All Micro Theme 1 Flashcards

Question

Depreciation | Definition

Answer 1

The loss in value of an asset overtime

Answer 2

Demand is defined as the quantity of a good or service that consumers are **WILLING AND ABLE** to buy at any particular price.

Answer 3

The substitution effect is if the price of a good goes up, a consumer then switching to an alternate cheaper option

Answer 4

The income effect is where the price of a good rises so that a consumer can't buy as many units of a good as before

Answer 5

That all the other factors that affect demand are unchanged

Answer 6

“ceteris paribus”

Answer 7

* Changes in consumer income * The price of substitutes * The price of complements * The degree of advertising of the product * Tastes and preferences * Population size and structure * Cost and availability of credit * The quality of the product

Answer 8

Substitutes are two goods/services in competitive demand

Answer 9

Complements are two goods/services in joint demand

Answer 10

Normal goods increase in demand whenever there is a rise income and vise versa

Answer 11

With inferior goods a rise in income will lead to consumers buying fewer of them and a fall in income will lead to a rise in demand

Answer 12

* Individual - quantity that a consumer is willing and able to buy * Market - quantity bought by all consumers * Joint - when goods are bought together * Competitive - when 2 goods are rivals * Derived - when the demand for production increases because of the the product

Answer 13

The repeated observation that the quantity demanded of a good or service varies indirectly with its price

Answer 14

A measure of consumer satisfaction or consumer welfare

Answer 15

The total accumulated satisfaction from the consumption of a good or services

Answer 16

The extra satisfaction from the consumption of one more unit of a good or service

Answer 17

The repeated observation that consuming successive units of goods leads to a decreasing amount of extra satisfaction

Answer 18

The difference between the price that a consumer is willing and able to pay for a good or service and the market price that they actually pay

Answer 19

Any arrangement by which buyers and sellers come together to exchange goods or services which are scarce and can therefore be priced.

Answer 20

* A “free” market is one that is free from government interference or intervention. * Producers and consumers would not face taxes, subsidies or any other form of regulation. * They would be free to trade at a price and output level that was mutually beneficial.

Answer 21

* Negatively sloped, indirectly proportional * As the price increases quantity falls * Demand down

Answer 22

The quantity of a good or service that a firm is willing and able to produce at any given price level

Answer 23

* Producers are the risk takers. * Economists generally assume that firms exist to make a (maximised) profit. * The risk involved in production is that producers have to hire and pay for the factors of production before they sell the finished product. * If they have misjudged consumer demand it is possible that they will make a loss.

Answer 24

Profit = total revenue - total costs

Answer 25

* Supply to the sky * Directly proportional, positively sloped * Higher price creates a higher profit incentive and makes firms more willing and able to bring output to the market.

Answer 26

* The cost of production * The government * Productivity changes * The weather * Joint supply * Competitive supply

Answer 27

A tax is a compulsory levy on an individual or firm by the government.

Answer 28

A subsidy is a grant given to an individual or firm by the government. | Be aware that there is also consumer subsidies

Answer 29

Productivity is a measure of the rate of change of output e.g. output per worker or output per hour.

Answer 30

Producer surplus is defined as the difference between the minimum price a producer would be willing and able to accept to supply a good/service and the actual market price that they are paid

Answer 31

* A percentage or ad valorem tax is one whereby the tax is based on the value of the good being sold. * This will cause a pivoting/rotating shift of the supply curve with a greater divergence at higher prices

Answer 32

* A specific or unit tax is one whereby the tax is the same regardless of the price/value of the good in question. * This will cause a parallel shift in the supply curve

Answer 33

Where the demand and supply curves meet if plotted together to maximise consumer surplus and producer surplus

Answer 34

In a market free from government intervention prices are determined by the interaction of market forces at the point where demand equals supply.

Answer 35

Surpluses occur in a market when there is excess supply at any given price. Surpluses occur when prices are set above equilibrium. Markets are likely to remove surpluses quickly by reducing prices.

Answer 36

Shortages occur in a market when there is excess demand at any given price. Shortages occur when prices are set below equilibrium. Markets are likely to remove shortages quickly by raising prices.

Answer 37

* The demand curve will shift rightwards from D to D1. * At the original price p there is now excess demand. To remove this shortage, price must rise to a new equilibrium at p1. * The higher price gives firms a greater incentive to produce and this results in an extension up the supply curve. * The result is a new equilibrium in the market with a higher quantity traded at q1.

