1.1 + 1.2 ( nature of economics and how markets work) Flashcards
(194 cards)
1
Q
Define Scarcity
A
resources being finite and limited relative to demand for their use
2
Q
Define Opportunity Cost
A
the cost of missing out on the next best alternative
3
Q
Define Marginal Analysis
A
Examination of the additional benefits of an activity compared to the additional costs
4
Q
Define Capital Goods
A
goods (typically technology) that are used to make consumer goods and services
5
Q
Define Consumer Goods
A
products that satisy our needs and wants directly
6
Q
Define the PPF and draw/imagine the curve
A
Possibility Production Frontier- maximum combination of goods and services that can be produced with a certain level of resources
7
Q
What are the 4 Factors for productive capacity
A
Land (all natural resources)
Labour
Capital ( All tech used in production )
Entrepreneurship
8
Q
What is the Pareto Efficiency
A
any point on the PPF Curve, it is impossible to increase one value w/o less production of another
9
Q
What does point E on the PPF Curve represent
A
An inefficient economy, where not all factor inputs are being used so the economy hasnt reached its full potential productive capacity (PPF)
At this point we can increase both variables without an opportunity cause
10
Q
What is the difference between point C and point D
A
Point C has a higher % of capital investment than point D
so point C has relatively higher economics
11
Q
How do you get Point F
A
By running a trade defecit (importing goods) to live beyond your means
12
Q
How do you get to point A2
A
Economic Growth caused by an increase in the 4 factors of production (typically improvement in tehcnology)
13
Q
What happens as you shift to one side of the PPF Curve
A
The result is that opportunity cost rises ( due to the law of diminishing returns). Hence the curve shape
14
Q
What does a linear (straight) PPF show
A
the opportunity cost is constant
15
Q
4 factors causing inward PPF shift (depreciation)
A
1) Natural Disaster
2) ‘Brain Drain’
3) civil war/conflict
4) poor infastructure
16
Q
How does a PPF convey a recession
A
Output falling below the PPF
17
Q
What does A and B in the PPF with recession
A
A = full employed
B = unemployed resources
18
Q
What increases as you move closer to one extreme on the PPF
A
-Marginal Opportunity Cost will rise due to the law of diminishing returns
19
Q
How does opp. cost affect different economic agents (personal,business and government)
A
Personal : Choosing to buy clothes instead of a trip to the cinema
Buisness : Buying an expensive piece of equipment, rather then employing an extra person
Government : may decide to spend more on defence, than education
20
Q
What is the economic problem?
A
the issue of
our infinite needs/wants vs the scarcity of resources
Thus resulting in economics: the study of how to allocate these scarce resources. In turn creating the concepts of choice and opportunity cost
21
Q
What are Samuelsons 3 questions ( the first clear response to the economic problem)
A
- What to produce? (best combination of K + C)
- How to produce (best combination of factor inputs)
- For whom to produce (the problem of distribution)
22
Q
Define a Free Good
A
a zero marginal cost of supply - they do not use use factors of production when extra units are supplied (air)
23
Q
Define a non-renewable resource
A
finite in supply as no other mechanisms exist at present to replenish them
24
Q
Define a renewable resource
A
natural rate of resource replenishment>rate of extraction
25
What is a positive statement and positive economics
**FACTS.**
Objective statements that can be proven true or false
Positive economics deals with objective explanation and the **testing of theories**
26
What is a normative statement
**OPINIONS.**
Subjective statement that carry **value judgements** about what 'ought to be'
27
define specialisation
producing **a narrow range** of goods or services
28
Define Division of Labour
Where an individual worker specialises in a **limted range of skills**
29
Who famously wrote about the concept of **the division of labour**
Adam Smith wrote about it in ' The Wealth of Nations'
30
What does specialisation refer to in countries
Individual countries that produce **certain goods** that they are the **best at producing**.
