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OCR economics > Microeconomics PT2 > Flashcards

Microeconomics PT2 Flashcards

1
Q

when does the income elasticity change

A

when the demand for the good decreases as incomes increase

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2
Q

when is a good inferior

A

a good whose demand drops when people’s incomes rise

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3
Q

when is a good normal

A

when the demand for the good increases as incomes increase

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4
Q

is the value of an inferior good positive or negative

A

negative

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5
Q

is the value of an normal good positive or negative

A

positive

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6
Q

what is the elastic value of a necessity good

A

between 0 and 1

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7
Q

what is the elastic value of a luxury good

A

between 1 and infinity

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8
Q

when is a good income inelastic

A

when the value is between -1 and 1, when the responsiveness of quantity demanded is proportionally less than the change in income

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9
Q

when is a good income elastic

A

when the value is between -1 and infinity and 1 and infinity, when the responsiveness of quantity demanded is proportionally more than the change in income

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10
Q

when does YED = 0

A

when there is no relationship between income and quantity demanded

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11
Q

when is YED important for a business

A

helps firm predict how changes of economic cycle affects what to produce
luxury goods see more price volatility
important to have a diverse product range
high value products increase profit margins, high YED and low PED

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12
Q

cross price elasticity of demand

A

responsiveness of quantity demanded for one good due to a change in the price of another

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13
Q

cross price elasticity formula

A

% change in quantity demanded of good X / % change in price demanded of good Y

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14
Q

when two goods are substitutes

A

XED is positive because a rise in the price of one good leads to a rise in demand for the other

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15
Q

when two goods are complements

A

if a decrease in the price of one good causes an increase in the demand for the other

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16
Q

the relationship between XED and the products

A

the relationship between XED and the products

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17
Q

if XED is 0

A

the products are unrelated

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18
Q

when is XED inelastic

A

the value is between -1 and 1, when a change in demand of good X creates a less than proportionate change in demand for good Y

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19
Q

when XED is elastic

A

the value is between -1 and infinity and between 1 and infinity

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20
Q

when is XED useful to a firm

A

firms will have to look at substitutes its product has, if there are no substitutes the firm will raise its prices - firms spend on advertising to reduce substitutes and differentiate the product
can use knowledge of complements to increase overall revenue if firms produce both

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21
Q

price elasticity of supply

A

responsiveness of quantity supplied due to a change in price

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22
Q

PES formula

A

% change in quantity supplied / % change in price

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23
Q

when is PES 0

A

supply is perfectly inelastic - there is a completely fixed capacity

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24
Q

value of inelastic PES

A

when PES is between 0 and 1

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25
Q

PES inelastic

A

PES inelastic

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26
Q

unitary PES value

A

1

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27
Q

PES is unitary

A

a change in price leads to a proportionate change in quantity supplied

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28
Q

elastic PES value

A

between 1 and infinity

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29
Q

PES is elastic

A

a change in price leads to a more than proportionate change in quantity supplied

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30
Q

perfectly elastic PES value

A

infinity

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31
Q

PES is perfectly inelastic

A

a firm can sell any quantity at a given price - if prices rise above then the business will lose all sales

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32
Q

factors affecting PES

A

spare capacity
level of stock available
ease of employing factors of production
time period
perishable
substitution of capital for labour

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33
Q

why is PES important to firms

A

firms want to respond quickly to changes in price and demand
they want to make supply as elastic as possible

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34
Q

using knowledge of PED

A

price discrimination - demand varies between consumers
tax incidence - if demand is inelastic, higher tax leads to higher prices - the tax incidence will be mainly borne by consumers, if demand is elastic the tax will be mainly borne by producers

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35
Q

why is PED useful to firms

A

many factors to take into account PED is one of them
other measures of elasticity may be more important
in oligopoly situations firms might be more concerned about other firms through advertising and competition
allows for revenue increase - differences of PED can allow for price discrimination and convert consumer surplus into producer surplus

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36
Q

margin principle

A

individuals make decisions based on considering the impact of small changes from the existing situation

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37
Q

utility

A

the satisfaction received from consuming a good or service

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38
Q

marginal utility

A

the additional utility from consuming an additional unit of a good or service

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39
Q

total utility

A

total satisfaction gained from consuming a good or service

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40
Q

diminishing marginal utility

A

the more of a good you consume, the less satisfaction is gained from the consumption of the extra unit

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41
Q

marginal utility formula

A

change in total utility / change in quantity of units

42
Q

explain marginal utility demand curve

A

as the consumer consumers larger quantities of good x its marginal utility diminishes, therefore at diminishing price, the quantity of the good x increases the consumer must consider the utility of the commodity with the price they are paying for it - the consumer will demand as many units until marginal utility is equal to price

43
Q

concept of the margin for society

A

the social optimum is derived from marginal social benefit - marginal social cost

44
Q

market failure

A

when the free market mechanism does not leads to an optimal allocation of resources efficiently and society suffers as a result

45
Q

externality

A

a cost or benefit that is external to a market transaction and is not reflected in market prices - impacts a third party

46
Q

why does market failure occur

A

the price mechanism only takes into account private costs and benefits

47
Q

private cost

A

cost incurred by an individual as part of its production or consumption

48
Q

external cost

A

cost associated with individuals’ production or consumption which is borne by third parties

49
Q

social cost

A

private cost + external cost - full cost borne by society of a good or service

50
Q

private benefit

A

benefit given to an individual as part of its consumption or production

51
Q

external benefit

A

benefit that is associated with an individual’s production or consumption which is borne by third parties

52
Q

social benefit

A

private benefit + external benefit - full benefit society receives from a good or service

