a_level_economics_aqa_20240313164355 Flashcards
What does economics study?
The choices people take under conditions of scarcity and uncertainty.
What is microeconomics the study of?
Economics at the individual, industry or household level.
What is a positive statement?
A statement that can be tested, proved and/or amended due to evidence.
What is a normative statement?
A subjective statement.
What are the 3 assumptions microeconomists make?
- Rational consumers want to maximize satisfaction
from the products they purchase. - Producers/Companies wish to maximize profits by
producing goods at the lowest cost. - Government operates in the best interests of it’s
citizens by improving the economic and social
welfare of the aforementioned.
What is opportunity cost?
It measures the cost of a choice compared to the next best option.
i.e. If you go out for food, the opportunity cost is that you didn’t put that money into savings.
On a more macro scale, if you use land for agriculture and farming, you can’t then also use that land for education or healthcare.
What are the factors of production?
Land
Labour
Enterprise
Capital
What does land mean?
The scarce physical natural resources available for production.
What is labour?
The human input to create goods.
What is enterprise?
The people who own the companies that manufacture the goods.
What is capital?
The goods used in the supply of other products.
i.e. technology, machinery etc.
What are capital goods?
Goods that are used to make and manufacture consumer goods and services.
What are the three types of consumer goods?
Consumer durables
Consumer non-durables
Consumer services
Give an example of a consumer durable.
A washing machine
Give an example of a consumer non-durable.
A latte
Turning on the heating.
Give an example of a consumer service.
Hair cut
Tickets to a show
What does the rate of extraction of finite resources depend on?
It depends in part on the current market price. In a free market economy, businesses that extract resources such as oil will have a greater incentive to do so.
What are the two main economies?
Free market
Command
(Mixed)
What are the principles of a free market?
Markets allocate resources to people.
The economy is driven by the profit motive (i.e. this thing costs more therefore companies will make more of it).
Limited role of state because everything is privatised.
What are the principles of a command economy?
Most if not all resources are state-owned.
Planning from the state allocates resources.
Very little role for market prices.
What are the advantages of free market competition?
A natural efficient allocation of scarce resources (i.e. resources tend to go where market return is highest)
Competition tends to improve the quality of goods through innovation.
Competition means consumers can choose between companies to purchase from.
The profit motive stimulates capital investment lowering prices in the long run.
What is the role of State in a mixed economy?
There is a mix of private and public sectors.
State-owned industries (i.e. RBS or Network Rail)
Welfare (State pension, free healthcare etc.)
Spending on public services (Education and health investment)
What do normative statements have to contain?
A value judgement, be it implicit or explicit.
What is a value judgement?
Whether something is desirable or not.
What is a need?
Something that people must have, i.e. water, food, clothing etc.
What is a want?
A desirable, something that people would like to have.
What is welfare?
Human happiness.
What does pandering to human wants and needs cause?
The improvement of economic welfare.
How can economic welfare be skewed?
If a person consumes more material goods in the short term can improve current economic welfare, but in the long term, it can cause problems.
What is an economic system?
The set of institutions within a community that decides what, how and for whom to produce.
What are the two forms of economic mechanisms?
Command mechanism
Price mechanism
What economy does the command mechanism lead to?
Command economy
What economy does the price mechanism lead to?
Free market economy
What is a mixed economy?
An economy that contains both large market and non-market sectors.
What does a pure market economy do? (in regards to allocation of resources)
Price mechanisms allocate resources solely based on their value to society.
What is the term commonly used to describe China’s economy?
State-capitalism
When did the UK become a mixed economy?
Post WW2
What did the UK becoming a mixed economy involve?
Important industries such as coal, oil and gas were nationalised.
The NHS was set-up.
The 1944 Education Act extended state provision for education.
What was a problem with the 1944 Education Act?
Many poor parents had to turn down the “free” places as there were many extra costs involved.
What did the 1944 Education Act seek to do?
Remove the inequalities in the UK’s system.
What are the benefits of nationalisation?
The nationalised industries can be easier co-ordinated with a central plan from government.
Trading surpluses are not used for profit and are instead used to subsidise other public sectors or reduce poverty for example.
The state can more easily regulate the macro-economy.