Moreover, the theory of comparitive adv, states that countries should specialising in producing goods they are the best at
31
At what economic levels does specalisation occur at:
All economic levels
specilisation of an extended family
within buisness and organisations
in a country e.g. Bangladesh
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What are the main advanatges of specialisation in labour
- _lower unit cost_
- gain specialist skill and deterity as less time wasted
- becomes cost effective to give workers **specialist tools**
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What are the main disadvantages of specialisation of labour
- **Alienation** causes lower quality and abseteesism
- High _worker turnover_
- risk of structural unemployment and _occupational immobility_
34
What are the main _advantages_ of specialisation within _economies_
- Fits with theory of comparitive advanatge
- Increases output and quality
- larger range of g/s avaliable
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What are the main _disadvanatages_ of specialisation within _economies_
* **overspecialisation** makes it vulnerable to market prices and conditions
* may lead to **overextraction**
* changing tastes
* nation interdependence
* typically have low income elasticity
36
Define Production
measure of the value of the output of goods + s
37
Define productivity
a measure of the **efficiency** of the _factors of production_
(inc. in production DOES NOT equal an increase in productivity)
38
Define an economic good
Resources which are **scarce**
39
Define working capital
stocks of raw materials, and goods **waiting to be sold**
40
Define fixed capital
stocks of PPE (property,plant and equipment)
fixed as it wont be transformed into a final product
41
Define entrepreneurship
the seeking out of profitable opportunities and taking a risk
42
What is the law of diminishing returns
the decrease in marginal output of a production process as the amount of a single factor of production is incrementally increased
43
What is Adam Smith's central thesis (invisible hand)
Our indiviual self interest results in societal benefit
44
What did adam smith believe about the division of labour
It allows us to be more efficient and create a web of mutual interdependencies.
45
What are the main _advantages_ of a _free market_
* high level of competition, so strong incentive to innovate
* price mechanism removes shortages and surpluses
* Variety of goods
* Quicker response to demand changes
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What are the main _disadvantages_ of a _free market_
* Lots of waste and enviromental damage
* public/ merit goods missing/underprovided
* Demerit goods overprovided
* Unequal income distribution
47
What was Marx's theory of surplus value
The capitalist pays the worker less than the value of their labour to create a profit.
48
Define a command economy ( commuist )
a central gov, authority dictates the level of production that is premissible and the prices of goods and services
49
Define a free market
where resources are allocated by the price mechanism and there is no gov. intervention
50
What are the main _advantages_ of a _command economy_
* Gov can employ resources to **full employment**
* Equal/better income distrubution
* Gov can use resources to _maximise welfare_
* Social optimums of merit,demerit and public goods
51
What are the main _disadvantages_ of a _command eonomy_
* avoid hard work as cannot be unemployed
* Many products produced are useless
* low competition
* Often controlled through **political repression**
* lack of variety of goods
* illegal black market growth
52
Define a mixed economy
Some resources are owned by public and some by private
53
What are the main _advantages_ of a _mixed economy_
* Gov. can intervene to prevent the _worst excesses_ of private buisness
* Utilise taxes to create a **safety net**
* still maintain competitive markets to incetivise innovation
54
What are the main _disadvantages_ of a _mixed economy_
- **Difficult to decide** how and when to intervene
- argued welfare payments create work shy
- argued not enough wealth distrubution
55
Define demand
the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
56
What is effetive demand
level of demand that represents a real intention to purchase by people with the means to pay
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What is the basic law of demand
Demand has an inverse relationship with price
( as price goes up, demand goes down )
58
What does price going up or down do to the demand curve
Price going **up** leads to a **contraction** of quantity demanded
Price going **down** leads to an **expansion** of quantity demanded
59
What causes movement **along the demand curve**
ONLY a change in market price
60
What does it mean if the demand curve shifts inwards ( to the left ) or outward ( to the right )
It is due to **non-price factors**
61
What are 7 non-price factors in the demand curve(PIRATES)
P- Population
I- Income
R- Related goods ( subtitutes/complements )
A- Advertising
T- Tastes and fashions
E- Expectations
S- Seasons
62
Define a normal good
As income increases, so does demand for these goods
e.g. a car
63
What is the substituion effect
a fall in price of Good X makes it **relatively cheaper** compared to substitutes so there will be increased demand
64
What is the income effect
As price falls, the purchasing power of consumers increases
so people can buy more
65
What is derived demand and an example
The demand for a _factor of production_ used to produce another good
e.g. higher demand for mobile phones = higher demand for batteries
66
Explain Composite Demand and give an example
A Product has multiple uses; thus as demand for one use goes up, the supply for the other goes down.
