1
Q
What does Ceteris Paribus mean?
A
‘Other things being equal’ - assuming external factors remain constant
2
Q
What is Scarcity?
A
The idea that people have unlimited wants but limited resources
3
Q
What are Free Goods?
A
Not scarce (i.e - air)
4
Q
What are Economic Goods?
A
Scarce
5
Q
What is Opportunity Cost?
A
The cost of the next best alternative foregone
6
Q
What are the 4 Factors of Production?
A
(1) Land - Raw materials, factory, shop
(2) Labour - Workers
(3) Capital - Machinery/technology
(4) Enterprise - Entrepreneur to put all of these together
7
Q
What is the Production Possibility Frontier (PPF)?
A
A curved line on a graph that illustrates the maximum amount of goods and services that can be produced by an economy at a given point in time with available resources and technology
8
Q
What is the Law of diminishing returns?
A
Employing an additional factor of production will eventually cause a relatively smaller increase in output
9
Q
How does opportunity cost behave on a PPF graph?
A
Increases the closer you get to either axis as it is harder to shift production from one industry to another
10
Q
Why does a country rarely operate on the PPF?
A
As this would mean every available resource is being used; the country would have a zero unemployment rate
11
Q
What effect would an increase of either the quality or quantity of the factors of production have on the PPF?
A
Shift out the PPF
12
Q
What effect does an increase in interest have on savings and investment?
A
Increases savings, reduces investment
13
Q
What is Specialisation?
A
Where workers and countries focus on producing the goods and services that they are most skilled in producing
14
Q
What are the advantages of Specialisation and Division of Labour? (3)
A
Increased efficiency
Better quality products
Don’t have to train everyone in every field
15
Q
What is Division of Labour?
A
When the production process is split down into a series of very simple tasks and one individual specialises in one of these simple tasks
16
Q
What are the disadvantages of Specialisation and Division of Labour? (3)
A
Limited versatility of workers
Domino effect if one person messes up
Repetitive and mundane, potentially leading to more mistakes and lapses in concentration
17
Q
What are the 4 key functions of money?
A
- Medium of exchange
- Store of value
- Unit of account
- Standard of deferred payment
18
Q
What is Medium of exchange?
A
Anything that is generally accepted as payment for goods and services, or for settling debts
19
Q
What is Store of value?
A
Can be kept (saved) and still hold its value over time, so it can be used for future purchases
20
Q
What is Standard of deferred payment?
A
Can be used to settle debts or payments that are due in the future
21
Q
What is Unit of account?
A
Provides a common measure of value, allowing prices, debts, and economic worth to be expressed in the same standard
22
Q
What is Double coincidence of wants?
A
When two people each have something the other wants, and they agree to exchange these goods or services directly
23
Q
What are the 6 characteristics of effective money? (PDDHRR)
A
Portability
Divisibility
Durability
Hard to forge
Recognised as money
Relative scarcity
24
Q
What is the economic assumption? consumers, firms, rationality
A
Consumers aim to maximise utility (happiness)
Firms aim to maximise profits
Economists assume consumers will always behave rationally
25
What are the 6 reasons why consumers may not behave rationally?
1. Computational error
2. Asymmetric information
3. Herding
4. Inertia
5. Nudge Theory
6. Behavioural Economics
26
What is Computational error?
When a mistake happens while performing calculations (i.e- there is a special sale and you don't have time to calculate if its good or not)
27
What is Asymmetric information?
When one party in a transaction has more or better information than another
28
What is Herding?
When individuals mimic the behaviour of the majority
29
What is Inertia?
Resistance to change in decision-making or behaviour, often due to habit or uncertainty
30
What is Nudge Theory?
Using small changes in how choices are presented to gently influence people's behaviour (like product placement)
31
What is Behavioural Economics?
Study of how people make irrational decisions because of psychology and emotion
32
Demand
The want, need or desire for a product backed by the money to purchase it (willingness AND ability)
33
Supply
The quantity of a good producers are willing and able to sell at a given price
34
What factors affect demand? (6) (CIAAPP)
1. Celebrity endorsements
2. Income tax/levels
3. Advertisement/marketing campaigns
4. Actions of competitors
5. Population
6. Preferences
35
What factors affect supply? (6)
Tx Sb Lg CoP Ct Imp
1. Tax on products
2. Subsidies
3. Legislation
4. Costs of production and raw materials
5. Cartels
6. Improved technology
36
What is the correlation between demand and price?
Negative - demand line on graph will always slope down
37
What is the correlation between supply and price?
Positive - supply line on graph will always slope up
38
What is the point where the supply and demand lines meet?
Equilibrium point
39
What do economists believe about price and firms
Believe prices are not determined by firms but instead by supply and demand
40
How does supply act on a graph?
Positive gradient
41
How does demand act on a graph?
