Economics Paper 1 Flashcards
(161 cards)
1
Q
Outline what a free market economy is.
A
When governments do not intervene within a market and supply and demand allocate scare resources.
2
Q
Outline what an advantage of a free market economy is.
A
Lower prices due to greater compeition which can lead to greater innovation.
Profit motive for firms.
3
Q
Outline what a command economy is
A
when the government controls all major aspects of the economy and economic production
4
Q
Outline a disadvantage of a free market economy.
A
Inequality due to the ability of inheriting wealth.
Monopolies can exploit consumers through higher prices.
5
Q
Outline an advantage of a command economy.
A
Prevent monopolies abusing power.
6
Q
Outline a disadvantage of a command economy
A
less incentive to be efficent.
7
Q
What did Karl Marx support.
A
Command economy
8
Q
What economic thinker believed in the free market.
A
Adam Smith and Fredrick Hayek
9
Q
Outline what a mixed economy is
A
Combines both free market and command economy where supply and demand allocate resources as well as government intervention.
10
Q
Disadvantage of mixed economy
A
Can lead to government failure.
11
Q
Advantages of mixed economy.
A
Can minimise market failure such as regulation on monopolies for example the CMA blocking mergers.
12
Q
What is opportunity cost.
A
the next best alternative forgone
13
Q
What shifts the PPF curve
A
New technology
Change in resources i.e more land
Improvement in education/productivity.
14
Q
YED for a normal good
A
Between 0 and 1
15
Q
YED for a luxury good
A
Greater than 1
16
Q
YED for an inferior good
A
Less than 0 (negative)
17
Q
What is monopolistic competition
A
many firms sell differentiated products and have some degree of market power, but the market still exhibits competition.
18
Q
Features of a monopolistic competition.
A
Price makers
Low barriers to entry and exit
Many producers and consumers
Aim to profit maximise at MC = MR
19
Q
Advantages of a monopolistic competition
A
Product differentiation - firms innovate to stand out and become dynamically efficient.
20
Q
Disadvantages of a monopolistic competition
A
Not allocatively efficent at P = MC
21
Q
Outline what consumer surplus is
A
the difference between what consumers are willing to pay for a good or service and what they actually pay.
22
Q
Outline what producer surplus is
A
the price at which a producer is willing to sell a good or service and the price they actually receive.
23
Q
Outline what a monopsony is.
A
a single buyer of a good, service or labour. They have strong marker power over seller and can influence prices/wage rate and terms of trade.
24
Q
Advantage of a monopsony.
A
Firms have lower AC therefore are productively efficent and gan SNP and can innovate.
25
Disadvantage of a monopsony.
Reduction in wages and an increase in inequality which can lead to barriers to education, healthcare and employment opportunities.
26
Outline factors that shift the supply curve
Advancements in technology
Increased cost of production
27
Outline factors that shift the demand curve.
Peoples income
Number of substitute goods
28
Outline XED
Measures the percentage change in quantity demand for a good after a change in the price of another.
29
Formula for XED
XED = % change in QD of good A / % change in price of good B.
30
XED values
Substitute - greater than 1
Compliment - Less than 0
Unrelated - 0
Inelastic (Less than 1) - Weak
Elastic (Greater than 1) - Strong
31
Outline what the Nash equilibrium is
Where no one gains by chaining strategy (found on the bottom right of the game theory diagram).
32
What is a Cartel?
Group of firm that are colluding i.e opec is a legal cartel.
33
Outline overt collusion.
Formal agreement between firms to collude.
34
Outline tacit collusion
unspoken actions to limit competitiveness and collude.
35
Outline what an oligopoly is
where a small number of firms dominate the industry, meaning that there are only a few sellers who hold a large share of the market. (Dog fight for market share).
Not allocative or productively efficent.
36
Characteristics of an oligopoly
Few firms dominate the market
differentiated goods
price makers
High barriers to entry and exit
37
Advantage of an oligopoly
Benefit from purchasing economies of scale meaning they are more likely to have access to SNP meaning they can undertake risky RnD and innovation and increase the quality of goods which can provide a competitive advantage.
38
Disadvantage of an oligopoly.
