1.2 Flashcards
(132 cards)
1
Q
What are the two approaches to make an assumption ?
A
Deduction and Induction
2
Q
What is Deduction ?
A
Deduction is when you start with a hypothesis
3
Q
What is Induction ?
A
When you collect evidence
4
Q
What is neoclassical economics ?
A
It is a theory that focuses on supply and demand being the driving forces behind the production, pricing, and consumption of goods and service
5
Q
What is behavioural economics ?
A
- It is a school of economic thought based on evidence and observations to develop assumptions of economic decision making.
- It assumes that individuals have bounded rationality
6
Q
What is bounded rationality ?
A
Individuals wish to maximise utility but are unable to do so due to a lack of time, information and ability to process information
7
Q
What prevents consumers form being rational ?
A
- A lack of time
- A lack of information
- A lack of ability to process information
8
Q
What do consumers aim to maximise ?
A
Consumers aim to maximise utility
9
Q
What is meant by a customers utility ?
A
The satisfaction they gain from consuming a good or a service
10
Q
What do firms aim to maximise ?
A
Firms aim to maximise profits
11
Q
How do firms maximise profits ?
A
Through producing as efficiently as possible and making things that consumers want and need
12
Q
What do economic agents require to make rational decisions ?
A
- Time
- Information
- The ability to process information
13
Q
What are the aspects of human behaviour that prevent rationality ?
A
- Habitual behaviour / Consumer inertia; when they are satisfied with what they have
- Being influenced by the behaviour of others
- Consumer weakness at computation; when the consumer does not understand the data or information
14
Q
What is Privatisation ?
A
The process of transferring economic activity from the state to the market
15
Q
What is Nationalisation ?
A
The process of bringing economic activity under state control
16
Q
What is Demand ?
A
Demand is the quantity of a good or service purchased at a given price over a given time period
17
Q
What is the law of demand ?
A
Ceteris paribus, as the price of a good increases quantity demanded decreases; conversely, as the price of a good decreases quantity demanded increases
18
Q
What is meant by Diminishing Marginal Utility ?
A
- It refers to the falling satisfaction for every additional unit consumed
- The more you have of something, the less satisfied you are with it
19
Q
What is the income effect ?
A
Assuming a fixed level of income, the income effect means that as the price level falls the amount that consumers can afford increases, and so demand increases
20
Q
What is marginal utility ?
A
The utility or satisfaction obtained from consuming one extra unit of a good or service
21
Q
Explain diminishing marginal utility
A
As successive units of a good are consumed, the marginal utility gained from each extra unit will fall
22
Q
How do you work out government spending on subsidies ?
A
Subsidy rate x quantity sold
23
Q
How do you work out total tax revenue ?
A
Tax revenue = tax rate x quantity sold
24
Q
What is a reason for the demand curve being downward sloping ?
A
When the price of the good is lower, more can afford it and/or are willing to buy it. So consumer demand increases
25
How do changes in prices affect the demand curve?
You go along the demand curve, but it doesn't shift
26
What does a decrease in price lead to ?
A decrease in price results in an extension/expansion in demand. We can represent this on a diagram by movement along the demand curve, to the right
27
What does an increase in price lead to ?
An increase in price results in a contraction in demand. This can be represented by a movement along the demand curve, to the left.
28
What causes a shift in the demand curve ?
Non price related factors such as PIRATES
29
What is PIRATES ?
- Population; larger the population, higher the demand
- Income; more disposable income means more demand
- Related goods
- Advertising; good advertising will increase demand
- Tastes and fashions
- Expectations; if the price of something is likely to increase in the future than demand is likely to increase in the present
- Seasons; demand changes according to the seasons
30
What is a substitute good ?
Substitute goods are alternative products that could be used for the same purpose
31
How does the price of a substitute good impact demand ?
- As the price of a substitute good increases, demand for the original product increases. Less people will buy the substitute good.
- As the price of the substitute good decreases, demand for the original product will decrease. More people will buy the substitute good.
32
What is a complementary good ?
Complimentary goods are products that are used together
33
How does the price of a complimentary good impact demand ?
- If A is a complement to B, an increase in the price of A will result in a negative movement along the demand curve of A and cause the demand curve for B to shift inward; less of each good will be demanded.
- Conversely, a decrease in the price of A will result in a positive movement along the demand curve of A and cause the demand curve of B to shift outward; more of each good will be demanded
34
What is revenue ?
Revenue is the income that a government or company receives
35
How do you calculate total revenue ?
Price × Quantity
36
What is supply ?
Supply is the quantity of a good or service that firms are willing to sell at a given price over a given time period
37
What is the law of supply ?
Ceteris paribus, as the price of a good increases, the quantity supplied increases and as the price of a good decreases, the quantity supplied also decreases
38
What does the supply curve assume ?
- Firms are motivated to produce by profit
| - The cost of producing a unit increases as output increases
39
Why does the supply curve slope upwards from left to right ?
This is because an increase in price will also lead to an increase in supply and the quantity produced
40
What does an increase in price lead to (supply curve) ?
