1.1: The Market System - Paper 1 Flashcards
What is the problem of scarcity? (2)
Where there are infinite wants but limited resources. (1)
Because there are limited resources, so people need to make choices (1)
Define Opportunity Cost: (1)
The cost of the next best alternative given up. (1)
Explain the effects of Opportunity Cost on consumers, the government and producers (6)
Consumers: Individuals have to choose how to spend their limited budgets (2)
Producers: For example, producers would have to choose between training its workforce, or buying a machine. (2)
Government: For example, a government may choose between building a hospital or building a new motorway. (2)
Explain the positive and negative causes of economic growth: (7)
Positive: (3)
Negative: (4)
Positive:
- New technology: More reliable and produce more output. (1)
- Improved efficiency: Efficient methods mean more output can be produced with fewer resources. (1)
- Education and Training: The economy becomes more productive when educated workers increase. (1)
Negative:
- Lack of natural resources: Like oil and coal (1)
- Weather: If it is too hot, it may prevent countries from reaching their agricultural targets. (1)
- Emigration of skilled workers (1)
- Wars, conflict and natural disasters (1)
Explain what economists assume that consumers and businesses aim to do: (2)
- Consumers aim to maximize their benefit (1)
- Businesses aim to maximize their profit (1)
Explain why consumers may not maximize their benefits: (3)
- Consumers are not always good at calculating their benefits. (1)
- Consumers have habits that are hard to give up. (1)
- Consumers sometimes copy other peoples behavior. (1)
Explain why businesses may not maximize their profit: (3)
- Producers may have managers that revenue maximize or sales maximize. (1)
- Producers may prioritize caring for customers. (1)
- Producers may complete charitable work. (1)
Define the term Demand: (1)
The quantity of goods and services consumers are willing and are able to buy at a given price. (1)
Explain the factors that shift the demand curve: (6)
- Advertising: If goods are advertised more heavily, the demand is likely to increase and shift to the right. (1)
- Income: If salaries and income increase, people will more likely spend their money which causes the demand curve to shift to the right. (1)
- Fashion and taste: Demand patterns may change due to consumers taste and fashion, so the shifting of the curve depends on the customers preference. (1)
- Price of subsitutes: The price of a subsitute will effect the demand accordingly. (1)
- Price of compliments: Some things are bought together, like milk and cornflakes. If the demand for one of these goods were to rise, the demand will fall for the other. (1)
- Demographic Changes: Age distribution of population, a certain gender dominates the population, geographical distribution and population structure. (1)
Define the term Supply: (2)
Amount that producers are willing to offer for sale at different prices (1) in a given period of time. (1)
Explain the factors which cause a shift in the supply curve: (5)
- Costs of production: If production costs rise, sellers are likely to reduce their supply. This is because their costs will be reduced and vice versa (1)
- Changes in technology: New technology becomes available that businesses use in their production processes. This technology is more efficient and can reduce costs of production (1)
- Indirect taxes: These are taxes that are imposed on spending. When imposed, it will shift the supply curve to the left. These taxes also discourage the consumption of harmful products. (1)
- Subsidies: This is money that is paid by the government to make prices lower, reduce the cost of producing goods or providing a service. This encourages the production of a certain good. (1)
- Natural Factors: Especially for agricultural products, natural disasters and weather plays an important role in supply. For example, if there are good conditions for growing crops, this will increase the yield and therefore increase supply.
In the event of a natural disaster, this will damage crops and reduce crop yield. (2)
Define the term excess demand: (2)
Where demand is greater than supply (1) and there are shortages in the market (1)
Define the term excess supply: (2)
Where supply is greater than demand (1) and there are unsold goods in the market (1)
Explain how market forces remove excess demand (2)
- Producers could raise the price (1)
- Producers could employ more resources and increase supply (1)
Explain how market forces remove excess supply (2)
- Producers would lower their prices (1)
- Producers could store the excess supply and release it to the market at a later date, (1) but this is not practical for fresh items
Define the term PED: (1)
The responsiveness of demand to a change in price.
