Economics Theme 1 Flashcards

Question

What is the role of the state in a mixed economy?

Answer 1

Reduce negative externalities Provide public goods Control demerit goods Supply merit goods Control macroeconomic variables Provide legal framework Encourage free trade Encourage competition

Answer 2

Advantages:< Competition, lower prices Consumer choice Rewards entrepreneurship Encourages innovation Productive efficiency Economic growth Disadvantages: Wealth and income inequality Less control of demerit goods supply Little regulation Less support for vulnerable

Answer 3

There is an invisible hand that self-regulates the behaviour of the market place. Individuals seek to maximise personal gains - each individual's self-interest leads to an efficient allocation of resources, which benefits society as a whole.

Answer 4

The state should not interfere too much - its role is to maintain the law. Government interference leads to totalitarian rule which restricts freedom and undermines democracy. There should be some government intervention, but most decision making should be left to individuals and firms and the price mechanism.

Answer 5

Labour will be exploited, so they will unite to overthrow capitalists. This will lead to socialism, where entire communities own the means of production and workers are paid wages. This will lead to communism, where the government own the means of production and output is distributed centrally.

Answer 6

Consumers aim to maximise utility Firms aim to maximise profits Economic agents won't always do this (e.g. profit satisficing, sales maximisation, revenue maximisation, consumer weakness at computation, behavioural economics)

Answer 7

A movement along the demand curve shows demand increasing or decreasing because of a change in price. A shift of the demand curve shows demand increasing or decreasing because of a factor other than price.

Answer 8

A movement along the supply curve shows supply increasing or decreasing because of a change in price. A shift of the supply curve shows supply increasing or decreasing because of a factor other than price.

Answer 9

Population Income Related goods Advertising Taste Expectations Season

Answer 10

Change in costs of production Joint/Competitive supply Technological progress Prices of other products (if a firm can switch between which products it produces) Government policy (e.g. taxes, subsidies, regulation) Expectations of future events (Change in price will result in a movement along the supply curve)

Answer 11

Marginal utility is the amount of satisfaction an individual derives from consuming one extra unit of a product. Marginal utility decreases over time because the individual is less satisfied with each extra unit they produce. Total utility will increase until the point where marginal utility stops increasing. It will then begin to decrease as marginal utility beings to decrease. Consumers often tend to continue consumption after marginal utility reaches zero, before stopping.

Answer 12

If increased consumption of a product provides less marginal utility, the consumer will only buy additional units if the price falls. This is why demand increases when price falls and vice versa.

Answer 13

PED measures the responsiveness of demand to a change in price. % change in Qd / % change in P

Answer 14

YED measures the responsiveness of demand to a change in incomes. % change in Qd / % change in Y

Answer 15

XED measures the responsiveness of demand for one good to a change in the price of another good. % change in Qd of good A / % change in P of good B

Answer 16

0 = Perfectly Inelastic 0 to -1 = Inelastic -1 = Unitary Elasticity -1 to Infinity = Elastic Infinity = Perfectly Elastic

Answer 17

Positive means it is a normal good Negative means it is an inferior good 0 to 1 = Inelastic & Normal (often necessities) 1 to Infinity = Elastic & Normal (often luxuries)

Answer 18

Positive means the products are substitutes Negative means the products are complements< <0 (negative) = Complements 0 = Unrelated >0 (postitive) = Substitutes

Answer 19

Availability of substitutes Luxury vs necessity Proportion of income spent on good Habits / addictive Time period (more elastic in long run)

Answer 20

Necessity vs luxury Consumers' income levels Standard of living The trade cycle

Answer 21

Substitute vs complement vs no relationship

Answer 22

Inelastic good price rise --> Increase in total revenue (Increase in revenue from price is greater than decrease in revenue from demand) Inelastic good price fall --> Decrease in total revenue (Increase in revenue from demand is less than decrease in revenue from price) Elastic good price rise --> Decrease in total revenue (Increase in revenue from price is less than decrease in revenue from demand) Elastic good price fall --> Increase in total revenue (Increase in revenue from demand is greater than decrease in revenue from price

Answer 23

PES measures the responsiveness of supply to a change in price. % change in Qs / % change in P

Answer 24

0 = Perfectly Inelastic 0 to 1 = Inelastic 1 = Unitary Elasticity 1 to Infinity = Elastic Infinity = Perfectly Elastic

Answer 25

Availability of raw materials Length and comlexity of production process Mobility of factors of production (how easily can switch to producing other products instead) Level of stocks Spare/excess production capacity

Answer 26

In the short run at least one of a firm's factors of production are fixed. In the long run all factors of production are variable. Short run economic growth is when the economy uses spare capacity to increase GDP. Long run economic growth is when the productivie capacity of the economy increases.