e.g. milk is used in cheese, yoghurt, cream and butter
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What is rationing effect concerned with Composite Demand
- As a result of having many uses; if one of these uses goes up in demand , it will **limit the avaliability of another**
e. g. If there is a higher demand for butter, there will be a more limited avaliablity of milk to make cheese
68
What is joint demand and an example
- When demand for 2 goods is in **interdependent**
e. g. a decrease in price for printers will cause an increase in printers but alsoa higher demand for ink
69
Define Utility
Measure of the **satisfaction** we get from purchasing and consuming a good
70
What is the law of diminishing marginal utility
As there is more consumption, people's utility decreases.
The first consumption has the **highest utility** as it grants the majority of the immediate need
71
How does the law of diminishing marginal utility explain the inverse relationship between price and quantity demanded
As people's consumption increases, their utility decrease so they are willing to pay less.
72
Define Supply
quantity of good/serv. that a producer is willing and able to supply onto the market at a given price in a given time period.
73
What is the basic law of supply
As **prices increase**, there is an **expansion of supply**
74
What is the profit motive and how does it link to the supply curve
Suppliers look to get the best prices for their product
thus if the price rises, there is an expansion of supply
75
What ONLY causes movement ALONG the supply curve
Change in market price
76
What effect does a rising price have on the supply curve
An **expansion of supply** ( chase profit motive )
77
What effect does a falling price have on the supply curve
a **contraction of supply**
78
What are the 3 Laws of Supply
1) The Profit Motive
2) Production Costs
3) Newcomers
79
Explain the effects of the 3 laws of supply
Profit motive - expansion of supply as price rises as it becomes **more profitable**
Production Costs - Higher output leads to higher production costs so they must **raise the price**
Newcomers - higher prices incetivise new businesses to enter **raising total supply**
80
What is Joint Supply and an example
Changes in one product leads to changes in a by-product of it
e.g. expansion in beef markets will lead to expansion of supply of beef hides
81
What does it mean if the supply curve shifts inwards ( to the left ) or outwards (to the righr)
It is due to **non-price factors**
82
What are 7 non-price factors in the supply curve and if they cause an inward or outward shift
1. change in unit _cost of production_ (either)
2. _fall in exchange rate_ as it increases cost of imports ( **inward** )
3. Advances in production technology ( **outward** )
4. Newcomers ( **outward** )
5. seasonal factors ( either )
6. Subsidies ( **outward** )
7. Taxes and Regulations ( **inwards** )
83
Define equilibrium (market clearing price)
a balance between demand and supply
(where the supply and demand curves intersect)
84
What is happening at Point A
At Point A there is an **excess supply** thus there is **downward pressure on the price.** as people lower the price to sell more to stop the glut of products
85
What is happening at point B
At Point B there is **excess demand** there is **upwards pressure on the price** as producers chase profit motive and increase supply and thus price. Eventually reducing demand.