Firms may collude to charge higher prices therefore exploiting consumers. This collusion can be difficult to regulate and find out about.
39
What diagram can be used when showing price rigidity in an oligopoly market.
The kinked demand curve. If a firm increases price consumers switch to rivals and loose market share.
If a firm reduces prices then other firms also copy to not loose market share in the long run. (In the short run the firm that lowers their prices can see an increase in sales revenue).
40
Outline horizontal integration.
two business in the same industry merge at the same stage of production.
41
Example of horizontal integration.
BA and Iberia.
42
What is forward vertical integration?
involves acquiring a business in the same industry but higher on supply chain.
43
What is backward vertical integration?
involves acquiring a business in the same industry but further down the supply chain.
44
Example of vertical integration.
Apple is known for design and owning all key manufacturing components/processes.
45
Advantage of vertical integration
Total control over materials and quality which protects the firms brand image.
46
Disadvantage of vertical integration
Can lead to firms becoming large meaning the principal agent problem can be an issue which can lead to short term thinking to maximise personal benefits.
47
Advantage of horizontal integration.
increase in market share and less competition so firms may be able to spend less on advertising lowering average costs and have large control over prices.
48
Disadvantage of horizontal integration.
Competiton authorities such as the CMA may block mergers as they feel market share will be too large and consumers may be exploited. Such as the blocked merger between Sainsbury's and Asda.
49
Outline what conglomerate integration is.
Firms form different industries merging. I.e Facebook merging with Oculus.
50
Advantage of conglomerate integration.
Allows firms to diversify across industries spreading risk making them less vunerable which can give firms more confidence to undertake risky RnD increasing quality an consumer choice.
51
Disadvantage of conglomerate integration.
Lack of experience in the new sector which can increasing firms venerability to competition.
52
Outline what organic growth is.
When firms grow their market share and/or revenue through internal efforts such as developing new products.
53
Advantage of organic growth
Lower risk.
Allows owner to have full control.
54
Disadvantage of organic growth.
Slower growth.
55
Outline what a positive statement is.
Is a factual statement that can be tested true or false. Such as the uk is an island.
56
Outline what a normative statement is.
a value judgement. I.e the UK should impose a road tax on cyclists.
57
What impact will migration have on labour (leaving the country)?
Supply of labour decreases therefore wage rate increases.
58
Outline what price discrimination is.
when a firm charges a different groups of consumers different prices for the same good i.e a student bus faire.
59
What are the 3 conditions necessary for price discrimination.
The first must have market power
Must have information about consumers elasticities
Must be able to limit reselling
60
Advantage of price discrimination to consumers.
Can cross subsidise loss making services i.e pensioner discounts funded by higher prices for adults.
61
Advantage of price discrimination to firms.
Make higher revenue/profit than if they just charged one set price. - Show on diagram.
62
Disadvantage of price discrimination.
Can reduce consumer surplus as more money being transferred to firms increasing inequality such as through inheritance of assets.
Profits from price discrimination could be used to finance predatory pricing.
63
Where is profit maximisation found?
MR = MC
64
Where is revenue maximisation found?
MR = 0
65
Where is sales maximisation found?
Average revenue = AC
66
What efficiencies are present in perfect competition in the short run?
Allocative efficient.
67
What efficiencies are present in perfect competition in the long run?
Productive
Allocative
68
Characteristics of perfect competition.
Many buyers and sellers
Homogenous goods
Price taker
Perfect information - buyers and sellers.
69
What happens if firms in a perfectly competitive market make SNP in the short - run?
SNP would attract new firms due to the easy of entry increasing supply and lowering price therefore firms would make normal profit in the long - run.
70
What happens if firms in a perfectly competitive market make a loss?
Firms leave the market due to ease of exit so lower supply and an increase in price leading to normal profit. Furthermore, this increase in competition would push firms to become more efficient further lowering AC.
71
Outline what direct taxes are.
Taxes paid directly to the government by individuals or businesses on income or wealth. I.e income tax, corporation tax, CGT or inheritance tax.
72
Outline what indirect taxes are.
paid by a third party i.e VAT and exercise duties (taxes on items such as alcohol and cigarettes).
73
Outline what a progressive tax is.