State the formula for PED:
PED = % change in quantity demanded/% change in price
Define the following terms: (8)
- Perfectly inelastic (demand) (2)
- Price inelastic (demand) (1)
- Unitary elasticity (demand) (2)
- Price elastic (demand) (1)
- Perfectly elastic (demand) (2)
- Perfectly inelastic (demand): Demand where PED = 0, (1) a change in price will result in no change in the quantity demanded. (1)
- Price inelastic (demand): change in price results in a proportionately smaller change in the quantity demanded (1)
- Unitary Elasticity (demand): Where PED = -1, (1) the responsiveness of demand is proportionately equal to the change in price (1)
Price elastic (demand): change in price results in a greater change in the quantity demanded. (1)
Perfectly elastic (demand): Demand where PED = infinity (1), an increase in price will result in zero demand (1)
Explain the factors influencing PED: (4)
- Subsitutes: Goods that have a lot of close subsitutes will tend to be more elastic. This is because consumers are able to switch easily from one product to another. For example, if strawberry jam prices rise, consumers can switch to other types of jam. (1)
- Degree of necessity: Goods that are considered essential by consumers will have inelastic demand. If food and fuel prices rise, consumers have no choice but to purchase the same amount all the time (1)
- Percentage of income spent on goods or service: For expensive products, consumers spend a large amount of their income on these. Consumers may choose to wait until prices drop. (1)
- Time: In the short term, goods have inelastic demand because it takes time for consumers to find subsitutes. In the long term, demand is more elastic because consumers are more prepared to look for alternatives. (1)
State the formula for total revenue: (1)
Total Revenue = Price x Quantity (TR = P x Q) (1)
Define the term PES: (1)
Responsiveness of supply to a change in price (1)
State the formula for PES (1)
PES = % change in the quantity supplied/% change in price
Define the following Terms: (8)
- Perfectly inelastic (supply): (2)
- Price inelastic (supply): (1)
- Unitary elasticity (supply): (2)
- Price elastic (supply): (1)
- Perfectly elastic (supply): (2)
Perfectly inelastic (supply): Where PES = 0 (1), the quantity supplied is fixed and cannot be adjusted whatever the price (1)
Price inelastic (supply): change in price results in a proportionately smaller change in the quantity supplied. (1)
Unitary elasticity (supply): where PES = 1 (1), a change in price will be matched by an identical change in the quantity supplied. (1)
Price elastic (supply): change in price results in a proportionately greater change in the quantity supplied (1)
Perfectly elastic (supply): where PES = infinity (1), producers will supply an infinite amount at the given price. (1)
Explain the factors influencing PES: (4)
- Factors of production: If producers have easy access to factors of production like labour, materials and machinery, they will be able to boost productivity which means that supply will be elastic. (1)
- Availability of stocks: Producers that hold stocks of goods can respond quickly to price changes so supply is elastic. Where this is not possible, supply will be inelastic. (1)
- Spare capacity: If there is spare capacity, producers would be able to produce more with the resources that they have. (1)
- Time: In general, all producers can adjust output if they are given time. As a result, the more time producers have to react to price changes, the more elastic supply will be. (1)
Define the term income elasticity of demand: (1)
Responsiveness of demand to a change in income. (1)
State the formula for income elasticity of demand: (1)
Income elasticity of demand: % change in quantity demanded/% change in income (1)
Define the following terms:
- Luxury good
- Normal good
- Inferior good
- Luxury Good: a good for which demand increases more than proportionally as income rises. (1)
- Normal Good: Goods for which demand will increase if income increases or fall if income falls. (1)
- Inferior Good: A good in which demand drops when peoples income rises
Explain the significance of price/income inelasticities to businesses. (2)
- Many firms will be interested in the income elasticity of demand (1) because changes in income in the economy may affect their demand (1)
Explain the significance of price/income elasticities to the government (4)
Indirect Taxes (1): It is important for governments to select products (to add indirect tax) that have inelastic demand because consumers will avoid heavily taxed products if demand for them is elastic (1)
Subsidies: (1) Governments might also consider PED when granting a subsidy to producers because the effect of a subsidy is to shift the supply curve to the right and to help the poor by making the good cheaper. So it is important that the demand is price inelastic (1)
Define the term mixed economy: (1)
An economy where goods and services are provided by both the public and private sectors.
Define the term public sector: (1)
Government organisations that provide goods and services in the economy (1)
Define the term private sector: (1)
Provision of goods and services by businesses that are owned by individuals or groups of individuals
Explain the differences between public and private sectors:
- Ownership/Control (2)
- Aims (2)
Ownership:
- Private Sector: Private sector businesses are owned by individuals or groups of individuals (1)
- Public Sector: Public sector businesses/organisations are controlled by local or central government. (1)
Aims:
- Private Sector: In the private sector, the aims of firms are likely to be determined by their owners. The aims of most private firms is to make profit. (1)
- Public Sector: The aims in the public sector depends on the service each public firm provides, these could include improving the quality of services or minimizing costs. (1)
Explain how the problems of ‘What to produce’, ‘How to produce’, and ‘For whom to produce’ are solved in the mixed economy. (3)
What to produce: both market forces and government decisions determine which goods and services are produced and how they are distributed. (1)
How to produce: In a mixed economy, resource allocation is determined by a combination of market forces and government intervention. (1)
For whom to produce: The goods produced in the private sector are sold to anyone who can afford them. The market system is responsible for their allocation. In contrast most public sector goods are provided free to everyone and paid for from taxes. (1)
Define the term market failure: (1)
Where markets lead to inefficiency: (1)
State reasons why market failure can happen: (4)
- Externalities (1)
- Lack of competition (1)
- Missing Markets (1)
- Lack of information (1)
Explain why governments need to intervene because of market failure: (4)
- Businesses may produce a lot of pollution
- Some businesses may heavily dominate the market
- Poor information about products from firms
- Factors of production are immobile.
Explain the freerider problem: (3)
The free rider problem is an issue in economics. (1) It is considered an example of a market failure (1). It is an inefficient distribution of goods or services that occurs when some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs. (1)
Define the term free rider: (1)
- An individual who enjoys the benefit of a good but allows others to pay for it. (1)
Explain the role the private and public sectors play in the production of goods and services: (2)
Private sector: The private sector is responsible for providing the everyday goods and services bought like people like food, clothes, cars, entertainment, holidays etc. (1)
Public Sector: The public sector provides goods and services like public transport, light, and electricity. They also provide goods in which the private sector cannot provide in sufficient quantities. (1)
Explain the importance of the public and private sectors in different economies: (2)
Public sector: In some countries governments play a key role in the provision of public services such as education, health care and infrastructure. (1)
Private sector: In some economies, governments believe that a greater quantity of goods and services should be provided by the private sector to potentially increase the quality of the product (1)