Answer 27

PES is more elastic in the long run as factors of production are not fixed, so producers adjust to market conditions. Whereas in the short run it can be difficult to do this, because at least one factor of production is fixed, so it is more difficult for producers to change production and the PES is more inelastic.

Answer 28

The equilibrium price is the point at which demand equals supply and all products will be sold. A curve may shift left or right, which would change the market equilibrium. Market forces are always pushing prices towards market equilibrium (where demand and supply meet).

Answer 29

If there is excess demand, firms will raise their price so that demand will fall to where supply is at. If there is excess supply, firms will lower their price so that demand will increase to where supply is at.

Answer 30

(Perfectly elastic supply, Speculation, Inelastic supply, Buffer stock schemes) Producers in a commodity market are selling homogeneous or very similar goods, so there is little to no product differentiation and products are likely to be unbranded. Therefore, the commodity price is determined by the market as a whole, and the market has perfectly elastic supply. Commodities are subject to speculation. E.g. if the price of gold is expected to increase, there will be an increase in demand for gold, and the price will therfore increase. Hard commodies (extracted from the ground) are usually non-rewable, and the production is time-consuming and complicated, so these products have an inelastic supply. Soft commodities (that are grown) also have an inelastic supply because of the time-consuming production process and vulnerability to natural disasters and bad weather conditions. When possible, buffer stock schemes are used for commodities, so that suppliers can choose when to increase or decrease supply, therefore stabalising prices.

Answer 31

Rationing function Incentive function Signalling function

Answer 32

Excess demand for a good or service will lead to a rise in its price due to scarcity. The higher price will lead to a decrease in demand as it restrits the number of buyers who are able and willing to buy the product. As the product becomes restricted its availability is effectively rationed. There will be a contraction along the demand curve showing an increase in price and decrease in quantity demanded.

Answer 33

Through their consumption choices, consumers send information to producers about changing wants and needs. Higher prices give producers a motive to increase supply of a good or service, as they can make higher profits. There will be an expansion along the supply curve showing an increase in quantity supplied.

Answer 34

The signalling function provides information to producers about where resources are required and where they are not. A price rise represents scarcity and a price fall represents surplus. This will signal to producers to supply more or less, and where their resources can be best used.

Answer 35

Consumer surplus: The difference between the price a consumer is willing to pay and the price they actually pay. Producer surplus: The difference between the price a producer is willing to supply at and the price they actually receive.

Answer 36

Demand shift left: Consumer surplus decrease, Producer suplus decrease Demand shift right: Consumer surplus increase, Producer surplus increase Supply shift left: Consumer surplus decrease, Producer surplus decrease Supply shift right: Consumer surplus increase, Producer surplus increase

Answer 37

A direct tax is a tax on an income or profit, whilst an indirect tax is a tax on a good or service.

Answer 38

The tax will be paid for by the consumer and producer, and the government will receive the tax revenue. The government will be able to increase spending in the economy or decrease its current account deficit. The tax will internalise negative externalities and try to achieve the social optimum level of output. Costs will increase for firms, which will cause supply to shift left. Quantity supplied will decrease and price will increase. The revenue from the higher price will be used by the firm to pay the tax, and the firm will pay the remaining amount and make lower profits. If demand is inelastic the incidence of tax will be greater for the consumer. If demand is elastic the incidence of tax will be greater for the producer. Producer surplus and consumer surplus will both decrease.

Answer 39

A specific tax is a set amount per unit, whilst an ad valorem tax is a percentage of the selling price.

Answer 40

A subsidy is a financial incentive to a firm to produce or consume a given product. It can be a lump sum or per unit.

Answer 41

Supply will shift right as costs are lower for firms. This allows them to increase quantity and decrease price, and consumers will have lower prices. The government will either have to borrow money or sacrifice expendature elsewhere in the economy to fund the subsidy. Consumer surplus and producer surplus will both increase.

Answer 42

Consideration of the influence of other people's behaviour / herding behaviour The importance of habitual behaviour Consumer weakness at computation

Answer 43

People are influenced by what others do when making consumption decisions. Herding behaviour is when people follow similar consumption patterns to others, rather than analysing the situation and making their own decision. It often feels safer or allows consumers to feel more socially accepted.