- An increase in price leads to an extension in supply.
| - Movement along the curve towards the right
41
What does a decrease in price lead to (supply curve) ?
- A decrease in price leads to a contraction in supply.
| - Movement along the curve towards the left.
42
What causes an extension in supply ?
An increase in price
43
What causes a contraction in supply ?
A decrease in price.
44
What are the factors that shift the supply curve ?
- Productivity; higher productivity causes an outward shift because average price for the firm decreases
- Indirect taxes; inward shift in supply
- Number of firms; More firms there are, the larger the supply
- Technology; more advanced the technology causes an outward shift
- Subsidies; subsidies can cause an outward shift in supply
- Weather; favourable conditions will increase supply, shift to the right
- Costs of production; If it falls, shift to the right. If it rises, shift to the left
45
Why does the number of firms in a market affect supply ?
If there are more firms in a market, there are likely to be more firms producing the same good. This increases the amount of the good available.
46
How can we represent an increase in the number of firms on a curve ?
A shift to the right on the diagram
47
What is a market ?
A market is anywhere where buyers and sellers meet to exchange goods and services
48
What is excess demand ?
Excess demand is when there is too much demand in relation to supply
49
How is excess demand eliminated by market forces ?
- Excess demand is easily eliminated by market forces. If either the price or the supply goes up, demand will decrease exponentially
50
What is excess supply ?
Excess supply is when there is more supply than there is demand
51
How is excess supply eliminated by market forces ?
- Excess supply is easily eliminated by market forces. This is resolved when firms reduce prices to sell off excess supply.
- Lower prices discourage supply and encourage demand until the excess is removed.
52
What is the equilibrium price?
- The equilibrium price is the price where demand equals supply
- Where consumers and producers willingly meet
53
Why is the equilibrium price also known as the market-clearing price?
It is also known as the market clearing price because all the products supplied to the market are bought or cleared from the market.
54
What is a direct tax ?
A tax levied directly on an individual or organisation
55
What is an indirect tax ?
A tax levied on a good or service
56
What is a specific tax ?
- Tax is the same fixed amount at all prices
| - Causes a parallel shift in the supply curve
57
Examples of a specific tax
Fuel duty, beer duty
58
What is an ad valorem tax ?
- The tax increases as the amount sold rises
| - Causes a non parallel shift in the supply curve
59
Examples of an ad valorem tax
VAT, Import tariffs
60
What does the government aim to do by imposing taxes ?
- To raise government revenue
| - To reduce certain economic activities
61
What is a subsidy ?
Money given to firms by the government in order to encourage production
62
What do subsidies lead to ?
- Increased production
- Lower production costs
- Lower costs for customers
- Shift right in the supply curve
63
Why does the government give subsidies ?
Governments give subsidies to firms in order to encourage production
64
What does a subsidy do to the supply curve ?
It shifts the supply curve to the right
65
What is derived demand ?
It is the demand for a factor of production used to produce another good or service
66
What is effective demand ?
Effective demand is when a desire to buy a product is backed up by having an ability to pay
67
What is joint demand ?
Joint demand is when demand for one product is positively related to demand for a related good or service e.g. fish and chips, they are complementary
68
What is composite demand ?
Composite demand is where a product has more than one use, an increase in demand for one product leads to a fall in supply of the other.
69
What is the price elasticity of demand ?
PED measures the responsiveness of demand given a change in price
70
What is the equation for price elasticity of demand ?
Percentage change in quantity demanded / percentage change in price
71
When is PED elastic ?
When the PED value is greater than 1
72
When is PED inelastic ?
When the PED value is between 0 and 1
73
When is PED unitary elastic ?
When the PED value is 1
74
When is PED perfectly elastic ?
When the PED value is infinity
75
When is PED perfectly inelastic ?
When the PED value is 0
76
When is demand price elastic ?
When a change in price causes a proportionally larger change in demand
77
When is demand price inelastic ?
When a change in price causes a proportionally smaller change in demand
78
What are the determinants of price elasticity of demand ?
- Number of substitutes
- Necessity
- Addictiveness
- Time
- Proportion of income spent on the product
79
What effect does number of substitutes have ?
- The more substitutes a product has, the greater the degree of consumer switching will be when there is a price change
- The more substitutes a product has the more elastic demand must be
80
What effect does necessity have ?
If a product is considered a necessity, demand is likely to be price inelastic as people require the product no matter what the price is
81
What effect does addictiveness have ?
The more addictive a product is, the more price inelastic demand will be
82
What effect does time have ?
Time gives consumers the opportunity to find alternatives. Therefore the greater the time period, the more price elastic demand will be
83
What effect does the proportion of income spent on the product have ?
The greater the proportion of income spent on a product the less able consumers will be able to afford any price increases. Therefore, the greater the proportion of income spent on a product the more price elastic demand will be
84
What is the price elasticity of supply ?
PES measures the responsiveness of supply given a change in price
85
What is the equation for price elasticity of supply ?
Percentage change in quantity supplied / percentage change in price
86
When is supply price elastic ?
When a change in price causes a proportionally larger change in supply
87
When is supply price inelastic ?
