1
Q
What is the basic economic problem?
A
How to allocate scarce resources given unlimited wants
2
Q
What are the factors of production?
A
Capital, enterprise, land, labour
3
Q
How to allocate the factors of production?
A
What to produce, how to produce, whom to produce to
4
Q
What is opportunity cost?
A
The cost of the next best alternative foregone when choice is made
5
Q
What can a PPF do?
A
- Maximum possible production of 2 goods/services with given factors of production
- The various combinations of 2 goods/services that can be produced with given factors of production
6
Q
What does increasing efficiency do to PPF?
A
Doesn’t move the PPF but the letters can move from productively inefficient to productively efficient; c is unattainable with given factors of production
7
Q
What does increasing production do to PPF?
A
- If use of factors of production is better, it may move up to the line.
- If use of factors is re-allocated, it will move along the line.
- If factors of production are increased in quantity or quality, the curve will move out.
8
Q
What is a specialised PPF?
A
Starts at one point with 2 lines going from it down to the bottom PPF1 PPF2
9
Q
What is the definition of demand?
A
The quantity of a good or service consumers are willing and able to buy at a given price in a given time period
10
Q
How does a price factor move the demand curve?
A
A contraction moves it left along the line; an extension moves it right along the line.
11
Q
What is the law of demand?
A
There is an inverse relationship between price and quantity demanded, assuming ceteris paribus
12
Q
What is the income effect?
A
The income cannot keep up with prices, so the demand contracts
13
Q
What is the substitution effect?
A
As prices rise, the demand shifts to price competitive goods/services
14
Q
How does a non-price factor affect the demand curve?
A
Shifts the demand line left or right
15
Q
What are non-price factors for the demand curve?
A
- Fashion
- Population
- Income
16
Q
What is the definition of supply?
A
The quantity of goods/services producers are willing and able to produce at a given price in a given time
17
Q
How does a price factor affect the supply curve?
A
Moves it left on the line for contraction and right on the line for extension
18
Q
What is the law of supply?
A
There is a direct relationship between price and quantity supplied, assuming ceteris paribus
19
Q
How do non-price factors affect the supply curve?
A
Moves the line left or right (s1-s2, s-s3)
20
Q
What are non-price factors of supply?
A
- Technology
- Subsidy
- Productivity
21
Q
What is a positive statement?
A
A positive statement is a statement which is objective and made without any value judgement or emotions
22
Q
What is a normative statement?
A
A normative statement is a one which is subjective and based on opinion
23
Q
What backs what?
A
Positive statement backs normative statement
24
Q
What is a renewable resource?
A
A renewable resource is a resource of economic value that can be replenished and replaced at the same level as consumption
25
What is a non-renewable resource?
A non-renewable resource is a resource of economic value which cannot be readily replaced by natural means at an equal level to consumption
26
What is specialization?
Specialization is the production of a limited range of goods/services by a company/individual/country, making trade needed
27
What is division of labour?
Division of labour is where workers specialize in, or concentrate on, one area of the production process
28
Who stated the concept of both specialization and division of labour?
Adam Smith
## Footnote
Visited a pin factory which was split into 18 divisions, impressively making 5,000 pins per employee
29
What are the advantages of division of labour and specialization?
- Increased labour productivity
- Higher quality of goods/services
- Less time wasted between jobs
30
What are the disadvantages of division of labour and specialization?
- When employees are bored, quality may decrease
- Reduction of craftsmanship and more standardization of products
31
What are the functions of money?
- Medium of exchange
- Measure of value
- Store of value
- Method of deferred payment
32
What is a free market economy?
In a free market economy, individuals make their own choices and own the factors of production without government interference
33
How are resources allocated in a free market economy?
Price mechanism
34
Who supported the free market economy?
Adam Smith (1723-1790) believed in the free market economy and laissez-faire approach by government
## Footnote
Explained resources allocated with the invisible hand, leading to more competition and lower prices for consumers
35
Who else supported the free market economy?
Friedrich Hayek (1899-1990) stated that state control of the economy leads to loss of freedom
## Footnote
Believed the poor are better off in free economies; central minority choices forced on everyone in non-free economies.
36
What are the advantages of a free market economy?
- System is automatic due to the invisible hand
- High motivation and competition
- Political freedom
37
What are the disadvantages of a free market economy?
- High levels of inequality
- Resources could be wasted on unproductive expenses
- Problem of externalities
38
What is a command economy?
A command economy is where all factors of production are owned by the state except labour.
## Footnote
No private property; resources allocated by government; everyone receives the same wage.
39
What are the advantages of a command economy?
- Minimum standard of living
- Less wasted resources
- Easier long-term planning
40
What are the disadvantages of a command economy?
- Impossible for no waste and perfect decisions
- Increase in bribery and corruption
- Loss of freedom
41
What is a mixed economy?