Answer 44

The status quo is the tendency of consumers to stick with their current situation instead of making a change. This may be due to consumers "playing safe", as trying something new could make them worse off. This is loss aversion (when consumers try to avoid a loss rather than try to acheieve a gain). Consumers also build routines that they don't want to change.

Answer 45

Consumers often have a weakness in day to day computation and will make judgments based on mental short cuts when uncertainty exists or it is too difficult to compute the available information. People also find it hard to forecast future feelings and tend to exagerate small probabilities. Consumers of addictive products tend to base their decision off the immediate gratification they receive, without considering the future problems. There are the three heuristics which also help to explain this.

Answer 46

Availability heuristic Anchoring heuristic Representativeness heuristic

Answer 47

As a mental shortcut, people make judgments about the likelihood of an event based on how easily an example comes to mind. E.g. if a person has just watched a documentary about burglary, they may think their chances of being burgled are higher than they actually are, and this may influence their consumption decisions. People often make judgments based on events that are fresh in their head.

Answer 48

People tend to make decisions by comparing a nearby reference point (i.e. using an arbitrary starting number to estimate a different number). e.g. bread machine costs £230 which is a lot of money so has no sales. Same company releases new machine for £400, and £230 now seems like a good value and sales increase.

Answer 49

People tend to make mental shortcuts where they use past experiences or stereotypes to guide their decision making. They use this information rather than the more accurate information at hand to make a decision. E.g. a gambler making a bet because they believe they are in a run of good luck. E.g. Guessing if an astrological person is a holistic healer or teacher based on description vs statistics.

Answer 50

Market failure occurs when the allocation of goods and services is inefficient. It often leads to a net loss of economic welfare.

Answer 51

Negative externalities Under-provision of public goods Information gaps

Answer 52

The costs created by economic agents when producing or consuming a product which result in a loss of economic welfare. This happens when the free-market quantity demanded/supplied is higher than the social optimum quantity demanded/supplied.

Answer 53

This is when firms do not provide goods and services because they find it difficult to charge for the product.

Answer 54

This is when consumers have asymmetric information; some economic agents have more information about the product than others. This can be caused by failure to disclose information, lack of education/awareness, framing issues (how the product is portrayed) or difficulty estimating the costs and benefits.

Answer 55

Private costs: The costs of consuming or producing a good or service that are paid for by those who use them. Private benefits: The benefits of consuming or producing a good or service that are received by those who use them Social costs: The costs of consuming or producing a good or service that are paid for by society. Social benefits: The benefits of consuming or producing a good or service that are received by society. External costs: The costs to a third party when social costs are greater than private costs. External benefits: The benefits to a third party when social benefits are greater than private benefits.

Answer 56

External cost of production: Dumping of toxic waste External cost of consumption: Passive smoking / anti-social behaviour from drinking alcohol External benefit of production: Creation of jobs from building a new factory External benefit of consumption: Becoming better skilled so contributing more to the economy

Answer 57

Reduce negative externalities Increase positive externalities Increase supply of merit goods Decrease supply of demerit goods Supply public goods that would be undersupplied by the market Reduce inequality Support industry

Answer 58

Public goods: When its use by an individual does not stop others from using it, and its consumption does not reduce the amount available for consumption by others. They are non-rival goods (consumption doesn't reduce amount available) They are non-exludable goods (impossible to prevent others from using) Private goods: When its use by an individual stops others from using it, and its consumption reduces the amount available for consumption by others. They are rival goods (consumption reduces amount available) They are excludable goods (possible to stop others from using)

Answer 59

Public goods are not profitable because consumers are unwilling to pay for them. This is because they are non-exludable, so can be used without payment. These goods are also necessary for daily life and national development, so the government takes control of supplying them.

Answer 60

This occurs when people can benefit from a good or service without paying for it. If enough people can enjoy a good without paying the cost, there is the danger that the good will be under-provided or not provided at all. If one sailor builds a light house, all sailors benefit from the illumination. If other sailors don't contribute to its upkeep, it may be too expensive to continue operation, and it will be under-provided.< Public good examples: Gardening and street lights

Answer 61

Symmetric information: Consumers and producers have the same level of knowledge about the products, and they know everything there is to know about them and the effects of consuming them. Asymmetric information: When there is imperfect knowledge or an inbalance of information. E.g. second hand car sellers often know more about the car than buyers.

Answer 62

Without having full information about a product it is difficult for consumers and producers to make decisions regarding price, quality and other relevant factors when buying and selling. This can lead to inefficient decisions to be made and resources to be spent when they could be spent better elsewhere.