86
What is the effect of an inward shift of demand on a Price-Demand Graph
There is a **lower equilibrium price** so there is a **contraction of supply**
87
What is the effect of an inward shift of supply on a PD Curve
a **higher price equilibrium** so a **contraction of demand**
88
What is the effect of an outward shift of demand on a PD Graph
A **higher equilibrium price** so there is an **expansion of suppy**
89
What is the effect of an outward shift of supply on a PQ graph
**lower price equilibrium** and an **expansion of demand**
90
Explain the movement from Point A to Point C
A rise in demand causes price to peak at B as supply cannot catch up as fast
When an **expansion of supply** occurs, due to profit motive, the price falls to C
91
What about when there is an outward shift in both supply and demand
Both factors cause **quantity of goods bought and sold to increase** but the market price will be dependent upon which one increased more
e.g. here supply exceeds so market price falls
92
Define Elasticity
the percentage change of one economic variable **in response to a change in another**
93
How is Price Elasticity of Demand calculated
94
What is an alternative formula to the basic PED Formula
95
How do you work out % Δ
96
What is an elastic good
A good with a PED \>1
Meaning, a change in price leads to a **bigger change in demand**
97
What is the demand curve like for a good with PED\>1
98
What is an inelastic good
A good with a PED\<1, Meaning a change in price leads to a **smaller change in demand**
99
what is the demand curve for an inelastic good
100
What happens if PED = O
The good is **perfectly inelastic,** the demand doesn't relate to price anymore
101
What happens if PED = infinity
The good is **perfectly elastic**, there is **only one price** at which a consumer is willing to pay
102
What happens if the PED = 1
It is described as **unitary elastic demand**, a change in price is met with a **propotionate change in demand throughout**
103
What is the demand curve for a perfectly inelastic curve look like and how do shifts in supply interact with it
a horizontal line. if supply falls, market equilibirum can rise without any contraction in demand
104
What is the demand curve for a perfectly elastic good and how do supply shifts interact with it
a horizontal line
change in market supply will not lead to any change in market price. Implying that the supplier has **no pricing power** (typically in a very competitive market)
105
What is the demand curve for a unitary elastic good like and how does it relate to consumer spending
total consumer spending remains the same at every level
106
What will happen to the coefficient of a PED along a linear line
The PED will **vary** as you move along the curve
107
What is the PED at high prices ( on a linear demand curve )
It is **elastic**
108
What is the PED at low prices ( along a linear demand curve )
It is **inelastic**
109
What 3 things is PED used to predict
1. effect of change in £ on total revenue
2. **price volatility**
3. effect of a change in indirect tax on £ and Q.D.
110
What is surge pricing
When demand \> supply ⇒ ⇡£
e.g. uber
111
What are the main problems with PED
* **inaccurate data**
* Assumption of profit maximisation
* price sensitivity subject to time, region and range
112
Define total spending
amount buyers spend on a product
113
Define total revenue
the amount sellers recieve from selling the product
114
If the good is **inelastic** what will happen to total revenue as ⇑£
⇑ Revenue with ⇑ £
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If a good is **elastic**, what will happen to total revenue as prices rises
⇓ Revenue with ⇑ £
116
If the good is **unitary elastic**, what will happen to total revenue as prices rise
nothing
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What is **cross elasticity of demand** (XED)
Measures the responsiveness of demand of Good X after a change in price of a related Good Y
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What is a **substitute**
a good which can replace another e.g. coke and pepsi
119
What is the formula for XED
120
What are close substitues and weak subtitues and what is the demand curve for each
close subtitues are products that can be directly replaced so have a positive and **high YED**
weak substitues are products that are less similar so still have a positive but **low YED**
121
What is a complement
a good which is demand as it is in use with another good (**joint demand**)
e.g. printers and ink
122
What are close and weak complements
Close complements are those where they have strong joint demand so have a **negative high XED**
Weak complements are those with a weak joint demand so have a negative **low XED**
123
What is the XED of unrelated goods
They have a XED of O
124
Define YED (income elasticity of demand
the relationship between a change in quantity demanded for good X and a change in real income
125
What is the formula for YED
126
What is a normal good
a good which is income elastic
127
What 2 categories of normal goods are there
Normal neccesities: low but +ve
Normal luxuries: high and +ve
128
What is an inferior good
a good that has **-ve YED** and is a **counter-cylical** good
129
How is YED useful for firms
it allows firms to estimate how demand for its products will change
130
Define and identify on the graph where consumer surplus is ( to do with demand )
the gap between what the consumer is willing to pay and what they actually pay
e.g. consumer is willing to pay $5 for a good, but pays $3
131
How does low and high PED ( price elasticity of demand ) interact with consumer surplus
a **low** PED = **high** consumer surplus
a **high** PED = **low** consumer surplus
132
How does consumer surplus change with shifts in supply + demand
It **increases** with **outward shifts**
It **decreases** with **inward shifts**
133
Define producer surplus and identify where it is on the graph
difference between what producers are willing and able to supply a good for and the price they actually receive
e.g. producer would be willing to sell a good for $4, but he is able to sell it for $10, he achieves producer surplus of $6.