Takes a higher percentage of tax from people with higher incomes.
74
Outline what a regressive tax is.
Takes a higher percentage of tax from people with low income.
75
Outline what an ad valorem tax is. (Indirect).
A certain percentage of the price of the good. VAT is levied at 20% so the more expensive the good is the more VAT that is paid.
76
Outline what a specific tax is. (Indirect).
A fixed amount of tax on a good. For example, a £20 passenger levy on a long-haul flight.
77
Name all types of government intervention.
Maximum and minimum prices.
Tradable pollution permits.
Taxes.
Subsidies.
State provision of information.
State provision of public goods.
Regulation.
78
One likely effect of reducing the number of tradable pollution permits. (Gov intervention).
Reduce the supply of permits therefore increasing the price.
79
Adv of maximum/minimum prices. (Gov intervention).
Stops the overproduction/decentivises.
80
Disadvantage of maximum/minimum prices. (Gov intervention).
Can lead to shortages of goods - increasing price - reducing consumer surplus.
81
Adv of tradable pollution permits. (Gov intervention).
High tax revenues due to the sale of permits.
Incentive to reduce pollution as firms can sell excess permits increasing revenue.
82
Disadvantage of tradable pollution permits. (Gov intervention).
High administrative costs - Gov failure. (Difficult to monitor and impose fines).
83
Disadvantage of taxes/subsidies. (Gov intervention).
PED of good will it make much difference?
Taxes can be regressive increasing inequality.
84
Adv of taxes/subsidies. (Gov intervention).
Can reduce negative externalities discouraging consumption of demerit goods moving back to socially optimum level of production and consumption.
85
Outline state provision of information. (Gov intervention).
when the government helps to close information gaps.
86
Adv of state provision of information. (Gov intervention).
Can reduce consumption of demerit goods. - Positive externality.
87
Disadvantage of state provision of information. (Gov intervention).
Increase cost for businesses to comply with new laws that may have been implemented to combat.
88
Outline state provision of goods. (Gov intervention).
When the government produces a good/service typically a necessity i.e healthcare or public good which the free market struggles to provide.
89
Adv of state provision of goods. (Gov intervention).
No profit motive therefore can charge lower prices to consumers increasing consumer wealth fare and disposable income which can be spent elsewhere.
90
Disadvantage of state provision of goods. (Gov intervention).
Costs a huge amount of money - 150bn on healthcare - can lead to a raise in taxes and larger national debt.
May have to be privatised to compete with new private firms who have a profit motive and therefore may be more efficient.
91
Adv of regulation. (Gov intervention).
Simple and easy to understand therefore people/firms are more likely to follow them.
92
Disadvantage of regulation. (Gov intervention).
Difficult to decide exactly what regulation and punishment (fines) but needs to be great enough to stop negative externalities.
93
Outline some reasons for remaining small.
Avoid diseconomies of scale.
Avoiding having to add VAT to goods and services (£90,000 threshold).
Niche market - Charge higher prices - more profitable.
Owner wish to remain in control.
Owner preferences - Profit scatisifise.
94
What is a merger.
When two firms agree to combine and operate as a single firm.
95
ADV of a merger.
Synergy - one firm may be more efficent.
Economies of scale
Access to new markets
Shared resources
Lower competiton - can give higher pricing power (increase or decrease price).
96
Disadvantage of a merger.
Job losses.
Diseconomies of scale.
CMA may block the merger.
Culture clashes.
97
Outline what PES is.
measures the responsiveness of quantity supplied to a change in price.
98
Formula for PES.
% change in QS/ % change in P.
99
What determines elasticity of PES.
Time period - short run - inelastic - can't change production. Long run - elastic can hire labour.
Spare capacity
Availability of factors of production.
100
What is the division of labour (this is different to specialisation)?
Where the production process is split into different tasks, and each worker focuses on one specific task.
101
An advantage of the division of labour.
Firms only have to train workers in one specific role meaning they can lower their costs/training costs.
102
Disadvantage of the division of labour.
Workers can become bored and demotivated therefore becoming less productive - may also increase absenteeism and labour turnover increasing costs.
103
Outline what a public good is (2 conditions).