What are the negatives of nationalisation?
There is no longer a price incentive, this can lead to massive inefficiency. (x-inefficiency and normal inefficiency)
What is x-inefficiency?
The lack of effective competition in an industry leading to higher costs.
What is privitasation?
The transfer of a business from public ownership to private ownership (i.e. Thames Water)
What is marketisation?
The introduction of competition into the public sector. Prices are charged for goods and services that the government provided free of charge before. Commonly links with privitisation.
What is deregulation?
The removal of previously imposed regulations.
Why did the UK goverment lean into deregulation?
In an effort to increase investment opportunities, deregulation hoped to eliminate restrictions for new businesses to enter markets.
What is the combination of privitisation, marketisation and deregulation called?
Economic liberalisation
What is production?
The conversion of inputs into outputs
What is a capital good?
A good that is used in the production of other services.
What is a consumer good?
A good that is consumed by individuals to satisfy wants and/or needs.
What is an “easy” way to improve economic welfare?
Increasing consumption of material goods.
What are the four factors of production?
Land, labour, capital and enterprise.
Why is enterprise different from the other factors of production?
They address issues by deciding what to produce, how to produce it and for whom to produce it.
Is enterprise included in command economies?
No. The central state decides what to produce, how to produce it and for whom to produce it.
What is entrepreneurial profit?
The profit remaining after the cost of employing the other factors of production.
Why do entrepreneurs do what they do?
In a free-market economy, there is a price incentive to generate more money, this leads to risk taking on behalf of entrepreneurs to generate more income to increase the price incentive.
Can finite resources be recycled?
In theory, however, it is often not economically viable to recycle more than a tiny fraction.
What is scarcity?
The limited amount of a particular resource leading to rationing of those resources.
What is the fundamental economic problem?
How best to make decisions against the problem of scarcity to maximise human happiness and economic welfare.
In free market economies, what determines the rationing of scarce resources?
The price mechanism.
What is choice?
Choosing between alternatives when making a decision on how to use scarce resources.
How can people avoid going into debt when the price of living goes up?
People must sacrifice spending on other sectors (entertainment, luxuries etc.)
When does the need for choice arise?
When an economic agent must choose between two (or more) mutually exclusive events.
What must economists assume about people?
People behave rationally.
What must people have in order to behave rationally?
Information about the topic (i.e. knowledge that smoking causes cancer therefore the population should not smoke)
What happens when a choice must be made?
People always choose what they think at the time is the best alternative.
“that they think at the time” - seeing a film, expecting to enjoy it, but hating it. It’s still technically rational behaviour, as you did not have all of the information needed. If you see the same film again, that’s irrational.
What is inter-temporal choice?
Choice over time.
Where does inter-temporal choice come into effect?
When choosing to sacrifice the short-term benefits, in exchange for possible long term benefits that outweigh the short-term.
What is the key feature of a PPD?
PPF (Production Possibility Frontier) or production possibility curve.
What are the three types of PPD’s?
Linear, Concave, Convex
What does a straight line PPF represent?
An indication of perfect factor sustainability of resources.
What does a linear PPF mean in regards to marginial opportunity cost?
Switching resources from x to y is constant.
What is an example of a linear PPF?
Resources are not specialised and can be substituted for each other with no added cost.
What can a PPF diagram be used to represent on a macro scale?
Economic growth
Full employment and unemployment.
What are the two forms of economic growth?
Short run
Long run
How is economic growth defined?
An increase in the potential level of real output the economy can produce over a period of time.
How is short run economic growth shown on a PPF diagram?
Movement from Point C to B.
How is long run economic growth shown on a PPF diagram?
The movement of the frontier from PPF1 to PPF 2.
How does short run economic growth occur?
Makes use of spare capacity within the economy.
How does long run economic growth occur?
An increase in total productive capacity.
How can you demonstrate employment levels on a PPF?
The frontier demonstrates complete full employment of labour.
Point D demonstrates a certain level of unemployment.
(Note that if long run economic growth moves the frontier to the point E, points A, B, C will now be inside the frontier and as a result would now be points of unemployment)
How can you tell if a PPF is showing microeconomics or macroeconomics?
The labels on the axis of the graphs.
