gain a more accurate idea of how economic agents act.

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6
Q

How is YED calculated?

A

% change in QD /
% change in income

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7
Q

How is XED calculated?

A

% change in QD of A /
% change in Price of B

(Substitutes have a positive YED, and complements have a negative YED)

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8
Q

How is PED calculated?

A

% change in QD
divided by
% change in P

HINTSB

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9
Q

How is PES calculated?

A

% change in QS
divided by
% change in P

PSSST

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10
Q

Demand acronym…

A

P - Population
A - Advertising
S - Subsidies
I - Income tax
F - Fashion/trends
I - Interest rates
C - Complementary goods

PASIFIC

These SHIFT demand.

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11
Q

Supply acronym…

A

P - Productivity
I - Indirect taxes
N - No. of firms
T - Tech
S - Subsidies
W - Weather
C - Costs of production

PINTSWC

These SHIFT supply

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12
Q

PED acronym…

A

H - Habit forming
I - Income proportion (How much of your income it takes)
N - Necessity v luxury
T - Time between switching between products ( elastic (short-run) and inelastic (long-run).
S - Substituability
B - Brand loyalty

HINTSB

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13
Q

PES acronym…

A

P - Production lag
S - Substitutability of FoPs
S - Stock lvl
S - Spare capacity
T - Time period

PSSST

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14
Q

How can the demand and supply of oil be impacted?

A
  • Rise in living standards can increase oil demand, and vice versa.
  • Value of the US dollar, if their value is low, demand for oil will rise as it will become cheaper.
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15
Q

What can affect short-run oil supply?

Oil hs inelastic demand and supply.

A
  • Supply-side shocks e.g. war.
  • This will cause inflation, leaving less disposable income.
  • This will mean less tax receipts for the govt, making oil more pricey and this will lower supply.
    -> This budget deficit may lead to a BoP deficit due to not enough money to make imports.
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16
Q

How does supply and demand affect housing?

A
  • Housing price is mainly determined by demand factors e.g. high living standards and consumer confidence can cause a rise in demand for houses.
  • Short-run PED and PES for housing are inelastic
  • If house prices rise, and many houses are bought, this will up people’s assets, increasing consumer confidence + investment.
  • Also, more construction jobs will be available.
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17
Q

Define productivity…

A

Output per factor employed

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18
Q

Do fixed costs vary?

The costs of a firm

A

No, not in the short-run.

In the long-run, all costs are variable.

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19
Q

How are total costs calculated?

A

TC = TFC + TVC

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20
Q

How are avg costs calculated?

As well as AFC and AVC?

A

AC = TC / Q
AFC = TFC / Q
AVC = TVC / Q

AC is also known as ATC.

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21
Q

How do you calculate labour productivity?

A

Output / Total no. of workers

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22
Q

How is MC calculated?

(marginal cost)

A

Change in TC / Change in Q

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23
Q

What point is productively efficient?

MC is shaped like a Nike tick.

A

MC = AC
-> Also where lowest AC can be met.

MC falls then rises due to the law of diminishing reurns.

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24
Q

What marginal product, and its link with MC?

MP is the additional output from adding one extra factor input.

A

AS MP rises, MC falls and vice versa.