134
how does producer surplus interact with shifts in demand + supply
**outward** shifts = **higher** producer surplus
**inward** shifts = **lower** producer surplus
135
Identify both consumer AND producer surplus on this graph and what does it tell you
they operate in **equilibrium**, ceteris paribus
136
What are the 3 main functions of price
* Rationing
* Singalling
* Incentives
*
137
What is the rationing effect
Prices rise as supply falls to decrease demand and **preserve** the good
138
What is the signalling effect
Prices adjusting to demonstrate **market conditions**
e.g. where market resources are needed(or not)
139
What is the incentive effect
The rising price of a good causes supply increase
Decrease of price causes demand increase
140
What is an **ad valorem tax**
percentage tax e.g. 20% on the unit price
141
**specific tax**
set tax per unit
142
What is the effect of an ad valorem tax on a supply curve
to cause a pivotal shift in the supply curve
143
If PED\>1 and indirect tax who will absorb most of the costs.
if the **co-efficient of price elasticity of demand \>1**, then most of the burden of an indirect tax will be **absorbed by the supplier**
144
indirect tax & PED\<1 who will absorb most costs
If the co-efficient of **price elasticity of demand \<1**, most of an indirect tax can be **passed on to the final consumer**
145
What does a government subsidy do to the supply curve ( Draw graph and show subsidy)
Causing an outward shift
146
How do you calculate government spending on the subsidy.
Both formula and shading on a graph
Total spending = government susbsidy per unit \* quantity produced
147
If the market PED is elastic, what is the stronger effect of a subsidy
It has a strong effect on the **quantity**
148
If the PED is inelastic what is the larger effect of the subsidy
it has a larger effect on the new **price**
149
What is cost benefit analysis
process used to measure the benefits of a decision or taking action minus the costs associated with taking that action.
150
Problems with cost benefit analysis
* hard to assign monetary values e.g. water/air quality, social inclusion
* **Uncertainty** with major products e.g. population growth, operating costs
151
What is the **economic incidence** of a subsidy
Indicates who is made better off by the subsidy
152
What is the **legal incidence** of the subsidy
indicates who, by law, the subsidy is intended to help
153
Why does the price of a good fall by the full effect of the subsidy
The producer keeps the extra revenue
154
What is the overall cost of the subsidy to the government in this graph
CABP1
155
What is the gain to the consumer, the total gain and the extra they pay after the subsidy
the gain is P-P1 per unit and the whole gain to the consumer if PFB1
the extra bit they pay is LFQQ1
156
Mark on the sections where there is benefit to the producer and benefit to consumer as a result of the subsidy
157
Where is the producer revenue on this graph of indirect taxation
158
where is the welfare loss on this indirect tax
159
What is an index number
A figure refelecting price or quantity compared with a base value (always 100)
160
What is the formula for an index number
Index number in Year Y = (Data Value in Year Y / Base Year Value)\*100
161
What is assumed about the ‘economic man’
rational,intelligent and emotionless
162
What is ‘bounded rationality’
Consumers do not have sufficient information
163
What is ‘bounded rationality’
Consumers do not have sufficient information
164
What is ‘Heuristics’
**mental shortcuts** for optimal, not perfected, decisions
165
What are default choices (habitual nature)
repeat behaviour as they require little cognitive behavious
166
What are choice architecture
describes how the decisions we make are affected by the layout / sequencing / range of choices that are available
167
What are is an example influenced by social norms
Social norms about ‘giving’
168
What is Herd Behaviour
Making decisions based in part **on who is around us** and the choices they make e.g. financial markets, items off a menu in restaurant
169
What is Anchoring
Value set by **mental reference points** e.g. 2.00 wings meal
170
What is Priming
