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CIE AS economics > Econ plus dal micro notes year 1 in flashcards > Flashcards

Econ plus dal micro notes year 1 in flashcards

1
Q

What is the economic problem?

A

How to allocate scarce resources given unlimited wants

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2
Q

What choices have to be made based on the economic problems?

A

What to produce
How to produce it
Whom to produce it for

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3
Q

What are the FOP’s?

A

CELL
Capital - man made aids to production (machinery)
Enterprise - people who are risk takers to make profit
Land - natural land
Labour - human resources (workers)

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4
Q

What is opportunity cost?

A

It is the cost of the next best alternative foregone when a choice is made

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5
Q

What does the PPF / PPC show?

A

The maximum possible production of 2 goods/services with given factors of production

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6
Q

How can you see efficiency on a PPF curve?

A

Any point ton the curve is productively efficient.
Only 1 point is allocatively efficient
Pareto efficiency is where nobody can be made better off without making someone else worse off. Any point on the curve is pareto efficient.

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7
Q

How can you increase production on a PPF?

A

Use FOP better, if you are producing inside the curve.
If already on the curve, reallocate FOP to give more of one than the other

Shift PPF curve. You do this by increasing quality and quantity of FOP’s

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8
Q

What is the definition of demand?

A

It is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period

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9
Q

What is the law of demand?

A

There is an inverse relationship between price and quantity demanded. As price increases, quantity demanded decreases and vice versa assuming ceteris paribus

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10
Q

What is the income effect?

A

As prices go up, our income doesn’t allow us to buy as much so demand contacts

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11
Q

What is the substitution effect?

A

As prices go up, other goods become more competitive so we switch consumption to those other goods

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12
Q

What factors cause a movement of the demand curve? (Pneumonic)

A

PASIFIC
Population
Advertising
Substitutes price
Income
Fashion/tastes
Interest rates
Compliment’s price

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13
Q

What is an inferior good?

A

As income goes up, demand for the good decreases

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14
Q

What is a normal good?

A

As income goes up, demand for the good increases

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15
Q

What is the definition of supply?

A

Supply is the quantity of a good or service producers are willing and able to produce at a given price in a given time period

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16
Q

What is the law of supply?

A

As price increases, Quantity supplied increases and vice versa assuming ceteris paribus

This is due to the profit motive, if price is higher, producers will want to make more profit

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17
Q

What factors cause a shift in the supply curve? (Pneumonic)

A

Price doesn’t shift the curve just moves along it

PINTSWC
Productivity
Indirect tax
No of firms
Technology
Subsidy
Weather
Costs of production - transport, labour, oil, raw material, utilities and regulation

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18
Q

What is the free market?

A

Any place where buyers meet suppliers to exchange goods and services, free from government intervention.

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19
Q

What is equilibrium?

A

It is when demand = supply (known as the market clearing position)

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20
Q

What does equilibrium in a free market represent?

A

It represents allocative efficiency, this is because at equilibrium, the resources that firms are using are used to make goods and services are perfectly following consumer demand

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21
Q

What are prices in the price mechanism? (pnemonic)

A

ARSI
Allocate scarce resources efficiently
Ration scarce resources by encouraging/discouraging consumption
Signal excess demand/supply and need for increase or decrease in resources
Incentivises producers to make more or less output for more profit

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22
Q

How can you see excess demand or supply?

A

Excess demand can be seen through long queues or waiting lists. Prices will naturally rise. Relate to ARSI
Excess supply can be seen through full stock, empty chairs. Prices will naturally fall.
These are both forms of disequilibrium

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23
Q

What are the 4 functions of the price mechanism?

A

Excess demand:
Signals to producers that price is too low
Incentive to increase price to make more profit / milk it.
Excess demand then gets rationed away.
New equilibrium where there is perfect allocation of scarce resources. (THE INVISIBLE HAND theory by Adam Smith suggests all this)

Excess supply:
Signal to producers that price is too high
Incentive to lower price to liquidate their excess stock
Excess supply gets rationed away
Perfect allocation of resources at new equilibrium

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24
Q

What is consumer surplus?

A

The difference between the price consumers are willing and able to pay for a good/service and the price they actually play
It is found below the demand curve and above the price line.