Answer 38

* The supply curve will shift rightwards from S to S1. * At the original price p there is now excess supply. To remove this surplus price must fall to a new equilibrium at p1. * This lower price gives consumers a greater incentive to buy and this results in an extension down the demand curve. * The result is a new equilibrium in the market with a higher quantity traded at q1.

Answer 39

* The demand curve will shift leftwards from D to D1. * At the original price p there is now excess supply. To remove this surplus price must fall to a new equilibrium at p1. * This lower price means firms have a lower incentive to produce and this results in a contraction down the supply curve. * The result is a new equilibrium in the market with a lower quantity traded at q1.

Answer 40

* The supply curve will shift leftwards from S to S1. * At the original price p there is now excess demand. To remove this shortage price must rise to a new equilibrium at p1. * This higher price means consumers are less willing and able to buy and this results in a contraction up the demand curve. * The result is a new equilibrium in the market with a lower quantity traded at q1.

Answer 41

* If both demand and supply conditions are changing at the same time then it is the relative size of the two shifts that determine the final effect on the price and output in the market. * Huge opportunity to make evaluation. Be brave and state which effect you think is likely to be stronger and why.

Answer 42

Elasticity is a measure of sensitivity or responsiveness.

Answer 43

Price elasticity of demand measures the sensitivity of the quantity demanded of a good or service following a change in its price

Answer 44

* Price elasticity of demand * Income elasticity of demand * Cross elasticity of demand

Answer 45

Income elasticity of demand – this measures the sensitivity of consumer demand to a change in consumer income.

Answer 46

Cross elasticity of demand – this measures the sensitivity of the demand for one good following a change in the price of another good/service

Answer 47

* The % change is huge * Very sensitive to change in the price * Almost horizontal

Answer 48

* Demand is unresponsive * % change is quite small * Nearly vertical

Answer 49

* The number of close **substitutes** * Whether the good is a **necessity or a luxury** * The **proportion of income** spent on the good * The **time** period

Answer 50

* How easily a consumer can switch away from a good/service * May involve switching brands, however brand loyalty comes into place * Relies on the demand for a product or the particular brand

Answer 51

* If the good is a necessity then a price rise won't affect the demand that much * If a luxury a price change can have a huge impact on demand * Changes based on the situation necessity for some people might be a luxury for others * Addiction also means that something will feel more necessary

Answer 52

* A lowly priced good will still be bought because it doesn't have a huge impact * A 10% increase for a heating bills is much more significant than for a salt increase

Answer 53

* In the short term demand will be price inelastic due to brand loyalty * In the long term people will switch brand to cheaper options

Answer 54

Percentage change in quantity demanded / percentage change in price

Answer 55

* PED<1 then the good is price inelastic * PED>1 then the good is price elastic

Answer 56

When the PED=0

Answer 57

Unitary elastic

Answer 58

Q/p | To help remember how to calculate PED

Answer 59

Curve is like a curvy L (hyperbola) and has asymptotes on both axis

Answer 60

* Elasticity can change along the curve * When the price is high usually the demand is price elastic * When the price is low usually the good is price inelastic

Answer 61

* Elasticity varies along the length of most demand curves * Like a sock a demand curve is more elastic at the top

Answer 62

* Are usually estimates * Likely to be unreliable becuase of data inaccuracies * They can change at any time so require constant remeasuring * If close to 1 then could be inelastic or elastic so unreliable as a price change could have a huge impact

Answer 63

* A tax that is placed on the producer * Raises production costs, lowers profit incentive, supply curves shifts left * The firm can choose to accept the value of the tax or they can pass it onto the consumer * Tax measured by the vertical distance between S and S1 (AB) * Tax absorbed by consumer is AC in the form of higher prices * Tax absorbed by the producer is BC * If the demand curve is perfectly inelastic then the enitre value of the tax is passed onto consumers

Answer 64

Income elasticity of demand measures the sensitivity of the quantity demanded of a good or service following a change in consumer income

Answer 65

Cross elasticity of demand measures the sensitivity of consumer demand for one good following a change in the price of another good.

Answer 66

Any positive answer is a normal good

Answer 67

Any negative answer is an inferior good

Answer 68

If the YED or XED is elastic or greater than one then it is a luxury

Answer 69

If the YED or XED is less than one or inelastic it is a luxury

Answer 70

%changeQd/%changeY | Y means income

Answer 71

%changeQd of B/%changep of A

Answer 72

Compliments

Answer 73

Substitute

Answer 74

* Between 0 and 1 means a weak relationship * Between 1 and infinity means a strong relationship

Answer 75

* Goods which are necessities for some people might be luxuries for other people * Also could **change with time** as a luxury 20 years ago could be a necessity now * YED will also **vary** within a product **range** * Usually an **estimate** and not always reliable or accurate

Answer 76

Price elasticity of supply measures the responsiveness of the quantity supplied of a good or service following a change in its price.