An economic system combining private and public enterprise where government planning and free market allocate resources
42
What is the government's role in a mixed economy?
- Creating a framework for rules
- Supplements and modifies the price system
- Redistributes income
43
What is rational decision making?
- Consumers aim to maximize utility
- Firms aim to maximize profit
- Governments aim to maximize social welfare
44
What is diminishing marginal utility?
The satisfaction derived from consumption of an additional unit of a good will decrease the more the good is consumed.
45
What is elasticity of demand?
Elasticity of demand is an attempt to measure the responsiveness of quantity demanded to changes in other variables
46
What is the PED equation?
% change in quantity demanded / % change in price
47
What is PED?
PED is the responsiveness of demand to a change in price of a good
48
What is unitary elasticity?
Unitary = PED = 1
49
What is relatively elastic?
Relatively = PED > 1
50
What is perfect elastic?
Perfect = PED = infinity
51
What is perfectly inelastic?
Perfectly inelastic = PED = 0
52
What factors affect PED?
- Time
- Addictiveness
- Availability of substitutes
53
What is the significance of PED?
Price elasticity of demand and price elasticity of supply determine the effects of imposition of subsidies or direct tax
54
What causes a lower incidence of tax on consumers?
More elastic demand curve
55
What causes a lower incidence of tax on producers?
More inelastic demand
56
What is the inelastic demand curve?
Two supply lines starting from s1 shifting left to s2 where it meets a downward d1 causing p2 and q2.
## Footnote
The consumer has to handle the burden.
57
What is the elastic demand curve?
Same as inelastic but the demand line has a much lower gradient.
## Footnote
The producer has to handle the burden.
58
What is the subsidies inelastic demand graph?
s1 - s2 shifting supply line right met with a very steep demand line meaning a fall in price and rise in quantity.
## Footnote
Consumer gains more.
59
What is the subsidies on elastic demand curve?
Same as inelastic but lower gradient supply line.
## Footnote
Producers gain more.
60
What is different on tax diagrams?
s1 and s2 are swapped
61
What is the relationship between PED and revenue for elastic and inelastic?
For elastic, a decrease in price leads to an increase in revenue; for inelastic, a decrease in price decreases revenue.
## Footnote
For unitary elastic curve, a change in price does not affect change in revenue.
62
What is YED?
Income elasticity of demand is the responsiveness of demand to change in income
63
What are the 3 goods shown by YED?
Inferior good is YED < 0; normal good is YED > 0; luxury good YED > 1
64
What is the YED equation?
% change in quantity demanded / % change in income
65
What is the significance of YED?
- Important for businesses to know how income affects sales
- May impact goods the firm produces
66
What is cross elasticity of demand (XED)?
This is the responsiveness of demand for Product A to the change in price of another Product B
67
What are the 3 goods shown by XED?
Substitutes are XED > 0; complementary XED < 0; unrelated good XED = 1
68
What is the significance of XED?
This shows how price changes by other firms will affect you
69
What is PES?
Price elasticity of supply is the responsiveness of supply to change in price of a good
70
What is the equation for PES?
% change in quantity supplied / % change in price
71
How steep are each of the following?
1. Relatively inelastic = very steep
2. Unitary elastic = regular
3. Relatively elastic = not steep
72
What is the equilibrium point on graphs?
The equilibrium point refers to the point at which there are no more forces bringing about change, known as market clearing
73
What is excess demand?
If price is set below equilibrium, then there is excess demand
## Footnote
Illustrated as orange at the bottom of the box.
74
What is excess supply?
If price is set higher than equilibrium, then there will be excess supply
## Footnote
Illustrated as orange at the top of the box.
75
What is price mechanism?
Price mechanism allocates resources in a free market economy so price is determined by the interaction of supply and demand (invisible hand theory)
76
What is the rationing function?
The price system's way of rationing goods; as price increases, some can't afford it, so limited resources are rationed/allocated to those able to afford and value it the most
77
What is the signalling function?
Signalling function acts as a signal to which resources should be used; a change in price moves resources into manufacturing product and changes quantity sold and bought
78
What is the incentive function?
Acts as an incentive for people who work hard so buyers realize that the more money they have, the more they can buy
79
What is consumer surplus?
Consumer surplus is the difference between the price a consumer is willing to pay and the price they actually pay, set by the price mechanism
80
What is producer surplus?
Producer surplus is the difference between the price a supplier is willing to produce at and the price they actually produce at
81
What is the consumer and producer surplus graph?
Normal supply line and demand line; draw p1 and q1; above p1 is consumer surplus and below p1 is producer surplus
82
What is the effect of more inelastic demand?
Higher producer surplus
83
What is community surplus?
The total welfare to society is community surplus
84
What is indirect tax?
Indirect tax is the tax on expenditure where the person who is ultimately charged the tax is not the person responsible for paying the sum to the government
85
What is ad valorem tax?
