Year 12 Microeconomics Flashcards
What is a public good?
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)
What’s the difference between traditional economic theory and behavioural economic theory?
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.
Some biases of behavioural economics…
- Rules of thumb
- Anchoring
- Social norms
- Bounded rationality
How can governments use behavioural economic theory within their policies?
(Choice architecture)
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.
Define behavioural economics:
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.
How is YED calculated?
% change in QD /
% change in income
How is XED calculated?
% change in QD of A /
% change in Price of B
(Substitutes have a positive YED, and complements have a negative YED)
How is PED calculated?
% change in QD
divided by
% change in P
HINTSB
How is PES calculated?
% change in QS
divided by
% change in P
PSSST
Demand acronym…
P - Population
A - Advertising
S - Subsidies
I - Income tax
F - Fashion/trends
I - Interest rates
C - Complementary goods
PASIFIC
These SHIFT demand.
Supply acronym…
P - Productivity
I - Indirect taxes
N - No. of firms
T - Tech
S - Subsidies
W - Weather
C - Costs of production
PINTSWC
These SHIFT supply
PED acronym…
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
PES acronym…
P - Production lag
S - Substitutability of FoPs
S - Stock lvl
S - Spare capacity
T - Time period
PSSST
How can the demand and supply of oil be impacted?
- 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.
What can affect short-run oil supply?
Oil hs inelastic demand and supply.
- 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.
How does supply and demand affect housing?
- 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.
Define productivity…
Output per factor employed
Do fixed costs vary?
The costs of a firm
No, not in the short-run.
In the long-run, all costs are variable.
How are total costs calculated?
TC = TFC + TVC
How are avg costs calculated?
As well as AFC and AVC?
AC = TC / Q
AFC = TFC / Q
AVC = TVC / Q
AC is also known as ATC.
How do you calculate labour productivity?
Output / Total no. of workers
How is MC calculated?
(marginal cost)
Change in TC / Change in Q
What point is productively efficient?
MC is shaped like a Nike tick.
MC = AC
-> Also where lowest AC can be met.
MC falls then rises due to the law of diminishing reurns.
What marginal product, and its link with MC?
MP is the additional output from adding one extra factor input.
AS MP rises, MC falls and vice versa.
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).
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.
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
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…
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.
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.
When do SRAC curves move?
When ALL FoPs change.
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.
How is TR calculated?
TR = P x Q
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.
How is average revenue calculated?
AR = TR / Q
How is MR calculated?
(marginal revenue)
Change in TR / Change in Q
How is profit calculated?
TR - TC
TR = TC is profit and TR> TC is supernormal profit.
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.
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.
When is TR maximised?
When PED = -1 and MR = 0.
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.
TR at its maximum when MR = …
MR = 0
MR occurs at the midpoint of the AR curve
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.
What’s one thing the price mechanism does?
- Signals changes in price, demand and supply.
- e.g. high price may indicate high demand.
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.
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.
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.
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.
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.
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).
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
What causes upward/downward shifts on LRAC curves?
- External changes
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
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.
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)
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)
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.
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)
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.
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…
Define government failure…
- When governemnt intervention causes a misallocation of resources in a market.