What is resource allocation?
The process through which the available factors of production are assigned to produce different goods and services.
What is productive efficiency?
A firm minimising the cost of a good.
When it is impossible for an economy to produce more of one good than the other.
When does productive efficiency occur?
When an output is maximised from available inputs.
How can you show productive inefficiency on a PPF?
Points within a frontier.
How can you show productive efficiency on a PPF?
Points on the frontier.
What is productive inefficiency often associated with?
Unemployment.
What is another prequisite for productive efficiency?
As you are on the frontier, more capital goods can only be produced by giving up the production of other goods.
What is utility?
The pleasure or satisfaction obtained from consumption.
What is marginal utility?
The additional pleasure obtained from consuming one more unit of something.
What do total and marginal utility curves both show?
The same information, demonstrated in different ways.
How do marginal utility graphs differ from total utility graphs?
Marginal utility graphs plot the data as separate observations, whereas total utility shows the data cumulatively.
What is the marginal utility in reference to the total utility?
The marginal utility is the difference of n2 - n1
What is diminishing marginal utility?
The decrease of satisfaction due to overconsumption, (added consumption of each item)
Where is the point of satiation on a marginal utility curve?
The point at which it crosses the x-axis.
What is the point of satiation on a total utility curve?
The crest of the graph.
What do economists have to assume about the point of satiation?
Consumers will cease consumption of that product as it is irrational for them to do so.
What is the ‘hypothesis of diminishing marginal utility’?
For a single consumer, the marginal utility that comes with consumption of a good or service diminishes for each additional unit consumed.
What was Adam Smith’s diamonds and water paradox?
Nothing is more useful than water: but; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may be frequently had in exchange for it.
What did Adam Smith’s paradox mean?
Practical items have a value in use, but often have little or no value in exchange.
On the other hand, impractical items have almost no value in use, but have a very high value in exchange.
Why does Adam Smith’s paradox work?
Diamonds have a very low supply, hence their value is very high. In most areas of the world, water is not scarce, so the value is very low.
The marginal utility of having one diamond is far higher than a glass of water as it is worth far more.
At what point does Adam Smith’s paradox break down?
If one is dying of thirst, the marginal utility of a glass of water is far higher than the marginal utility of an added diamond, at least until the thirst is quenched.
What is the link between marginal utility and an individual’s demand?
If an item has a value, you will consume the item/s to the point of satiation until the marginal utility is lower than purchasing another item.
As price of a given item increases, the marginal utility of buying more of it reduces.
Essentially, the higher the price, the lower the quantity that is demanded.
What is utility maximisation?
Economic agents decide their market plans in order to maximise a target goal in the pursuit of self-interest.
What is the difference between maximising vs. minimising behaviour?
There are two ways of thinking about any objective.
Maximising = the utility gained from the set of goods consumed
Minimising = reducing the outlay or cost of obtaining the same combination of a bundle of goods and/or services.
What are the constraints of choices consumers make in the market?
Limited income
A given set of prices
The budget constaint
Limited time available
How does limited income cause a change in the choices of consumers?
No-one has an infinite income so income spent on one good cannot then be spent on another good.
How does a given set of prices cause a change in the choices of consumers?
Consumers in and of themselves cannot actually affect market prices. Given this assumption, consumers are ‘price-takers’ rather than ‘price-makers’
How does the budget constraint cause a change in the choices of consumers?
Essentially the opportunity cost of consumption. If you purchase one good, you must forgo the opportunity to purchase another good.
How does the limited availability of time cause a change in the choices of consumers?
It is impossible to consume more than one good at a time, and you cannot store an infinite number of goods for later consumption.
What is the margin?
The current level of activity.
How can an economic agent maximise a desired objective?
An economic agent must undertake an activity to the point at which the marginal private benefit is equal to the marginal private cost incurred due to production of the good.
How can an economic agent maximise a desired objective?
An economic agent must undertake an activity to the point at which the marginal private benefit is equal to the marginal private cost incurred due to production of the good.
How do consumers maximise utility?
Consume a good up to the point at which MU = P.
Can utility be measured?
No, you cannot actually measure the utility gained for each unit of a good consumed.
How have economists got around the problem of utility measurement?