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25
Define the law of diminishing marginal returns... | Only applies in the short-run.
When a variable FoP rises, and other FoPs stay the same, the extra output is MP. | (marginal product).
26
Law of diminishing returns
- Eventually, continously adding units of one FoP will limit addiional output and MP fall as input rises. | Only applies in the short-run.
27
What are some internal economies of scale? | EoS are the cost advantages of production on a large scale.
* Managerial * Risk- bearing * Financial * Technical * Marketing * Purchasing
28
What are some external EoS? | EoS are the cost advantages of production on a firm.
- Public transport improvement + Road network/railway network improvement - Qualifications can be offered to big local employers. | Can lead to monopoly power...
29
Some diseconomies of scale... | (Internal and external)
Internal: -> Loss and wastage -> Miscommunication -> 'Them and us' - Different interests between different parts of the firm. External: -> Raw material price may rise due to high demand.
30
How can high fixed costs create large EoS?
-> Expensive equipment can be effective at reducing cost for producing each unit e.g. robot-based assembly lines.
31
When do SRAC curves move?
When ALL FoPs change.
32
What do external changes cause on a curve?
* This causes LRAC to shift up or down -> Up during diseconomies of scale due to production costing more, and vice versa.
33
How is TR calculated?
TR = P x Q
34
The 3 increasing returns to scale are... | These describe the effects of increasing production
- Increasing, constant and decreasing. | LRAC is minimised at the MES, where the lowest possible AC can be met.
35
How is average revenue calculated?
AR = TR / Q
36
How is MR calculated? | (marginal revenue)
Change in TR / Change in Q
37
How is profit calculated?
TR - TC | TR = TC is profit and TR> TC is supernormal profit.
38
Why does a price-taker have a perfectly elastic demand curve? | (Firms)
- If the firm's price rises, quantity sold would be zero, and a firm would not lower their price they can sell at a higher price.
39
Why does AR = MR on a price taker? | Perfectly elastic!
- All units sold bring in the same revenue as eachother, making it equal. - Total revenue rises in line with sales when average revenue is constant.
40
When is TR maximised?
When PED = -1 and MR = 0.
41
Name some of a firms objectives... | (Firms' objectives)
-> **Profit maximisation** (may be an objective for the **long-run**) -> **Revenue maximisation** (may be an objective for a new firm in the short-run) where** MR = 0** ->** Sales maximisation** where AR = AC (Highest output level in the long-run and **higher than this would cause a loss.** -> Maximising profit in the long-run would mean giving up short-run profit.
42
TR at its maximum when MR = ...
MR = 0 | MR occurs at the midpoint of the AR curve
43
What is the divorce of ownership from control, and what can it lead to?
-> Where those deciding the conduct of a firm are those who own it, due to different shareholders. -> This can lead to the principal-agent problem, a shareholder pays an agent to act in their interests, but instead, the agent acts in their own self-interest.
44
What's one thing the price mechanism does?
- Signals changes in price, demand and supply. - e.g. high price may indicate high demand.
45
Define consumer surplus and producer surplus:
* Consumer surplus is when a consumer pays less for a good then the amount they were prepared to pay for it. * Producer surplus is when a producer receives more than the price they were willing to accept. -> Consumer surplus above equilibrium and producer surplus below equilbrium.
46
Define market failure...
This occurs when there's a misallocation of resources within a market, and leads to society suffering as a result. | MPB, MSB,overconsumption, etc.
47
What is a public good?
- A public good is used collectively and leads to market failure - e.g. firework displays or lighthouses. - The main traits a public good has are that its non-excludable and non-rivalrous, and maybe non-rejectable. - Some goods may be a quasi-public good, as they contain traits of a private and public good. - e.g. terrestrial TV is excludable, but non-rivalrous and rejectable. | Private goods are excludable as they require payment.
48
Pros and cons of subsidies...
- Can support domestic industry, and may be able to exploit EoS. - Subsidising a merit good will make it cheaper and increase demand for it. - However, oppoptunity cost, can cause inefficiency within production.
49
Pros and cons of setting maximum prices: | (Price controls)
- Allows more people to purchase a good, reducing income inequality - Prevent monoplies from exploiting consumers. - HOWEVER, rationing scheme may be required to limit consumption, and excess demand can create a black market.
50
Pros and cons of min. prices | (Price controls)
- Can limit consumption of demerit goods e.g. cigs - Can restrict monopsony power. - HOWEVER, opportunity cost and destroying excess goods is a waste of resources. | (A monopsony is a single buyer).
51
What are some factors of govt. failure/govt. intervention?
-> Conflicting policy objectives -> 'Red tape' may decrease supply and demand due to lengthy process of purchase. -> Market distortions e.g. producers will overproduce if they're guaranteed a min.price. -> Regulatory capture. -> Administrative costs in attaining information. -> Costs could be used for other things. -> Unintended consequences e.g. People avoiding insurance or tax evasion
52
What causes upward/downward shifts on LRAC curves?
- External changes
53
Define market failure...
- When a misallocation of resources occurss, causing society to suffer as a result. - Complete market failure means no market exists e.g. national defence. - Partial market failure when the price of quantity supplied of the good/service is wrong
54
Define consumer surplus and producer surplus...
Consumer surplus - When a consumer pays less than the amount that they're prepared to pay for it. Producer surplus - When a producer receives more for a product than the price they're willing to accept.
55
What is a normal good?
- A good that whicjh people demand more of if their real income rises. - This will cause the demand curve to shift right | (e.g DVDs)
56
What is an inferior good?
- A good which people will demand less of if their real incomes rises. - This will cause the demand curve to shift left. | (e.g. cheap clothing)
57
What is derived demand?
- Demand for a good or FoP used in making another good or service. - e.g. rise in demand for fencing will boost demand for wood.
58
What are complementary goods?
- Goods that are often used together, e.g. strawberries and cream - A rise in strawberries' prices, strawberries' demand will fall, and cream demand will fall. | (These goods are in joint demand)
59
What are substitute goods?
- Goods that are alternatives to eachother e.g. beef and lamb - A rise in price of one good will lower the demand for it and will boost demand for the substitute, and vice versa.
60
Objectives of firms...
- Profit max. (MC = MR) - Revenue max. (MR = 0) - Sales max. (AR = AC) - Profit may be JUST a LONG-TERM objective - Other objectives involve benefit to society etc...
61
Define government failure...
- When governemnt intervention causes a misallocation of resources in a market.

Economics (16 decks)

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