Micro Lower 6 Flashcards

Question

YED - % change in quantity demanded/ % change in income

Answer 1

YED measures the responsiveness of quantity demanded in relation to a change in income. If YED is greater than one, good is income elastic. If YED is less than one, good is income inelastic. A positive YED estimate tells us that this is a normal good. Normal goods =cars; holidays, restaurant etc. A positive YED that’s elastic ›1 indicates a good's a luxury. (+ 1.7). A positive YED that’s inelastic <1 eg 0.6 indicates the good's a necessity. A negative YED estimate tells u that this is an inferior good. IG = cheap meat & coach travel.

Answer 2

XED measures the responsiveness of demand in relation to a change in the price of another good. A positive XED estimate indicates that the two goods are substitutes & in competitive demand, so as the price of one good rises, so too does the demand for the other & vice versa. A negative XED indicates that two goods are complements & are in joint demand, so as the price of one good rises, the demand for the other falls & vice versa

Answer 3

PES measures the responsiveness of quantity supplied given a change in price. PES is always negative - law of supply

Answer 4

Production lag - delay between decision to produce a good & actual production of that good. Stock - managing stock levels is crucial for meeting demand w/o overproducing, which can lead to waste Spare capacity - unused production capacity a firm has available, no need to invest in additional resources or infrastructure Substitutability of factors - how easily 1 factor of production can be substituted to another. Higher substitutability allows firms to adjust their production more flexibility in response to changes. Time - short run and long run. This affects everything from now quickly goods can be delivered & produced. To how long consumers are to wait

Answer 5

Key issue that comes from the problem of scarcity is that is it forces individual consumers, firms & gov to make choices. Everyone needs to prioritise the consumption of whatever commodities the need. Gov has to make choices between alternative uses of resources. Economic analysis's all about analysing choices made by consumers firms & gov. Every choice involves a range of alternatives. Marginal analysis is based on the idea that people take decisions by considering change that could be made. Marginal analysis is an approach to economic decision making based on considering the additional marginal benefits & costs of a change in behaviour.

Answer 6

PPC shows the max possible combination of goods/services that can be produced using all available resources. Economic growth can be shown by an outward shift in the ppc

Answer 7

Concept of efficiency- any point on the PPC is a productively efficient point where the FoP are all being used to max potential. Any point inside PPC is inefficient- some of the FoP are unemployed or under-unemployed

Answer 8

-Opportunity cost is based on the belief or assumptional you’re rational. But you aren’t always rational. -Never really know the loss of alternative option. Can’t measure other outcomes. -Simple model that only considers 2 choices when hundreds of can be made.

Answer 9

Specialisation is when an individual, firm or a country focuses on the production of a narrow range of goods/services to increase efficiency. E.g Xaverian specialises in A-levels & Cadbury specialises in chocolate. However this is very risky. Division of labour is when the production process is broken down into many separate tasks. E.g motor company having a few workers/ people specialise in spray painting and others on the wheel.

Answer 10

1 way in whech economic growth occurs is via specialisation or division of labour. Adam wrote about the Division of labour in studying a pin factony of Glasgow, he found that when workers completed every task independently, output was low. By splitting the production of a good into lots of different tasks, and allocating each one to different workers more could be produced as workers developed greater skill in performing their particular task with specialist tools, therefore leading to less wastage of materials and greater quality. As well as increased output, there were corresponding lower unit costs.

Answer 11

Barter’s a system of exchange where people in a transaction directly exchange goods/services for other goods/services without using a medium of exchange, such as money. It relies on a ‘double coincidence of wants’ to be successful. Functions of money : 1) Avoids needs of a ‘double coincidence of wants’ 2) Unit of account /A measure of value 3) A medium of exchange 4) Standard of deferred payment (buy now, pay later).

Answer 12

MF - occurs when resources aren’t being used in a way that produces the best allocation of resources for consumer. Therefore fails is acheive economic efficiency . → Too much/little of a goods being produced / consumed. An externality or spillover effect, is when those not directly involved in a particular decision (3rd parties) are affected by the actions of others. For example therefore smoking leads to others passive smoking and they could get lung cancer etc. There are 4 different types of externalities that lead to market failure & consequently fail to maximise social welfare.