Paul Samuelson conceptualised ‘revealed preference’.
It works by observing how consumers behave in reference to their preferences. Consumers reveal a preference buy choosing items at a given price for given levels of income.
What is (effective) demand?
The desire to buy a good or service and willingness to pay for it.
What can shift a demand curve to the right?
Incomes
External Shocks (Recession, Economic Booms etc.)
Change in people’s tastes / seasonality
Prices of complementary goods (printer / ink cartridges)
Prices of substitute goods (competition)
Derived Demand (changing the demand of a product changes the price of the raw material)
Composite Demand (a raw material can be used for multiple applications, therefore the application that has the most demand will have the most raw materials rerouted to that application.) (e.g. oil can be used for petrol and plastics. If the price of petrol rises due to demand, more oil will be rerouted to that application, with less oil for plastic, therefore the price of plastics will increase.)
What is derived demand?
Derived demand is the demand as a result of what the raw material can do for you.
(i.e. demand of fencing increases therefore price of wood will increase)
What are Veblen Goods?
Goods that we demand because they are expensive. Seemingly irrational behaviour.
What is the difference between Giffen Goods and Veblen Goods?
Nothing, they are the same name for goods that are demanded because they are expensive.
What is the distinguishing behind wrong decisions and irrational decisions?
Wrong decisions are a result of spending money on a good, expecting to get utility from it, but actually not getting any/little utility from it.
Irrational decisions are spending money on an item that you know at the time you will get no utility from.
Why may people choose to underspend a merit good, and overcosume a demerit good?
They may not possess sufficient information in order to prevent them making a wrong decision.
What is asymmetric information?
One party to a market transaction possesses less relevant information to the exchange than the other.
How can asymmetric information manifest itself?
Through adverse selection.
What is adverse selection?
Adverse selection is when one economic agent has more information than another economic agent, so one economic agent can make a wrong decision as a result.
Who described the problem of asymmetric information in an article?
George Akerlof.
What did Akerlof’s article describe?
The market for ‘lemons’
‘lemons’ is slang for poor quality second hand cars.
What did Akerlof’s article entale?
Suppose there are only 4 types of cars. New and used. Good and bad.
A new car may be good or bad. A used car may be good or bad.
The individuals within the market buy a new car without knowing whether or not the car they purchase will be good or bad.
There is clearly an asymmetry of information here, as the sellers have far more information about the cars they are selling, and the buyers do not know.
This leads to all good and bad used cars selling at the same price however, as if there is one used car that is priced lower than another, it is clear to a consumer that is a lemon, therefore it is less likely to sell.
If the car is priced at the same point, then it will sell at the same price despite its lower quality.
What is behavioural economics?
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.
Where has most of the behavioural economics study come from?
The USA.
Why does the location of study on behavioural economics come from possibly cause problems?
There could be a bias towards the USA as a dominant or ‘correct’ economy.
What is behavioural economics based on?
The insights of psychologists seeking to understand human behaviour and decision making.
What did the UK government set up in 2010?
The Behavioural Insights Team (BIT).
They brought together many disiplines that are closely related. (behavioural economics, psychology and social anthropology)
According to Dan Ariely, what is the difference between traditional economics and behavioural economics?
Traditional economics involves coming up with a theory then using it to explain actual behaviour.
Behavioural economics involves studying actual behaviour, then coming up with a theory.
What is the BIT based on?
Nudge Theory
What is Nudge Theory?
You can change the environment in order to indirectly influence a person’s decision making.
They still maintain free choice, but are essentially incentivized to choose one way or the other.
What is the Homo Economicus?
The Economic Man
What does the Homo Economicus actually mean?
The economic man is:
Self-interested
Aware of the consequences of his actions
Rational
Aware of what he wants
Acting on his preferences
What are the short-comings of Homo Economicus?
People are somewhat altruistic.
Humans are generally impatient and lack self-control
Humans generally have ‘status quo bias’
Research from cognitive psychology suggests that:
Humans make decisions based on simple-rules-of-thumb (heuristics)
Humans have a large variety of biases (confirmation, recency etc.)
Humans can make decisions based on emotions (anger, regret etc.)
What is bounded rationality?