Negative gradient
42
What is an extension on a supply/demand price/quantity graph
movement to the right
43
What is an contraction on a supply/demand price/quantity graph
movement to the left
44
What movement would an increase in price cause in demand
Contraction (to the left)
45
What movement would a decrease in price cause in demand
Extension (to the right)
46
What movement would an increase in price cause in supply
Extension (to the right)
47
What movement would a decrease in price cause in supply
Contraction (to the left)
48
Functions of price (3) SRI
1. Signalling - showing how much consumers want
2. Rationing - keep items relatively scarce
3. Incentive - good price will make you want to buy
49
Signalling (functions of price)
prices rise and fall to reflect surpluses and scarcities, consumes express their preferences
50
Rationing (functions of price)
price acts to ration scarce resources (i.e- prices rise if there is a shortage
51
Incentive (functions of price)
a change in price will affect consumers' demand for goods (i.e - taxes)
52
Diminishing marginal utility
as your consumption of something increases, the utility you get from consuming each additional unit decreases
53
Consumer Surplus
the extra satisfaction gained by consumers from paying an actual price for a good which is less than that which they would have been prepared to pay
54
Producer Surplus
the extra earnings gained by a producer from receiving a price for a good that is higher than the price at which they would have been prepared to supply
55
Where is consumer surplus on a supply demand graph?
Above the point of equilibrium, on the left of the demand line
56
Where is producer surplus on a supply demand graph?
Below the point of equilibrium, on the left of the demand line
57
Price elasticity
responsiveness of demand to a change in price
58
Elastic
number is greater than 1
59
Inelastic
number is less than 1
60
Price elasticity formula
%change in quantity demanded / %change in price
61
Revenue formula
demand x price
62
Cross Price Elasticity of Demand
responsiveness of a demand for a good to the change in price of another good
63
Cross Price Elasticity of Demand formula
%change in quantity demanded of good A /change in price of good B
64
Compliments/Complementary goods
An increase in the price of one good causes a fall in demand of the other (negative correlation)
65
# How does price affect demand
Substitute goods
An increase in the price of one good causes a rise in demand of the other
(positive correlation)
66
Normal goods (IED)
As income increases, demand increases (positive)
67
Inferior goods [IED]
As income increases, demand decreases (negative)
68
Income elasticity of demand
How responsive the quantity of demand of a product is to a change in income
69
Income elasticity of demand formula
%change in quantity demanded/ % change in income
70
Normative statement
Opinion-based
71
Positive statement
Fact-based
72
Where would tax be on a SD graph?
Between S1 and S2
73
Specific/Unit tax effect on supply curve
Parallel shift in supply curve
74
Ad valorem/percentage tax effect on supply curve
Supply curve shift & pivots to the left
75
Example of ad valorem / percentage tax
VAT
76
What is tax on a supply demand graph?
The vertical distance between S and S1
77
What do consumers have to pay of tax revenue on a supply demand graph?
P-P1
78
What is the total tax revenue on a supply demand graph?
P2-P1
79
Elastic on an SD graph
Less steep demand line
80
Inelastic on an SD graph
Steep demand line
81
Tax Incidence
How much of the tax the seller / buyer pays
82
How does incidence act with inelastic demand?
Incidence of tax falls mainly on buyer
83
How does incidence act with elastic demand?
Incidence of tax falls mainly on the seller
84
What must you remember about who pays tax to the government in practical terms and what does this do to the supply curve?
The seller, shifts supply curve in
85
What do subsidies do to the supply curve?
Parallel shift to the right, reduces costs of production
86
What do taxes do to the supply curve?
Parallel shift to the left, increases costs of production
87
Subsidy
A payment to firms by the government to encourage them to produce their good/service
88
Why do agricultural prices often change regularly and by large amounts?
Yields greatly vary year by year, and the variation determines supply: lower supply will increase prices. Also weather is not predictable.
89
What does IS stand for?
Immediate supply
90
What are the two main reasons for intervening in a market? (2)
1. Protect producers from prices falling too low
2. Protect consumers from prices rising too high
91
Buffer stocks scheme (3)
An organisation, often the government, attempts to smooth out fluctuations in prices by the purchase and sale of stocks
price too low - govt buys stock and stores (inc demand)
price too high - govt sells stock from store (inc supply)
92
Minimum price scheme evaluations (2)
Encourages overproduction of farmers
Costs govt money to buy stock and have a bunch to sell
93
Price elasticity of supply
% change in product supplied / % change in price
94
Short run
Only one factor of production is variable
95
Long run
All factors of production are variable
96
What is a commodity?
A raw material used in the production of other goods
A homogenous product (consisting all parts of the same kind)
97
Derived demand
Demand for one product is dependent on the demand for another product
E.g - demand for more steel = more demand for iron
98
Futures
These are contracts to buy or sell commodities at a specific date in the future
99
How are commodities traded?