Answer 13

Marginal private cost = the change in the producers total cost brought about by the production of an additional unit of a good or service. Marginal external cost = the change in the cost to 3rd parties other than the producer or buyer of a good or service due to the production of an additional unit of the good or service. It’s a negative spillover effect. Marginal social cost = refers to the cost that society pays as a result of the production of additional units or usage of a good or service. The total costs of producing an additional unit aren’t only undertaken by the producer but also by society.

Answer 14

Marginal private benefit = the maximum amount a consumer is willing to pay for an additional good or service. It is also the additional satisfaction or utility that a consumer receives when the additional good or service is purchased. The marginal benefit for a consumer tends to decreases as consumption of the good or service increases. Marginal external benefit = the benefit resulting from the production or consumption of additional units accruing to a different party than the one producing or consuming the product. This is the 3rd party spillover effect. Marginal social benefit = represents the total benefit to society from producing or consuming n additional units accruing of a good/service. Social benefit includes all the marginal private benefits plus any marginal external benefits of production/consumption.

Answer 15

Info failure = there’s a lack of info resulting in consumers & producers making decisions that don’t maximise welfare. Info failure results in over & under consumption of goods or services & therefore leads to market failure. It also leads to government intervention into markets to correct market failure cause by the existence of merit and demerit goods. Asymmetric - uneven/one side of party has info whilst the rest do not. Perfect knowledge - knowing all relevant information

Answer 16

- Where consumers aren't aware of the benefits or harmful effects of consuming a particular product. - Where persuasive advertising results in consumption levels that aren't in the best interest of consumers. - Where product packaging makes claims that are inaccurate or misleading Examples of imperfect info include overconsumption of tobacco /alcohol & under-consumption of healthcare /education. Other examples include the financial sector, pensions, insurance & the used car market

Answer 17

A situation in which 1 party gets involved in a risky event knowing that it’s protected against the risk & the other party will incur the cost. It arises when both parties have incomplete information about each other.

Answer 18

These are goods which when left to free market are under consumed ( overvalue short term cost & undervalue long term benefits).

Answer 19

Goods which when left to the free market are over consumed ( overvalue short term benefits & undervalue long term costs - we don’t understand the dangers ) Demerit goods generally have negative externalities. Examples; violent films & games, high caffeine energy drinks, tobacco products, alcohol fraud & binge drinking.

Answer 20

Goods that are both non rival and non excludable. Non rival & non excludable characteristics leads to a free rider problem.

Answer 21

Non excludable means that it is costly or impossible for one see to exclude others from using a good. Non rivalrous means that when one person uses a good, it doesn’t prevent others from using it. Zero marginal cost, once supplied, the marginal cost of supplying another individual is zero.

Answer 22

These are both excludable and rival. A car manufacturer can exclude someone from purchasing its car if that person cannot afford it. A school you need grades to get in & for university you need to pay for tuition.

Answer 23

An indirect tax is imposed on producers by the government e.g duties on cigarettes, alcohol & fuels & also VAT. Taxation acts as an increase in the production costs for producers & thus reduces supply, leading to an increase in price. Acts to discourage production/consumption of a good with negative externalities and demerit goods

Answer 24

A subsidy is a payment from the government to a producer to lower their costs of production & encourage them to produce more. Subsidies increases supply, leading to a reduced price which encourages production, consumption of a good with positive externalities & merit goods. Leading to expansion of demand. Examples; apprenticeship schemes, food/fuel, child care for working families

Answer 25

Minimum price are where goods cannot be sold below the price. The free market equilibrium price is deemed to be too low. The minimum price is also called the price floor. An MP is set by government and it’s an attempt to decrease consumption of demerit goods. Also an attempt to protect producers.

Answer 26

Surplus production Inefficient resource allocation Higher prices for consumers

Answer 27

Government could introduce a maximum price where goods cannot be sold at a price above this. The free market equilibrium price is deemed to be too high. Maximum price is set too encourage consumption of a particular good. E.g set for train tickets, rent, food

Answer 28

A buffer stock scheme is a government plan to stabilise prices in volatile markets. This requires the intervention of buying and selling.

Answer 29

Tradable pollution permits is used to tackle negative externalities for pollution. The government decides the desired level of pollution & releases permits. The aim is to provide markets incentives for firms to reduce pollution & the external costs associated with it.

Micro Lower 6 Flashcards

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