When making decisions, individuals’ rationality is limited by the information they have, information in their minds, and the limited time they have to make a decision.
What can bounded rationality often lead to?
Within complex situations, bounded rationality results in satisficing rather than maximising choices.
What is satisficing?
A decision-making strategy that aims for a satisfactory or adequete result rather than going for the most optimal solution.
What is bounded self-control?
The limited self control in which individuals lack the self-control to act in what they assume to be their best interest.
What do traditional or orthodox economics assume in reference to choice making?
People have complete self-control over their actions.
How do traditional / orthodox economics differ in comparison to behavioural economics in reference to decision making?
Traditional / Orthodox economists assume people have complete self-control of their actions, however, behavioural economists believe that individuals have limited self-control.
What is an example of bounded self-control in practice?
Post Christmas, many people make New Year’s Resolutions to improve themselves. For example, to lose weight. A person will decide to go for a run once a day, working well for a week or two, but when rain falls, the resolution breaks as a result.
What are the two types of thinking?
Thinking fast
Thinking slow
What are the differences in the types of thinking?
Thinking fast is done with little to no effort to analyse the situation. This is automatic thinking.
Thinking slow is done with concentration and mental effort required in order to come to a decison.
Where is thinking fast seen?
Buying a coffee in a train station, or ordering drinks in a bar.
It is also seen in high-level athletes. People who have practiced for many hours at their craft let their automatic thinking take over which allows them to play quickly and better.
Where is thinking slow seen?
Buying a house or a car.
While learning a new sport, an individual will take time to think about what they are doing (holding a golf club, or the rotation of a basketball)
What is cognitive bias?
A systematic error in thinking that affects the decisions and judgments a person makes.
What do behavioural economists suggest about automatic thinking?
Often heavily biased.
What actually is a cognitive bias?
A mistake in reasoning, often occuring as a result of any contrary information.
What are the two common problems with heuristics that lead to bias?
Availability
Anchoring
What is anchoring?
A cognitive bias describing the human tendancy when making decisions to rely too heavily on an arbitrary marker. (often the first piece of information)
What is availability?
Another name for recency bias.
Humans hold recent information in much higher standing over their decision making process.
What is the availability bias?
Individuals make judgments about the likelihood of future events in accordance with how easy it is to recall examples of similar events.
What is an example of availability bias?
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A person places read about 15 car thefts on the news, and therefore judges that car theft is far more common in the local area than it actually is.
A person sees a new millionaire every week as a result of the lottery and therefore buys a ticket thinking that they will win.
Who are Ipsos?
A market research company.
What did Ipsos publish?
Research highlighting how the general public in 14 countries held preconceptions on the make-up of their socities that were massively detached from reality.
What were the stats from Ipsos for the UK?
The average citizen believed that 24% of the population were immigrants (13% real)
The average citizen believed that 24% of the working-age population was unemployed (<7% real)
What is an example of anchoring?
A restaurant menu features a few very expensive items early in the main course section. Some more reasonably priced alternatives (comparatively) are placed after.
We are lured into choosing the cheaper option despite their prices still being high.
When given an option of 3 products of similar utility, priced at £50, £40 and £30, which one do humans choose?
£40. As a result of belief the middle option is not too expensive, but also not too cheap.
Humans often choose the middle option.
What is a social norm?
Forms or patterns of behaviour that are considered acceptable by a society or group within society.
What are nudges?
Factors that encourage people to think and act in particular ways.
What are the types of social norms (in economics)
Negative and Positive
What is an example of a negative social norm?
Attitudes towards drinking alcohol amongst young adults (particularily young men).
Many young adults drink heavily because they think it is what the majority of people their age do.
What is an example of a positive social norm?
Attitudes towards smoking across society.
Healthy campaigns have made it abundantly clear that smoking has a very negative effect on one’s health. This led to people being much more willing to accept laws to prohibit smoking and the risks of smoking.
What is the difference between a nudge and an economic sanction?
Economic sanctions involve restricting an individuals freedom to act as they want.
Nudges try and shift attitudes and behaviour to comply with social norms.
Which method of changing social norms is superior?
This is a normative statement, so it’s not actually clear.