Ad valorem tax is where tax payable increases in proportion to the value of the good
86
What is specific tax?
Specific tax is the amount added to price so more is paid on quantity than value
87
What is the relation between elasticity and incidence tax?
More elastic demand curve or inelastic supply curve leads to a lower burden of tax on consumers
88
What is a subsidy?
A subsidy is a grant given by the government to encourage production or consumption of a good or service
89
When does market failure occur?
Market failure occurs when the market fails to allocate scarce resources efficiently, leading to a loss in social welfare
90
What are externalities?
An externality is a cost or benefit a third party receives from an economic transaction outside the market mechanism
91
What are public goods?
Public goods are non-rivalry and non-excludable goods, meaning they are underprovided by the private sector due to the free rider problem
92
What are information gaps?
Information gaps occur when economic agents do not make rational decisions, so resources are not allocated to maximize welfare
93
What is MPB?
Marginal private benefit is the extra satisfaction for an individual for consuming one extra unit of a good
94
What is MSB?
Marginal social benefit is the extra gain to society from the consumption of one more good
95
What is MPC?
Marginal private cost is the extra cost to producing one more of a good
96
What is MSC?
Marginal social cost is the extra cost to society from the production of one more good
97
When do negative production externalities occur?
When social costs are greater than private costs
## Footnote
Examples include noise pollution from airplanes and industrial waste.
98
When do positive consumption externalities occur?
When social benefit is greater than social cost
## Footnote
Examples include education and healthcare.
99
What are the 3 forms of government intervention?
- Indirect taxes and subsidies - taxes on negative externalities and subsidies on positive externalities
- Trade pollution permits
- Provision of goods - NHS
100
What are quasi public goods?
Quasi public goods are goods that are not perfectly non-rivalry or non-excludable, like tolls on roads.
101
What is the free rider problem?
The free rider problem is where you can't charge an individual price for the provision of non-excludable goods because someone will gain benefit without paying
102
What is symmetric information?
Occurs when buyer and seller have access to the same information; this is perfect information
103
What is asymmetric information?
When one party has superior knowledge compared to the other
104
What causes information gaps?
Advertising, as it's designed to change the attitude without changing the product
105
What are the advantages of government intervention using indirect tax?
- Market produces at social equilibrium and social welfare is maximized
- Raises government revenue
106
What are the disadvantages of government intervention using indirect tax?
- Difficult to know the size of externality, so hard to target tax
- Creation of black market
- Taxes are politically unpopular
107
What are examples of indirect tax use?
- Landfill taxes
- Fuel taxes
108
What are the advantages of government intervention using subsidies?
- Welfare maximized
- Encourages small businesses
109
What are the disadvantages of government intervention using subsidies?
- High opportunity cost for government
- Difficult to target tax
- Difficult to remove
110
What do minimum and maximum prices need to affect?
- For maximum price to have an effect, it must be set below price equilibrium
- For minimum price to have an effect, it must be set above price equilibrium
111
What is a maximum price?
A maximum price is legally set on goods with positive externalities
112
What is a minimum price?
A minimum price is legally set on goods with negative externalities
113
What are the advantages of pollution permits?
- Government can cap the number of permits to drop pollution
- Encourages green technology
- Encourages efficiency
114
What are the disadvantages of pollution permits?
- Expensive to monitor and police
- Raises costs for both parties
115
What are examples of pollution permits?
US Sulphur trading scheme reduced sulphur dioxide by 40% and EU emissions trading scheme in 2005 represents a 21% reduction in greenhouse gases
116
What are the advantages of state provision of public goods?
- Corrects market failure
- Promotes equality
- Benefits government workers like NHS
117
What are the disadvantages of state provision of public goods?
- Expensive and high opportunity cost
- Government may be inefficient
118
What is an example of state provision of public goods?
More money spent on railways than NHS, even though 92% of all journeys in the UK are made by cars
119
What is the advantage of provision of information?
Helps act rationally
120
What are the disadvantages of provision of information?
- Expensive and opportunity cost
- Consumers may not listen
121
What is an example of provision of information?
Labels on smoking packets
122
What is government regulation?
Government imposes laws and caps to ensure that levels are set to MPB = MSC so companies can provide full information on products
123
What is the advantage of government regulations?
Overcomes market failure
124
What percentage of all journeys in the UK are made by cars?
92%
125
What is an advantage of the provision of information?
Helps act rationally
126
What is a disadvantage of the provision of information?
Expensive and opportunity cost
## Footnote
Consumer may not listen
127
What is an example of the provision of information?
Labels on smoking packets
128
What is an advantage of government regulations?
Overcome market failure and prevent exploitation of customers
129
What is a disadvantage of government intervention?
Laws may be expensive for government to monitor
## Footnote
Firms may pass on cost to consumer
130
What is an example of government regulation?
EU fishing quotas
economics luka
flashcards
Decks in class (8)
# Cards