53
Q

marginal private benefit

A

benefit from an additional unit of a good or service that the consumer receives - represented through demand

54
Q

marginal social benefit

A

MPB of consuming an additional good plus external benefits resulting from consuming that good

55
Q

marginal private cost

A

the marginal cost of producing that good - represented through supply

56
Q

marginal social cost

A

extra cost to society of producing an additional unit of output, including MPC and external costs

57
Q

why is there market disequilibrium with externalities

A

allocative efficiency is not achieved as MSB does not equal MSC

58
Q

explain allocative efficiency

A

Allocative Efficiency refers to the extent to which resources are allocated to their most valued use

59
Q

where is allocative efficiency on a graph

A

P = MC at the equilibrium, maximising producer and consumer surplus

60
Q

what graph can be shown to represent productive efficiency

A

PPF - anywhere on the curve is productive efficiency

61
Q

three functions of the price mechanism

A

signalling, rationing, transmission of preferences

62
Q

signalling

A

prices adjust to demonstrate where resources are needed, providing information about changing market conditions

63
Q

rationing

A

ration scarce resources when demand is in excess, leaving only those who are the most willing and able to pay

64
Q

transmission of preferences

A

through their choices, consumers send information to producers about their needs and wants, higher prices encourage more output

65
Q

private good characteristics

A

excludable, rivalrous, rejectable, has a marginal cost

66
Q

public good characteristics

A

non-excludable, non-rivalrous, non-rejectable, no marginal cost

67
Q

non-excludable

A

potential consumers cannot be prevented from consuming a good without paying for it

68
Q

non-rivalrous

A

the consumption of one good does not prevent consumption by another person

69
Q

non-rejectable

A

consumption cannot be prevented by a consumer

70
Q

zero marginal cost

A

the production of an additional unit does not add extra costs to the business

71
Q

quasi-public good

A

shares characteristics of private and public goods

72
Q

free-rider problem

A

those who benefit from a good or shared resource without paying for it and can continue to access it

73
Q

evaluating public goods

A

would not be provided in a free market - have positive externalities or are merit goods leading to market failure if underprovided

opportunity cost of providing the good
cost of the provision
risk of under-provision
public perception
political perspective

74
Q

information failure

A

information failure

75
Q

causes of information failure

A

misunderstanding the true costs or benefits of a product
uncertainty about future costs and benefits
complex information
inaccurate or misleading information
addiction
lack of awareness

76
Q

asymmetric information

A

when information is not shared equally between parties in a market transaction

77
Q

symmetric information

A

in competitive markets it is assumed consumers have perfect information, assuming rationality this will allow the efficient allocation of resources

78
Q

moral hazard

A

the party with more information alters their behaviour, causing extra costs to the other party eg. insurance

79
Q

merit good

A

more beneficial to the consumer than third parties yet still can provide positive externalities - underconsumed

80
Q

demerit good

A

more harmful to the consumer than society, yet can still provide negative externalities - overconsumed

81
Q

pollution permits

A

involves giving firms the legal right to pollute a certain amount, supply shifts in over time

82
Q

government failure

A

policies may have damaging long term consequences for the economy or society, may be ineffective at meeting stated aims, may do more harm than good

83
Q

what can government failure cause

A

distortion and interference with markets

84
Q

causes of government failure

A

political self-interest, poor value for money, policy short-termism, regulatory capture, conflicting objectives, bureaucracy, unintended consequences

85
Q

what can government failure be

A

inequitable, ineffective and misplaced

86
Q

key points surrounding government failure

A

free market economists believe the price mechanism should be used, we can only accuse government failure in hindsight, limited imperfect information, government may make decisions on behalf of special interest groups - loss of equity

87
Q

tackling government failure

A
  • initiating target setting
  • introducing competition into state-controlled markets
  • minimal state intervention
88
Q

indirect taxation

A

tax levied on producers levied on expenditure, which is passed onto consumers

89
Q

how does indirect taxation solve market failure

A

how does indirect taxation solve market failure

90
Q

how does indirect taxation work

A

increases costs of production raises price, moving output closer to the socal optimum

91
Q

limitations of indirect taxation

A

Regressive nature of indirect taxes. Indirect taxes tend to take a higher percentage of income from those on low income.

92
Q

evaluation of use of indirect taxation

A

PED, whether tax is used alongside other policies, ay lead to unintended consequences ie. increased inequality, may not raise prices, cost of collection

93
Q

evaluation of use of indirect taxation

A

PED, whether tax is used alongside other policies, ay lead to unintended consequences ie. increased inequality, may not raise prices, cost of collection

94
Q

tax incidence

A

the burden of a tax, shared amongst participants in a market

95
Q

when is tax burden mainly on the consumer

A

when demand is inelastic

96
Q

when is tax burden mainly on the producer

A

when demand is elastic

97
Q

Determinants of PES

A
  • number of producers
  • spare capacity
  • ease of switching
  • ease of storage
  • length of training time
  • factor monbility
98
Q

What is meant by market failure?

A

The inefficient distribution of resources by the free market.

99
Q

How do incentives of consumers signal resource allocation?

A

They may be responsive to price. If price is too high for consumers then the product will not be bought. Therefore resources are allocated elsewhere.

100
Q

How do incentives of firms signal resource allocation?

A

Firms may be responsive to price. If the price paid for the good/ service they are producing is not enough then they will allocate their resources elsewhere.

101
Q

How do government incentives affect resource allocation.

A

Government want to maximise welfare. If resources aren’t allocated accordingly then they may impose taxes or subsidies to re-allocate resources.

OCR economics (25 decks)

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