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25
Q

What is producer surplus?

A

The difference between the price producers are willing and able to supply a good or service for and the price they actually receive
Found above the supply curve and below the price line.

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26
Q

What is society surplus formula?

A

It is CS+PS

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27
Q

What are examples of compliment goods?

A

Printers and ink, coffee machines and coffee capsules, razors and blades
For example, f price of printers go up, demand for ink will go down as less people are buying them

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28
Q

What are substitutes?

A

Coke and Pepsi, Big mac and whopper, iPhone and Samsung
If price of iPhone increases then demand for Samsung will increase as people will move to them instead

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29
Q

What is derived demand?

A

It is derived from the demand of something else. For example, holidays and airline companies or cars and aluminium.

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30
Q

What is composite demand?

A

It is goods that require some input to make them.
For example bread and livestock need wheat and cheese and butter need milk
If more cheese is being produced, less butter will be produced as milk is being used for cheese

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31
Q

What is PED?

A

PED measures the responsiveness of quantity demanded given a change in price
PED = %change in quantity demanded / %change in price

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32
Q

What are the values of PED and what do they relate to?

A

Larger than 1 means demand is price elastic
Less than 1 means demand is price inelastic
0 means demand is perfectly price inelastic
Infinity means demand is perfectly price elastic
1 means demand is unit price elastic

33
Q

What factors affect PED? (pneumonic)

A

SPLAT
Substitutes
Percentage of income
Luxury / necessity
Addictive / habit
Time period

34
Q

What is PES?

A

It measures the responsiveness of quantity supplied given a change in price
PES = %change in quantity supplied / %change in price
PES is always +ve due to the law of supply

35
Q

What are the values of PES and what do they relate to?

A

Larger than 1 means supply is price elastic
Less than 1 means supply is price inelastic
0 means supply is perfectly price inelastic
Infinity means supply is perfectly price elastic
1 means supply is unit price elastic

36
Q

What factors affect PES? (pneumonic)

A

PSSST
Production lag
Stocks
Spare capacity
Substitutability of FOP’s
Time

37
Q

What is cross elasticity of demand?

A

It measures the responsiveness of Quantity demanded of a good/service given a change in price of another
XED = %change in quantity demanded of A / %change in quantity demanded of B

38
Q

What are the values of XED and what do they relate to?

A

Bigger than 1 means demand between goods is price elastic (strongly related which means price change of one leads to a much stronger demand change for the other)
Less than one means demand between goods is price inelastic (weakly related)
0 is perfectly price inelastic (no relationship)

If the value is -ve then it is a complement good
If the value is +ve then is is a substitute

39
Q

What is income elasticity of demand?

A

It measures the responsiveness of Quantity demanded of a good/service given a change in income
YED = %change in quantity demanded / %change in income

40
Q

What are the values of YED and what do they relate to?

A

Normal good is +ve : as income goes up demand goes up
Inferior good -ve: as income goes up demand decreases

Normal:
More than 1 means demand is income elastic (normal luxury)
Less than 1 means demand is income inelastic (normal necessity)

Inferior:
More than 1 means demand is income elastic
Less than 1 means demand is income inelastic

41
Q

What is an indirect tax and examples

A

It is an expenditure tax that increases costs of production but can be transferred to consumers via higher prices

VAT, cigarette, alcohol or fuel duty.
VAT helps raise gov revenue and the duties help to solve market failures

42
Q

What effect does indirect tax have on consumers/producers and the government?

A

Consumers don’t like it as it lowers consumer surplus and it is very regressive as it is the same rate for everyone
Producers/workers don’t like it either. This is as it lowers producer surplus and revenue. As a result, workers lose their job as there is less demand.
Government like it as it raises gov revenue and can correct some market failures

43
Q

What is the relationship between indirect tax and the elasticity of demand?

A

When demand is elastic, consumer burden is lower, producer burden is higher and gov revenue is lower
When demand is inelastic, consumer burden is higher, producer burden is lower and gov revenue is higher

44
Q

What is a subsidy and what does it do?

A

It is a money grant to firms by the government to reduce costs of production and encourage an increase in output.
It solves market failure and it increases affordability

45
Q

What effect does a subsidy have on consumers/producers and the government?