On exchanges, like shares in companies.
People also speculate by trading futures in commodities
100
What are the key problems in the UK housing market? (3)
Growing demand, short supply
Prices rise rapidly, real income not keeping up
Rent prices driven up as a result, making it hard to save up and buy a house
Older people not wanting to sell due to stagnating prices
101
What are rent controls?
Rent controls are government rules that limit how much landlords can charge or how fast rents can rise.
102
How do rent controls work? (2)
The government sets a maximum rent landlords are allowed to charge.
Rents can rise, but only by a set amount each year.
103
Benefits of rent controls (3)
Makes housing more affordable
Protects tenants from sudden rent hikes
Gives renters more security
104
Negatives of rent controls (4)
Housing shortages get worse
Landlords may reduce maintenance (lower quality housing)
Landlords may sell properties instead of renting them out
Can lead to black markets (illegal extra payments)
105
What will cause price to diverge from the equilibrium according to the cobweb theory?
If supply is more elastic than demand
106
What will reduce the price volatility according to the cobweb theory (and where would this move price towards)?
If demand is more elastic than supply, move price towards equilibrium
107
What are possible examples of the cobweb theory other than agriculture?
Housing - very inelastic and prone to booms or busts
108
Private Cost
A cost incurred by an individual (firm or consumer) as part of production or consumption of goods
109
Private Benefit
The benefit gained by an individual from purchasing goods
110
Market Failure
When the price mechanism fails to deliver maximum efficiency leading to resources not being allocated to their optimum use
111
Merit goods (2)
Provide consumers with unanticipated benefits, and so would be underprovided in a free market
Also have an external benefit associated with them
112
Demerit goods (3)
A good that has negative effects on a consumer
Consumers are often not aware of these effects due to imperfect information or are addicted to them (e.g - cigarettes)
These goods have an external cost
113
Public goods (2)
Non-excludable - people cannot be excluded from the consumption of the good
Non-rivalrous - consumption by one person does not diminish the amount available to others
114
What are some examples of public goods? (2)
Street Lights
Roads
115
What is one of the causes of Market Failure?
Asymmetric information as people may not maximise their utility if they lack all the relevant
116
What is an example of a merit good?
Vaccines
117
What is an example of a demerit good?
Cigarettes
118
External benefit (2)
Where the social benefit gained by society is greater than an individuals private benefit received from an individuals transaction (e.g - vaccinations)
Therefore, the free market will undersupply such goods
118
Externalities definition
Factors that are not taken into account when calculating the price of a good but that have an impact on human welfare
119
External cost (2)
Where the social cost felt by society is greater than an individual's private cost of consuming a specific produce (e.g- polluting rivers)
Therefore, the free market will oversupply such goods
120
Government Provision (2)
If the free market will not supply a good/service, then the government can provide it directly itself
For e.g - education, healthcare, police, defence
121
Government regulation (2)
legislation to encourage/discourage productiion of certain goods and services
e.g - quotas limiting production of certain goods (fish), bans son production and sale of goodds (drugs) bans on cigarette advertising, cigarettes in plain packaging
122
Market failure (1+5)
Occurs when the price mechanism leads to a misallocation of resources, resulting in a loss of social welfare
Several types: externalities, public goods (free rider problem), merit and demerit goods, information failure, monopolies
123
Free rider problem
when individuals take advantage of a shared resource or service without paying for it or helping provide it, causing it to be undersupplied on the free market
124
# Emissions trading system
EU ETS (4)
EU has set a limit on the amount of carbon they want to be emitted each year
Companies have to buy credits (1 credit = 1 tonne of CO2) to produce Co2 emissions
If credits aren't all used up, they can be sold to other companies
Logic is allowing the market to decied the cheapest and most efficient way to reduce CO2 emissions
125
# Definition, market, price
Pollution permits (3)
Issuing firms with 'permits' allowing them to pollute up to a certain level
A market is established for firms to buy and sell these permits, thus providing firms with a financial reward if they reduce their emissions
Effectively sets a 'price' for emitting CO2 into the atmosphere
126
Government solutions to market failure (4)
Subsidies - Electric car subsidies
Regulation - EU ETS, fishing quotas
Taxation - UK Sugar Tax
Provision of public goods - such as lamposts
127
Why are externalities, public goods, merit and demerit goods all examples of market failure?
Externalities: third-party effects ignored → misallocation
Public goods: free rider problem → underprovision
Merit goods: underestimated benefits → underconsumption
Demerit goods: underestimated costs → overconsumption
128
How did Adam Smith explain the importance of specialisation and division of labour
Adam Smith explained that the specialization and division of labour increase productivity, economic growth, and prosperity by breaking production into small, repetitive tasks
Economics
flashcards
Decks in class (4)
# Cards