Critics of nudges suggest that sanctions are more effective at changing behaviour, as there are harsh punishments for breaking sanctions.
Sanctions are good at changing a social norm in one instance, as most people will follow the law as it’s in their self interest to do so. They lead to nudges though, as in the example of smoking, as a result of banning smoking in public places, people are now less likely to smoke in one another’s houses as it’s socially unacceptable due to the sanctions.
What is altruism?
Concern for the welfare of others.
What is fairness?
Impartiality.
What did traditional economics believe in terms of altruism?
Homo economicus was not altruistic and only acted in self-interest.
What did traditional economics believe in terms of altruism?
Homo economicus was not altruistic and only acted in self-interest.
How can traditional economics factor in altruism?
It can still be accomodated in terms of maximising theory.
Humans want to help others in their nature, their first instinct is to cooperate rather than than compete.
What type of term is fairness?
Normative.
What is choice architecture?
A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making.
How and why are choice architectures employed by government?
Behavioural insights design choice architectures so that citizens are nudged to opt for chioces that are in their best interests.
On a practical scale, the literal placement of items in a canteen, for example. Studies within the field of behavioural economics find that items placed at the front of a canteen are more likely to be purchased. If a canteen wants people to eat more healthily, or make more profit, they should place salads or expensive items at the front respectively.
What is the default choice?
An option that is automatically selected unless an alternative is specified.
How and why is default choice employed by government?
When framing policy on certain issues, you can be asked to opt-in or opt-out of certain issues. If it is an opt-out system, many people will not change it as they cannot be bothered, or do not have the time.
If it is an opt-in system, people will also not change it as they cannot be bothered.
Opt-out systems are better within wider society as in the example of organ donation, the NHS now has organ donation as an opt-out system and as a result, the supply of organs is now much closer to the demand, and the public health improves.
The BIT introduced automatic pension enrolment under the same theory of opt-in vs opt-out.
What is framing?
How something is presented.
What is an example of framing?
Advertisers saying a yogurt is ‘90% fat free’ sounds a lot better than ‘10% fat’.
Where is framing commonly employed?
Advertising
Politics
What is mandated choice?
People are required by law to make a decision.
Where is mandated choice employed?
Microsoft Software Installation Boxes
How does mandated choice aid a company like Microsoft?
They comply with technology laws, but most people choose the recommended settings of sending their data to Microsoft.
They often automatically have the box already ticked for you, so in order to make the ‘wrong’ choice in the opinion of Microsoft, you must move your mouse to untick it then continue. Most people cannot be bothered to do even this and as a result, they move on with recommended settings.
What is restricted choice?
Offering people a limited number of options so people are not overwhelmed by the complexity of many different options.
Why is restricted choice mandated to energy companies?
Ensures people make a well-informed decision and are not overwhelmed.
What is a shove?
Instructions to behave in certain ways, often by introducing financial incentives or disincentivest to incentivize people to follow what the government wants them to do.
What are the differences between nudges and shoves?
Nudges:
Provide information for people to respond to in their own way
Creates positive social norms
Opt-out schemes rather than opt-in schemes and default choices
Active choice from individuals
Shoves:
Uses taxation and subsidies to alter incentives or punish people through tax
Uses fines, laws and regulations.
What are 4 behavioural insights that can be employed to charitable giving to increase it?
Make it easy
Attract attention
Focus on the Social
Timing Matters
How does making it easy increase charitable activity?
Giving people the option to increase their future payments so donations are not eroded by inflation.
Usage of default choices for senior staff members to opt-out of giving schemes.
How does attracting attention increase charitable activity?
Attracting individuals’ attention (personalised messages are excellent)
Reward of behaviour you try to encourage (matched funding schemes)
How does focusing on the social increase charitable activity?
Use prominent and famous individuals to send out support messages
Make acts of giving more visible within one’s social group
Establish group norms (and social norms) about how people anchor their gifts
What is a market?
A voluntary meeting of buyers and sellers in which exchange takes place.
Both buyer and seller must be willing to do the exchange.
What is a competetive market?
Markets in which large numbers of buyers and sellers possess good market information and can easily enter or leave the market.
What is ruling market price?
The price at which planned demand is equal to planned supply.
(also known as equilibrium price)