A

Consumers like it as it decreases price and increases consumer surplus as the affordability goes up. However the problem arises when you think how will the gov fund it? Opportunity cost in different areas like NHS
Producers like it as it is cheaper to produce
Gov like it if their objectives are being met however there are concerns about how producers are using the subsidies.

46
Q

What is a minimum price?

A

A fixed price set by the gov usually set above the equilibrium market price
It protects producers from price volatility and it solves market failure

47
Q

What effect does a minimum price have on consumers/producers and the government?

A

Consumers are not fans as they are paying higher prices. Less consumer surplus and choice. Also less affordability. It is regressive as it prices out the poor. There are also many trade offs and opportunity costs

Producers love it as they are protected and there is more revenue

Gov like it as if there core goals are being met, however they will be warned about the regressive effect on consumers.

48
Q

What is a maximum price?

A

A fixed price by the gov usually set below the equilibrium market price.
It is set to increase the affordability of necessity goods/services

49
Q

What effect does a maximum price have on consumers/producers and the government?

A

Consumers like it as it is more affordable and higher consumer surplus. Lots of excess demand though so consumers can’t access it fully
Producers don’t like it as it leads to a fall in producer revenue which means less profit for them
Gov like if they are hitting key goals. However it can lead to producers leaving the market.

50
Q

What is allocative efficiency?

A

It occurs when there is a maximisation of society surplus. so when D=S
It occurs when there is a maximisation of net social benefit MSB=MSC
It occurs where resources perfectly follow consumer demand

51
Q

What are private costs, social costs, private benefits and social benefits?

A

Private costs - producers cost of production
Social costs - private costs + external costs
In a free market we assume there are no external costs so MPC=MSC

Private benefits - individual consumers benefit upon consumption
Social benefits = PB+EB
In a free market we assume there are no externalities so MPB = MSB

When MPB = MPC that is the private optimum
When MSB = MSC that is the social optimum (allocative efficiency)

52
Q

What assumptions are made about a free market?

A

Many buyers/sellers
Perfect information
No barriers to entry/exit
Profit maximisation
consumers maximise utility

53
Q

What are the different types of market failure?

A

When the free market fails to allocate scarce resources at the socially optimum level oof output

1) Negative/Positive externalities - Not accounted for in the market mechanisms as producers and consumers only have self-interest at heart
2) Merit/De-merit goods- information failure leads to irrational decisions
3) Public goods - Free rider problem and firms only profit maximising
4) Common access resources - Self interest at heart - not sustainable
5) Income inequality
6) Monopoly power - 1 dominant seller and high barriers to entry
7) Factor immobility - difficult for factors of production (e.g. labour and capital) to move between different areas of the economy. Factor immobility could involve: Geographical immobility – When it is difficult to move from one geographical area to another.

54
Q

What are negative externalities in production?

A

They are costs to 3rd parties as a result of the actions of producers
Air pollution, resource depletion and degradation and deforestation
It occurs when MSC > MPC

producers ignore full social cost because of self interest
This leads to overproduction/consumption
This leads to price being too low and thus a misallocation of resources

55
Q

What are negative externalities in consumption?

A

They are costs to 3rd parties as a result of the actions of consumers
Smoking, excessive alcohol, excessive sugary drinks/fast foods
MSB<MPB

Consumers ignore social benefit and only look at self interest
This leads to overconsumption which leads to a misallocation of reosurces

56
Q

What are positive externalities in consumption?

A

They are benefits to 3rd parties as a result of the action of consumers
Healthcare, education, exercise and healthy eating
MSB>MPB

57
Q

What are positive externalities in production?

A

They are the benefits to 3rd parties as a result of the actions of producers
In-work training, R&D
MSC<MPC

58
Q

What are merit goods?

A

They are goods that are deemed to be more beneficial to consumers than they realise
Imperfect info
Info failure
Asymmetric info (not shared equally between parties)
Healthcare/education/exercise
They are under consumed/produced

59
Q

What are demerit goods?