A public good has to be non - rivalry (This means that when a good is consumed, it doesn’t reduce the amount available for others). And non - excludability (not possible to provide a good without it being possible for others to enjoy).
104
Are public goods under - provided in the free market?
Yes due to them being non - rivalry and non - excludable firms may not provide the good as they have difficulty charging people for their use.
105
What is the main problem with public goods?
The free rider problem - it is not possible to prevent anyone from enjoying a good, once it has been provided. Therefore there is no incentive for people to pay for the good because they can consume it without paying for it.
106
Outline factors that shift demand.
Income of consumers.
Price of substitutes.
Price of compliments.
Change in trends/fashion.
Seasonal.
Advertising.
107
Outline factors that shift supply.
A decrease in costs of production.
More firms.
Investment in capacity
The profitability of alternative products.
Productivity of workers.
Technological improvements
Lower tax.
Government subsidies.
108
How do you calculate PED.
% change in QD/% change in price.
109
Outline what PED is.
Measures the responsiveness of demand after a change in price.
110
What is the value for elastic PED?
Greater than 1. (change in price leads to a bigger % change in demand)
111
What is the value for inelastic PED?
Less than 1. ( a change in price leads to a smaller % change in demand).
112
Characteristics of a good with elastic demand.
Luxury (greater than 1).
Expensive and a big % of income.
Goods with many substitutes and a very competitive market.
113
Characteristics of a good with inelastic demand.
They have few or no close substitutes.
They cost a small % of income
Habitual.
114
Formula for YED.
% change in demand/% change in income.
115
Definition of an Inferior Good.
When an increase in income leads to a fall in demand - low quality good so as income rises you purchase less.
YED is less than 0.
116
Definition of a normal good.
This occurs when an increase in income leads to an increase in demand for the good.
YED is greater than 0 but less than 1.
117
Definition of a luxury good.
Demand for the good rises more than the increase in income i.e a 25% increase in demand for video games with a 10% increase in income.
YED is greater than 1.
118
Outline what a substitute good is (XED) - analysis mark.
increase in the price
of one good (in case study) will lead to an increase in
the demand for other another good (in case study).
Greater than 1.
119
Outline what a complimentary good is.
A good that is consumed together with another good.
When the price of one good rises, the demand for its complement falls.
Less than 1.
*Incorporate the case study within this i.e the compliment good of ....*
120
Outline what specialisation is.
When workers are assigned specific tasks within a production process.
121
ADV of specialisation.
Increased labour productivity - increases output for firms - utilise purchasing economies of scale - become more productively efficient - competitive advantage.
122
Disadvantage of specialisation.
Workers can become bored - increasing labour turnover - increases hiring and training costs (and time spent supporting new staff) - which can lower motivation within the firm increasing waste and reducing quality - less competitive.
123
Outline the 4 functions of money.
Medium of exchange.
Unit of account.
Method of deferred payment.
Store of value.
124
Outline store of value (function of money).
If we don't want to spend our money now we can store it and it will keep its value for the future.
125
Outline method of deferred payment (function of money).
Money is used to pay back debt (we can postpone payment into the future).
126
Outline unit of account (function of money).
We can use money to value goods, and can give different goods clear and distinct prices. - Money makes it easier to compare goods.
127
Outline medium of exchange (function of money).
Used for buying and selling goods rather than having to barter for something.
128
Name the 4 types of government failure.
Information gaps.
Distortion of price signals. i.e rent controls - discourage landlords.
Excessive administrative costs. i.e regulation.
Unintended consequences. i.e reducing benefits can increase the incentive to work however it can also increase inequality.
129
What is government failure.
When government intervention leads to a net welfare loss and insufficient allocation of resources.
130
Name the 4 types of market failure.
Negative and positive externalities.
Under - provision of public good (non - rivalry and non - excludable - free rider problem).
Information gaps.
131
Outline what the price mechanism is.
The system where prices are determined by the forces of demand and supply, and these prices then allocate scarce resources in a economy.
132
Outline the three key functions of the price mechanism.
Signalling function.
Incentive function.
Rationing function.
133
Outline the signalling function (price mechanism).
Prices signal to producers and consumers about changes in market conditions.
→ Rising prices signal higher demand or lower supply.