Answer 77

%changeQs/%changep

Answer 78

* Positive sign is expected because usually as price increases so does the supply due to a higher profit incentive * Negative - backward bending - labour markets

Answer 79

* Shallow and flat * Range between 1 and infinity

Answer 80

* Range between 0 and 1 * Steeper supply curve

Answer 81

* PES = 0 * Fixed supply at all prices * Fixed capacity venue * One-offs - mona lisa, limited edition

Answer 82

* Infinte supply * PES = infinity * No supply at any other price * Perfectly competitive labour market

Answer 83

* Time * Stock levels * The nature of the good * Availability of labour and other factors of production

Answer 84

Some goods can be made quickly and cheaply so that supply is very responsive whilst other goods that take time to produce will have much more inelastic supply. This time lag in production is also a factor in farming when there is a particular growing period for a crop.

Answer 85

The longer a firm has to adjust its supply potential, the more price elastic it will be. Remember it takes time for a firm to recruit new workers and buy in more raw materials, capital and open up new factories or offices. In the short run supply is likely to be very inelastic (possibly even perfectly inelastic) but in the long run the supply potential will be much more responsive to price changes.

Answer 86

Firms that carry large levels of stock will be well placed to increase supply quickly if there is a sudden increase in demand, making supply price elastic. Firms that operate with low or no stock levels will find it more difficult to respond quickly if there is a rise in demand and supply will be more price inelastic.

Answer 87

* If the economy is working at, or close to, **full employment** then it will be difficult for firms to expand their workforce following an increase in demand for their output. This will make their supply much more inelastic and vice versa * Firms may still be restricted in their ability to quickly increase output if there is a **shortage of skilled labour** even during periods of generalised unemployment. * Often it is a **shortage of capital** that can hold back production. If it takes time to borrow money, source new capital, order it, install it and embed it into the production process then supply will be relatively price inelastic.

Answer 88

The ability of a firm to respond to a rise in demand depends on its ability to increase its employment of the relevant resources. Supply will be more price elastic and responsive if resources shift easily (substitute) between different activities.

Answer 89

* The signalling function * The incentive function * The rationing function

Answer 90

* Prices provide information to buyers and sellers about the scarcity of a good or service * Falling prices signal that there is excess supply (surplus) * Rising prices signal that there is excess demand (shortage)

Answer 91

* Higher prices incentivise new firms to enter the market * Lower prices reduce the incentive to continue supplying the market * The incentive function refers to movement up or down a supply curve * Extention up supply curve - profit incentive * Contraction down the supply curve - disincentive

Answer 92

* If there is a shortage prices rise to a level that eliminates those not willing or able to pay the higher price * If there is a surplus prices will fall until more customers are attracted into the market * The rationing function refers to movements along the demand curve * Extention up the demand curve - more rationing * Contraction down the demand curve - less rationing

Answer 93

* Incentive function encourages an extention up the supply curve * Rationing function inspires an extention up the demand curve * The shortage is the signal function

Answer 94

* Disincentive function encourages a contraction down the supply curve * Less rational pressure inspires a contraction down the demand curve * The surplus is the signal function

Answer 95

* What to produce? - consumer sovereignty * How to produce it? - Competition * For whom to produce? - Price mechanism

Answer 96

* Private firms compete to meet the demands of consumers * Firms that meet the demands gain the highest profit * The consumer has all the power * Resources are transferred from declining to expanding industries * Workers follow the wage signals same with landowners * Adam Smith - "the invisible hand of self-interest"

Answer 97

* Firms are motivated by profit * Firms want to reduce production costs and increase revenue * Firms that combines its resources in the most cost effective manner will gain more profit than rivals * Lower prices mean that one firm can attract customers from the other firm * Resources will flow to the more efficient resource user

Answer 98

* Goods are priced according with their relative scarcity * Firms are encouraged to sell at equilibrium price * Prices act as the rationing function because only those that are willing and able to buy will pay meaning that supply equals demand * The consumers that are least willing and able to pay are eliminated from the market

Answer 99

* Alters the disposable income of the buyers and therefore shifts the demand curve * e.g. income tax

Answer 100

* An external effect or externality is one which affects an outsider who is not involved in either buying or selling the good or service. Externalities are often referred to as third party or spillover effects * Externalities can be either positive or negative and can occur at the point of production or the point of consumption

Answer 101

* If a trade takes place between a buyer and a seller in such a way that only these two “parties” are affected we say that all the costs and benefits are private and internal * Trade only takes place if there is a mutual benefit to both parties. This trade will be allocatively efficient since it makes both parties better off and therefore increases social welfare.