Answer 63

Qausi-public goods provide benefits to the public, but could be restricted if necessary. A true public good must be accessible to everyone all the time E.g. Roads can be restricted with a toll booth.

Answer 64

In the free market producers and consumers are usually only concerned with the private costs and benefits, which often results in negative externalities. The government aims to decrease production or consumption so that the gap between the social optimum and free market level of output or consumption is smaller, and the negative externality will be smaller. The opposite is true for positive externalities. The government may intervene in markets to encourage or discourage production or consumption. E.g. sugar tax, tradable pollition permits, subsidies. These will internalise the negative externalities as the gap between the private and social costs will decrease, or the social benefits will increase.

Answer 65

Merit goods provide external benefits when consumed. Demerit goods provide external costs when consumed.

Answer 66

Increase the price of products that cause negative externalities to reduce them and decrease the price of products that cause positive externalities to increase them.

Answer 67

Force producers to provide accurate information through accurate labelling (e.g. requiring alcohol percentage) Public broadcasts to improve knowledge (e.g. adverts showing the impacts of smoking) Laws forcing companies to be more transparent and publish their financial accounts Regulate advertising standards to be more informative and less persuasive Establish organisations to act as regulators (Competition and Markets Authority and Advertising Standards Authority

Answer 68

It is set below the equilibrium price to be effective. It creates lower prices for consumers and prevents them from being exploited, however there could be shortages as demand exceeds supply. It could also encourage trade on the black market.

Answer 69

It is set above the equilibrium price to be effective. It protects the earnings of producers, particularly in industries that have prices subject to great fluctuations. It sometimes creates a surplus as supply exceeds demand, which can be a good thing as the surplus can be stored for when there are future shortages.

Answer 70

To create a market to internalise the negative externality created from large firms polluting. It also aims to limit greenhouse gasses, as these cause global warming. Firms must pay high prices to pollute or stop polluting all together. The government gives them a choice, with the outcome being positive for the rest of society either way. The government can also later raise funds by selling more permits when they become scarcer. Firms will invest and innovate to become cleaner.

Answer 71

The increased cost for firms could be passed onto the consumer, which would increase prices for consumers without decreasing pollution or internalising the external cost. Very large firms will buy more permits without seeing a significant increase in their costs, which would limit the impact of the permits. It may create a barrier to entry in a market, which would restrict cometition It isn't worldwide, so even if the EU is successful at reducing pollution, there is still a lot of pollution elsewhere in the world that will impact the EU. If market price increases to a very high rate, fines may be cheaper than permits.

Answer 72

The government seeks to provide effective competition within markets to protect the interests of consumers so that they are not exploited by firms. Consumers will have greater choice and lower prices.

Answer 73

Taxation Subsidies Maximum and minimum prices Tradable pollution permits State provision of pubic goods Provision of information Regulation

Answer 74

A giffen good is an inferior good where higher price causes an increase in demand due to the income effect of the higher price outweighing the substitution effect. E.g. Poor people can eat potatoes or meat. Potatoes are cheaper and more filling. If price of potatoes increases, fewer people can afford meat and will instead buy more potatoes.

Answer 75

Veblen goods are normal goods where demand rises as price rises. This is due to people believing more expensive goods are better quaity goods. E.g. luxury cars.

Answer 76

Government failure exists when the government intervenes to correct a market failure, but the result is a more inefficient allocation of resources and there is a net loss of economic welfare.

Answer 77

Distortion of price signals Unintended consequences Excessive administration costs Information gaps

Answer 78

The government tries to create incentives and disincentives in order to influence the behaviour of individuals and firms. This creates markets that only survive with government support and markets that are have limited growth because of the government. This distorts the free workings of the market and creates distorted prices, which can lead to inefficiencies.

Answer 79

Unexpected events can occur due to government intervention if consumers or producers act in a manner that was not foreseen by the government. This can worsen the situation that the government was trying to resolve.

Answer 80

Administrative costs are the expendatures of government intervention. Even if the intervention creates benefits, the costs may outweigh the benefits, creating a net loss of economic welfare.

Answer 81

Information used by governments can be innacurate due to poor research or inability to predict the future. This delivers wrong signals to markets, meaning decision-making is flawed.

Answer 82

Specific tax Ad Valorem tax

Answer 83

1920s US government ban on alcohol. Led to a rise in organised crime as the mafia supplied alcohol. 1990s UK landfill tax led to an increase in illegal dumping of rubbish on the roads / fly-tipping.

Economics Theme 1 Flashcards

(107 cards)