→ Falling prices signal lower demand or excess supply.
134
Outline the incentive function (price mechanism).
Prices provide incentives to change behaviour:
→ Higher prices encourage producers to supply more (profit motive).
→ Lower prices encourage consumers to buy more.
135
Outline what the principle agent problem is.
occurs when the interests of an agent (manager) differs from the principle (owner) leading to a conflict in interest.
136
Outline factors which determine the survival of small firms.
- Competitive advantage - Niche market - innovate.
- Access to finance - difficult to access when small which can slow growth - EV - business grants.
- Flexibility and Adaptability
- Regulatory and Legal Environment - increases costs and can cause barriers to entry issues in some industries.
- Human Capital - Skilled workforce?
137
Outline factors that constrain business growth.
- Access to finance - high interest rate increases the cost of borrowing.
- Market constraints - high B2E/ market could be saturated/ structure of the market i.e oligopoly.
- Operational Constraints - supply chain issues / capacity limitations - lack of equipment.
- Regulatory and Legal Constraints
- Technological Constraints - Expensive to implement and can give other firms large advantages.
-External Economic Factors - inflation recessions.
138
Name the 3 times of diseconomies of scale.
Alienation.
Beaucracy.
Communication.
139
Types of economies of scale.
Internal:
Technical.
Purchasing.
Marketing.
Financial.
Managerial.
Risk bearing.
140
Example of external economies of scale.
Improved Infrastructure.
141
Outline what MES means.
Minimum efficient scale - lowest point on the long run average cost curve and is also known as an output range over which a business achieves productive efficiency.
142
Outline the law of diminishing marginal returns.
As more units of a variable input (like labor) are added to fixed inputs (like capital), the additional output (marginal product) produced by each additional unit of input will eventually decrease.
143
Outline what allocative efficiency is.
Optimal distribution of goods and services, taking into account consumer’s preferences. P=MC.
144
Are monopolies allocatively efficent?
No.
145
Is allocatively efficient present in perfect competition.
Yes.
146
Outline what productive efficiency is.
Producing maximum output at the lowest cost - bottom of the AC curve.
147
Outline what dynamic efficiency is.
Undertaking innovation and investment to improve production processes which will help lower long - run average costs. I.e investment new technology can increase labour productivity.
148
Outline x - inefficiencies.
Occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary.
149
Outline causes of x - inefficiencies.
- Monopoly power - little or no competition - SNP - lack the incentive.
- A nationalised firm owned by the government may face little or no incentive to try and make a profit. Therefore, it has less incentive to try and cut costs.
- Principal-agent problem. Shareholders may wish to maximise profits and minimise costs. But, managers and workers may pursue other objectives – keeping costs low enough to protect their job but then allowing costs to rise as it makes work more enjoyable.
150
Outline some ways of non - price competition.
- Loyalty card.
- Ethical/charity concerns.
- Unique selling points i.e vegan.
- Advertising/brand loyalty.
151
Outline what limiting pricing is. (Type of price competition).
Setting the price of a product or service low enough to make the market unattractive to new entrants, but still above the firm's marginal cost so that it remains profitable. (Limits contestability).
152
Outline what predatory pricing is. (Type of price competition).
Where a firm deliberately lowers its prices below its costs in the short - run to drive competitors out of the market. - This is illegal.
153
5 reasons consumers act irrationally.
Herd behaviour.
Habitual behaviour.
Difficulty in computation.
Consumer inertia.
Nudges.
154
3 types of market failure.
Externalities.
Public goods.
Information gaps.
155
4 types of government failure.
Information gaps.
Conflicting objectives.
Excess administrative costs.
Unintended concequences.
156
Outline contestabilty.
How easy it is for a firm to enter a market.
157
What makes a market contestable?
Low barriers to entry (sunk costs (start up costs) , technology, brand loyalty).
158
Factors that may change supply of labour.
Skill requirement.
Reduced net migration flows to UK.
Infrastructure – ability to commute or work from home.
159
Total revenue formula.
Price x quantity.
160
Average revenue forumla.
Total revenue/quantity sold. (Gives price).
161
Marginal revenue formula.
Additional revenue earns from selling 1 additional unit.