Answer 102

The price/money paid

Answer 103

Costs of production

Answer 104

* A rational buyer of a good will go through with the purchase if he believes that there will be a net benefit to him * Marginal private benefit - extra utility > price

Answer 105

* A rational seller of a good will go through with the sale if she believes that there will be net benefits to her * Revenue > costs of production

Answer 106

* Social costs = private costs + external costs * External costs = social costs - private costs * Social benefits = private benefits + external benefits * External benefits = social benefits - private benefits

Answer 107

* Marginal private cost * The cost to a firm of making the next unit of output is the MARGINAL PRIVATE COST * Only for externalities this is what we call the supply curve

Answer 108

* Marginal private benefits * The rational buyer will be assessing the extra benefits (or marginal utility) that he/she will personally receive from consuming the good. In this sense the demand curve is a MARGINAL PRIVATE BENEFIT curve * This is what we call the demand curve only for externalities

Answer 109

* Free market welfare is maximised by producing at the point where MPB = MPC * All units of output add more to total benefit than they do to total cost, because the MPB curve lies above the MPC curve. Each unit of output up to q* results in a NET WELFARE GAIN because it is adding more to consumer benefit than it is adding to the firm’s cost

Answer 110

Society is consumers, producers and all other third parties who are affected by the actions of the consumer and producer

Answer 111

* Information * Regulations * Taxes and subsidies * Tradeable permits * Bans * Max prices * Min prices * Nationalisation * Behavourial "nudges"

Answer 112

* When a free market is in equilibrium * Maximises social welfare

Answer 113

Productive efficiency is the ability of a firm to produce goods or services at the lowest possible cost, given the level of output and the available technology

Answer 114

Market failure happens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss

Answer 115

Complete market failure occurs when the market simply does not supply products at all - we see "missing markets" such as public goods

Answer 116

Partial market failure occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price. This happens when market activity leads to positive and negative externalities from production and consumption.

Answer 117

Social welfare is not maximised and society is allocatively inefficient

Answer 118

* There is non-rivalry - there is collective consumption * There is non-excludability - no one can be prevented from enjoying the benefits * DON'T confuse with all goods made in the public sector ie state school places * Public goods need to be provided by the government because private firms could not produce these goods profitably.

Answer 119

* There is rivalry in consumption - when consumed it leaves less of the good for someone else * There is excludability is consumption - individuals that do not pay can be stopped

Answer 120

Free riders are individuals who are willing to enjoy the benefits of an activity but are not prepared to share the cost

Answer 121

* Can produce the goods in the public sector * Force payment through tax * Public provision * The gov can collect taxes and pay private firms too produce the goods --> sub-contracting

Answer 122

* Goods that don't meet all of the characteristics of public goods but only some of the time or meet some but not all of the characteristics * Non pure public goods * e.g. beaches because based on size or if a private beach can be made excludable

Answer 123

* The gov still might overproduce or underproduce relative to consumer demand * The gov doesn't have the same functions that a private firm has so they have to guess or calculate

Answer 124

* In order for rational decisions to be made everyone has to habve the full information * Without full information overproduction + consumption or underproduction and consumption takes place * Without perfect information market failure happens and scarce resources are misallocated

Answer 125

* Consumers want to maximise utility * Firms want to maximise profit * Governments want to maximise social welfare * Behavourial economics has developed becaue consumers don't act rationally because they are effected by emotional, social and psychological forces

Answer 126

1. Consumer and/or producers don't have the full knowledge of the costs and benefits 2. One of the parties that want to trade has more information than the other

Answer 127

* Asymmetric information * Complex information * Ignorance by the consumer * Deception so the consumer is mislead

Answer 128

* People knowing the information but ignoring it * Children eating broccoli * Adults using tanning machines

Answer 129

* Advertising or misinformation means that the consumer doesn't have the full knowledge * Misleading about the beneifts and costs of low fat yogurts and slimming pills

Answer 130

* Consumer make irrational decisions because of the difficulty of the decision * Best car insurance or mobile phone contract

Answer 131

* The buyer and the seller have more or less information than the other * Second hand car salemen who knows the full history of the car but the buyer doesn't have all the information

Answer 132

* Consumers are trying to maximise their utility, but there is a boundary/limit to the amount of time they have to make the decision or their ability to process the information. * People often take shortcuts to shorten the process * Multi-choice Qs