When a change in price causes a proportionally smaller change in supply
88
When is PES elastic ?
When the PES value is greater than 1
89
When is PES inelastic ?
When the PES value is between 0 and 1
90
When is PES unitary elastic ?
When the PES value is 1
91
When is PES perfectly elastic ?
When the PES value is infinity
92
When is PES perfectly inelastic ?
When the PES value is 0
93
What are the determinants of price elasticity of supply ?
- Time required to produce the product
- Level of spare capacity
- Number of stock available
- Time
- Perishability of the product
94
What effect does the time required to produce the product have ?
- The greater the amount of time needed to produce the product the more price inelastic supply will be.
- Products with a shorter production time tend to be more price elastic.
- If the product can be produced quickly, firms will be able to respond to changes in price rapidly and vice versa
95
What effect does the level of spare capacity have ?
- The greater the spare capacity is in an industry the more price elastic supply will be.
- This is because there will be factors of production available to be used in production.
- Therefore, if there was a price rise the industry/firm would likely to be able to respond quickly by increasing production.
- Vice Versa
96
What effect does the number of stock available have ?
- The more finished goods available the more price elastic supply will be.
- This is because firms will be able to respond to a price rise by releasing some/all of these stocks on to the market straight away.
97
What effect does time have ?
- Time gives firms the opportunity to expand or reduce production.
- Therefore, the greater the time period, the more price elastic supply will be.
- Vice Versa
98
What effect does the perishability of the product have ?
- Some products are more perishable than others e.g. mushrooms.
- The more perishable a product is the harder it is to build up stocks of it.
- Therefore, the more price inelastic in supply the product will be
- Vice Versa
99
What is consumer surplus ?
- The extra amount of money consumers are prepared to pay for a good or service above what they actually pay
- It is the utility or satisfaction gained from a good or service in excess of the amount paid for it
100
What is producer surplus ?
- The extra amount of money paid to producers above what they are willing to accept to supply a good or service.
- It is the extra earning obtained by a producer above the minimum required for them to supply the good or service.
101
What does producer surplus show ?
Shows the economic gain for producers by selling the good
102
What does perfectly elastic demand mean ?
- Producer surplus is 0
| - Consumer surplus is 0
103
What does perfectly inelastic demand mean ?
- Producer surplus is infinite
| - Consumer surplus is infinite
104
What does more inelastic demand lead to ?
The higher the consumer surplus is likely to be
105
What does more inelastic supply lead to ?
The higher the producer surplus is likely to be
106
How would a decrease in demand affect surplus ?
Lead to a fall in consumer and producer surplus, as both price and output decreases.
107
What would happen if there was an increase in demand ?
Both consumer and producer surplus will increase
108
How would a decrease in supply affect surplus ?
It would lead to a fall in consumer and producer surplus
109
What would happen if there was an increase in supply ?
An increase in supply would lead to an increase in consumer and producer surplus
110
What is XED ?
- Cross price elasticity of demand
| - It measures the responsiveness of demand for one good to changes in the price of another good
111
What is the equation for XED ?
Percentage change in the quantity demanded of product A / percentage change in the price of product B
112
What is the XED of substitute goods ?
They have a positive XED
113
What is the XED of complement goods ?
Thet have a negative XED
114
What is the XED of unrelated goods ?
They have a XED of zero
115
What is YED ?
Income elasticity of demand measures the responsiveness of demand to changes in income
116
What is the equation for YED ?
Percentage change in quantity demanded / percentage change in income
117
What is the YED of inferior goods ?
Inferior goods have a negative YED
118
What is the YED of normal goods ?
Normal goods have a positive YED
119
How are normal goods classified ?
They are classified as either income elastic or income inelastic
120
What does the YED have to be for them to be classified as income inelastic ?
The YED has to be between 0 and 1 for them to be classed as income inelastic
121
What goods are income inelastic ?
These tend to be necessities
122
What does the YED have to be for them to be classified as income elastic ?
The YED has to be larger than 1 for them to be classed as income elastic goods
123
What goods tend to be income elastic ?
These goods are often luxuries
124
What is the price mechanism ?
How price allocates goods and services in a market based on the levels of demand and supply
125
What are the three functions of the price mechanism ?
- Signalling
- Incentive
- Rationing
126
What is the signalling function ?
- Prices adjust to demonstrate where resources are required
| - Prices rise and fall to reflect scarcities and surpluses
127
What is the incentive function ?
- An incentive is something that motivates a producer or consumer to follow a course of action or to change a behaviour
- Higher prices provide an incentive to existing producers to supply more because they provide the possibility of more revenue and increased profits
128
What is the rationing function ?
- Rationing is done to ensure the proper distribution of resources without any unwanted waste
- It refers to the capacity of a competitive market to equalise quantity demanded and quantity supplied
129
When demand is price elastic what does a decrease in price lead to ?
A rise in total revenue
130
When demand is price inelastic what does a decrease in price lead to ?
A decrease in total revenue
131
When demand is price elastic what does an increase in price lead to ?
A decrease in total revenue
132
When demand is price inelastic what does an increase in price result in ?
A rise in total revenue