A

They are deemed to be more harmful to consumers than they realise
Imperfect info
Info failure
Asymmetric info
Negative externalities in consumption
Cigarettes/Alcohol/gambling
Over consumed/produced

60
Q

What are the characteristics of public goods

A

They are non-excludable - benefits of consuming can’t be confined to the individual who has paid. No cost-efficient way to price
They are non rival. This means the quantity of the good doesn’t decrease upon consumption. For example, flood defences, road signs, street lights, roads, beaches.

61
Q

What is the free rider problem?

A

Individuals don’t contribute to the good as they know they don’t need to pay and instead can free ride on other contributors. This gives no incentive to private firms to supply. This leads to a missing market / complete market failure

62
Q

What is a quasi public good?

A

Sometimes shows are characteristics of pure public goods and private goofs. Roads and beaches

63
Q

What are common access resources?

A

They are natural resources over which no private ownership has been established
Forests
Seas
Air

The lack of private ownership leads to tragedy of the commons.
This is where only self interest is at heart so they keep exploiting these resources which leads to resource depletion

64
Q

When does gov failure occur?

A

When the costs of intervention outweigh the benefits of intervention. The end result is the worsening of the allocation of scarce resources harming social welfare.

Information failure:
Valuing externalities could be difficult which leads to wild policies

Admin and enforcement costs:
Cost of enforcing regulation, subsidies, state provisions and price controls

Unintended consequences:
Could be black markets, the impact on the poor, the impact on the firm and the impact on unemployment

Regulatory capture:
When regulating monopoly power - when the interests of society are overlooked for the interests of CEO’s and managers

65
Q

How are indirect tax and market failure related?

A

Increases a firms cost of production but can be transferred to consumers through a higher price

Indirect tax increases the cost of production which means they then try to internalise the externality by making the polluter pay. This solves the overconsumption/production problem. It promotes allocative efficiency whilst generating gov revenue

But:
It won’t work if there is price inelastic demand (cigarettes and other addictive things)
You need to set tax at the right level
Regressive
Can lead to black markets

66
Q

How are subsidies and market failure related?

A

Subsidies are money grants given to producers by the government to lower costs of production and encourage an increase in output.

By lowering the cost of production it leads to a decrease in price and an increase in quantity. This solves the underconsumption/production problem. This leads to allocative efficiency and a welfare gain.

But:
It is very costly
You need to set the subsidy at the right level
You need to know how firms will use the subsidy
Demand has to be elastic, not inelastic

67
Q

How is regulation and market failure related?

A

Regulation is Rule/Law enacted by the government that must be followed by economic agents to encourage a change in behaviour. It is a non-market-based approach.
It is a command/control approach. There needs to be enforcement, punishment, bans, limits etc etc.

If there is an incentive to change behaviour to move towards the socially optimum level then it solves the issues in the free market and helps to achieve allocative efficiency.

But:
Regulation is very costly
You need to set the right level of strictness
Will lead to black market and unintended consequences
Equity - unfair to give some firms pollution caps etc

68
Q

What are TPPs (Tradeable pollution permits)?

A

There will be a pollution can set at Q*. Then there are permits issued to match the caps
Firms make a decision based on the least cost. They can either invest in green tech or they can buy spare permits. Through this, the externality is internalised and polluters pay in the most efficient way
Strict enforcement has to be carried out for this to work
Through this, pollution comes down to the socially optimum level and allocative efficiency will be achieved. This method also promotes long-run incentives to invest in green tech (can lead to profit by selling permits)

But:
Can enforcement be afforded?
There is imperfect info for governments which can lead to policies being too strict or lack
There will be unintended consequences (shut down firms or move countries) or inflationary prices for consumers
International cooperation is required which can be difficult

69
Q

How does state provision solve market failure?

A

Direct provision of goods and services by the gov are free ay the point of consumption
Merit good is under consumed/produced and can lead to inequity and unfairness. Examples are healthcare and education
Public goods - missing market given the free rider problem

Gov considers the full social cost and social benefit of allocating resources at Q*. This makes it free at the point of consumption which solves the underconsumption/production and inequity issues which then solves the missing market issues. This leads to allocative efficiency and welfare maximisation

But:
If there is excess demand, there is no solution NHS
Cost - it is expensive and funding for the long run could means higher taxes and a greater opportunity cost
It is highly inefficient as there is no profit motive

70
Q

How do price controls (min and max) relate to market failure?