Answer 133

* Behavioural theorists are likely to point out that there are limits to the degree of self-control that humans can exert depending on the circumstances in which the decision is made * Impulse purchases * Decisions made under the influence of altered emotions * Pressure purchases * Buying when hungry

Answer 134

* Consumers are very much influenced by the behaviour of those around us and that they are likely to act as a “herd” when making consumption decisions * Fashion and what is trendy at the moment

Answer 135

* If they underestimate the costs * If they overestimate the benefits * Not understanding the difference between compound interest or contract penalties

Answer 136

* When the costs and benefits of an action occur at the same time, it is easier to compare and process the information * When the costs and benefits happen a long time apart it becomes more difficult to compare the effects * Short term benefit or long term cost tend to lead to overconsumption * Long term benefit or short term cost lead to underconsumption

Answer 137

* If they underestimate the benefits * If they overestimate the costs * A teenager not going to school

Answer 138

* Goods that have a negative external effect * Tend to be over-produced and over-consumed * They use too many scarce resources

Answer 139

* Indirect tax means that the MPC (supply) curve shifts lefts onto the MSC which becomes the MPC + tax * Removes the welfare loss * Now the social cost = private cost + external cost * Polluter pays which internalises the externality | However only if tax from the gov is correct. Size of tax hard to calcula

Answer 140

* A susbidy means the MPC shifts right onto the MSC which becomes the MPC + subsidy * Removes the welfare loss * Becomes allocatively efficient

Answer 141

* The MSB is further right than the MPB * The socially optimum level is where the MSB = MSC * To reduce the welfare loss the MSC moves right to become the MPC + susbidy

Answer 142

* With a negative consumption externality the MSB is further left than the MPB. * Therefore the socially optimum point is where MSB meets MSC * The welfare loss means that when a tax is imposed the Q remains at the MSB point * Therefore the MSC curve shifts left when an indirect tax is placed on it to remove the welfare loss

Answer 143

**Pros** * Generates revenue * Discourages people to buy * Increases price so based on the elasticity could change the quantity demanded * Fairness as the producers pay the cost of their actions * Can also raise money to be used for good such as funding education (hypothecated) **Cons** * Doesn't account for inelastic products * Hard to judge how much the tax should be * Doesn't work if the firms absorb the majority of the cost instead of passing it on * High taxes mean that some companies won't want to come to the UK or might leave for lower taxes

Answer 144

* When funds are collected from a specific tax and are earmarked or allocated for a particular purpose * Tax moneuy collected from cigs used to clear up the butts from the streets or on asthma adverts

Answer 145

* Goods that have positive external effects * Tend to be under-consumed and under-produced * Use too few scarce resources

Answer 146

**Pros** * A hypothecated tax on one secotr could provide the subsidy for another * Lowers the COP * Solves underconsumption and underproduction * Promotes allocative efficiency * Works well if the good is price elastic **Cons** * Costs the gov money, therefore costs us money through taxes * Gov would need to subsidise a whole industry not one firm which has huge costs * Hard to calculate the value of the externality and could move over time * Subsidy could be taken as profit by the firm

Answer 147

A minimum price is a price floor below which a seller is not allowed to legelly sell their good/service

Answer 148

* Reduces over-consumption because the price is above the free market level (equilibrium) * Reduces the consumers willingness and ability to buy the good so quanitity demanded falls

Answer 149

If the minimum price is below the equilibrium price then the quantity demanded will not change

Answer 150

* Most effective if demand is elsatic * Least effective if demand is inelastic * The price rise means that there is a surplus but the firms can't have a sale or reduce prices so it encourages a reduced supply in the long term * Hard to pick the minimum price level that leads to the socially optimum level * Min price doesn't generate any revenue for the gov unlike taxes

Answer 151

A maximum price is a price ceiling above which a seller is not allowed to legally sell their good/service

Answer 152

* Will cause a shortage and lowering the price means there is a lower incentive to supply * Some consumers will benefit because they will pay a lower price for the same good/service * Some consumers will lose out because they can't access the cheaper good because ferwe units are supplied * They do not require the gov to spend anything although enforcement requires money to be spent

Answer 153

Regulation involves the government in making rules, passing laws or enforcing standards of behaviour on firms or consumers

Answer 154

* Bans - negative externalities outweight any private benefit * Age restrictions - certain groups are prevented from buying demerit goods * Time restrictions - certain activities are prevented at certain times

Answer 155

* Works quicker than taxes * Long term costs are difficult to measure * Enforcement costs can be substantial * No revenue for the gov * Needs to be bacled up by sanctions and penalties

All Micro Theme 1 Flashcards

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