Our behaviour by cues that work subconsioucsly and prime us to behave in certain waves
e.g. playing of certain types of music in a shopping mall
171
What is framing
framing a question or offering in a different way
172
What is asymmetric framing
including an obviously inferior 3rd choice or a hyper-expensive 3rd option rather than a simple expensive/cheap option that can guide consumers to **more expensively priced items**
173
Availability Bias
distortion that arises from the use of information which is most readily available
e.g. over estimate likelihood of an air crash based on recent headlines
174
What is the Commitment effect
The **more public** our position, the **less willing** we are to **change it**
175
What does the concave shape of the PPF show
illustrates the law of **increasing opportunity cost**
176
Which of these can you not tell from a PPF diagram :
1. Productive efficiency
2. Allocative efficiency
3. Pareto efficiency
Cannot tell allocative efficiency since we cant see consumer demand from the PPF
177
define the price mechanism
a system where the forces of demand and supply determine the prices of commodities
178
What are the functions of money
1. Medium of Exchange
2. Store of Value
3. Measure of Value
4. Standard of Deferred Payment
179
What do barter systems rely on and how does a medium of exchange fix this
Barter systems rely on there being a double coincidence of wants between the two people involved in an exchange.
Money acts as a medium of exchange. This allows goods and services to be traded without the need for a barter system
180
What is the function of money; **standard of deferred payment**
the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future.
181
What type of economy did **Friedrich Hayek** propgate and how
Free Market Economy
* Intervention caused **economic instability**
* Government should **just maintain law** and order
* Small group of individuals (government) could never have enough information to properly allocate resources to people's needs
182
What are some examples of the role of the State in a mixed economy
* Progressive taxation to reduce inequality
* Government **regulation**
* Taxes on demerit goods
* gov't provision of public goods
183
What are the underlying assumptions of rational econommic decision making
are the underlying assumptions of rational econoare the underlying assumptions of rational econo
184
What are the underlying assumptions of rational economic decision making (for consumer, firms and govt.)
* Consumers aim to **maximise utility**
* Firms aim to **maximise profit**
* Governments aim to **maximise social welfare**
185
How does the concept of diminishign marginal utility influence the shape of the demand curve
* If more of a good is consumed there is less satisfaction derived from the good
* Thus **consumers are less willing to pay high prices at high quantities**
186
What is PES and the formula
Price Elasticity of Supply - the responsiveness of supply to a change in the price of a good
187
What is **unitary elastic PES**
PES = 1
188
What is **relatively elastic PES**
PES.1; q.s. changes by a larger percentage change than price so supply is relatively responsive
189
What is **relatively inelastic PES**
**PES\<1**; q.s. changes by a smaller percentage than price so supply is relatively unresponsive to price
190
What is **perfectly elastic** supply
PES = infinity ; a change in price means quantity supplied falls to 0
191
What is **perfectly inelastic PES**
Where **PES = 0;** a change in price has no effect on output
192
What are factors **affecting PES**
* **Time**; short-run inelastic, long run more elastic
* **Stocks**: businesses can you extra stock to respond to higher prices
* **Spare capacity**: businesses can respond to higher prices by increasing output
* **Avaliability of factors of production**
* **Ease of entry** into the market
* **Avaliability of substitutes**
193
define the **short run** in economics
that states that, within a certain period in the future, at least one input is fixed while others are variable
194
define the **long run** in economics
a period of time where all factors of production and costs are variable