A

Minimum price is used to discourage consumption of demerit goods
BUT:
if there is price inelastic demand then this means a small effect
It is regressive as i burdens the poor
It can lead to black markets
the price could be too strict or too lack

Maximum price is used to encourage consumption
But:
There is shortage due to huge excess demand
Can lead to black markets where there is lower quality. This is pure gov failure
Expensive to enforce
Too strict or lack
High cost for gov

71
Q

How does information provision link to market failure?

A

Gov funded info provision/advertising/education to encourage or discourage production of a good

Consumers make rational decisions as they know the true MPB. This solves over/under consumption which leads to a socially optimum level which gives allocative efficiency. It is a much more market friendly policy

But:
Expensive to carry out
No guarantee of success it is very dependant on the quality
It will most likely work in the long run no the short run

72
Q

How does property rights relate to market failure?

A

Incentive not to exploit CAR. Negative externalities now internalised and if enforced, it will reduce quantity to the socially optimum level.

But:
Can property rights be equally distributed (air and sea)?
Enforcement needed which is very expensive
Equity - who gets the rights?

73
Q

What are the features of market, command and mixed economies?

A

Free market:
Private ownership, Profit maximisers, high freedom of voice, High competition, Low role of government, High variety of goods and services, Quick response to demand change, Allocative efficiency/inefficiency, No shortages or surpluses, Merit goofs underprovides, De-merit goods overprovided, public goods have missing markets, Income distribution is unequal, Negative externalities from overproduction, Monopolies are present.

Mixed economy:
Private/public ownership, Profit motive/welfare maximisation motive, High and Low freedom of voice, High and Low competition, Gov plays a limited role, High and low variety and quality of goods and services, quick and slow response to demand change, Total efficiency maximisation, Shortages and surpluses, Gov intervention of merit/demerit/public goods, Income distribution is done by progressive tax and welfare state, Negative externalities are dealt with by gov intervention, Monopolies are dealt with by gov intervention

Command economy:
Public ownership, Welfare maximisation the motive, Low freedom of voice, Low competition, High role of gov intervention, Low variety and quality of goods and services, Slow response to a change in demand, Low efficiency, Lots of shortages and surpluses, Merit/demerit goods at the social optimum, Public goods are allocated, Income distribution is equal, Negative externalities are at social optimum and Monopolies can’t be formed

74
Q

Free market and market forces - pros and cons

A

Any place where buyers meet sellers to exchange goods and services, free from gov intervention
Allocative efficiency is met:
Supply=Demand
Society surplus is maximised
Net social benefit is maximised

Pros: (EPIC - efficiency, productivity, incentives and competition)
Allocative efficiency is met so no long-run disequilibrium
Encourages competition
Dynamic efficiency - reinvestment of R&D and technology
Job creation and economic growth
Freedom, Liberty and Choice
No risk of gov failure

Cons:
Markets can fail
Inequality (affordability)
Excessive profiteering (immoral ways to profit max)
Creative destruction
Price volatility (inelasticity leads to price volatility)

75
Q

What is specialisation and its pros and cons

A

Specialisation is the concentration of production on a narrow range of goods or services

Advantages:
Higher output - more trade, more growth (efficient production)
A wider range of goods/services
Greater allocative efficiency
Higher productivity through better use of workers
Improvements in quality

Disadvantages:
Finite resources
Changes in fashions and tastes
De industrialisation
National interdependence

76
Q

What is division of labour and its pros and cons?

A

Division of labour is the breaking down of the production process into seperate tasks upon specialisation

Advantages:
Workers are highly productive which means
Higher wages
Time-saving
Lower cost of production
Lower prices
Specialist capital for workers
Lower prices, higher quantity and quality for consumers

Disadvantages:
Demotivation of workers
High worker turnover
Risk of long-term unemployment
Highly standardised goods and services, loses their uniqueness

77
Q

Why are primary commodities very price volatile?

A

Demand and supply is so price inelastic
For demand it depends on necessity and lack of good substitutes. For supply it depends on large production lag and whether it is hard to store which leads to low stock

78
Q

What are positive and normative statements?

A

Positive is a statement that can be backed by facts and evidence
Normative is opinionated and holds value judgment

CIE AS economics (51 decks)

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