Micro Flashcards
(167 cards)
1
Q
Positive statement
A
An objective statement that can be proven to be correct or incorrect using available data
2
Q
Normative statement
A
A subjective statement that is based on an opinion or judgement
3
Q
The three economic problems
A
What should be produced?
How should it be produced?
Who should it be produced for?
4
Q
Factors of production
A
Land
Labour
Capital
Enterprise
5
Q
Land
A
Natural resources used in the production of other goods
e.g. coal, wood
6
Q
Labour
A
Human input into production
7
Q
Capital
A
Goods used in the supply of other products
e.g. machinery, factories
8
Q
Enterprise
A
Having an idea of how land should be used
9
Q
Opportunity cost
A
Measures the cost of a choice made in terms of the next best alternative foregone
10
Q
Possible production frontiers (PPFs)
A
Shows alternative combinations of two goods and services attainable when all resources are fully and efficiently employed
11
Q
Specialisation
A
When a specific factor of production is allocated to a particular job in the production process
12
Q
Advantages of specialisation
A
Greater output
More revenue
Cost per product decreases
13
Q
Disadvantages of specialisation
A
More training
More workers
More wages
Decrease in economic welfare of workers
14
Q
Production
A
measure of the value of output (measured in GDP)
15
Q
Productivity
A
The efficiency of the factors of production measured in output per person or output per person per hour
16
Q
Advantages of a free market economy
A
Lots of competition
Lots of choice
Strong economic growth
Improving quality and innovation
Strong incentives to continue developing and keep output high
17
Q
Free markets
A
allocates resources based on supply and demand and the price mechanism
Anything can be sold at any price that people will pay for
18
Q
Disadvantages of a free market
A
Inequality
Non profitable goods not produced
Monopolies common
19
Q
Planned economy
A
Government decides how resources are allocated
20
Q
Advantages of planned economies
A
Maximises welfare
Reduces inequality
Low unemployment
Prevents monopolies
21
Q
Disadvantages of planned economies
A
Poor decision making
Restricted choice
Lack of risk taking and innovation
Lack of efficiency
22
Q
Demand
A
the quantity of goods and services that consumers are willing to purchase at a given time at market price
23
Q
Effective demand
A
Demand is only effective when it is backed up by the willingness and ability to pay the market price
24
Q
Basic law of demand
A
Demand varies inversely with price
25
Causes of shifts of the demand curve
Changing price of substitute goods
Changing price of complementary goods
Changes in real income
Changes in income distribution
Effects of advertising and marketing
Interest rates
Changes in size/age structure of population
Seasonal factors
26
Utility
measure of satisfaction we get from purchasing and consuming a good or service
27
Total utility
Total satisfaction from a given level of consumption
28
Marginal utility
Change in satisfaction from consuming an extra unit
29
Derived demand
Demand for a factor of production used to produce another good or service
e.g. wood, steel
30
Composite demand
Demand for a good that has multiple uses
e.g. milk - an increase in demand for yoghurt will lead to a decrease in supply for cheese
31
Normal goods
Increase in demand when average income rises
32
Inferior goods
Decrease in demand when average income rises
33
Giffen goods
Increase in demand as price rises as consumer is solely dependent on that good
e.g. rice, potatoes
34
Veblen goods
Increase in demand as price rises due to luxury status
e.g. clothes, handbags
35
Price elasticity of demand (PED)
measures the responsiveness of demand to a change in price
36
Elasticity
The extent to which one variable responds to a change in another variable
37
PED equation
PED = % change quantity demanded / % change price
38
PED = 0
perfectly inelastic (demand doesn't change)
39
PED = >1
Inelastic (% change demand less than % change price)
40
PED = 1
Unitary elastic (change in price leads to a proportionate change in demand)
41
PED = < 1
Elastic (% change demand greater than % change price)
42
Factors effecting PED
Ease of substitutes
Addictive quality
Brand loyalty
Price of product as proportion of income
43
Revenue equation
Revenue = selling price x quantity sold
44
Revenue
amount of money generated through a firms sales
45
Uses of PED
Shows effect of a price change on total revenue
Shows price volatility
Price discrimination
46
Income elasticity of demand (YED)
Measures the responsiveness of demand to a change in income
47
YED equation
YED = % change quantity demanded / % change income
48
Normal goods and YED
Positive income elasticity
If inelastic are necessity
If elastic are luxury
49
Inferior goods and YED
Negative income elasticity
50
Uses of YED
Helps predict changes in the economic cycle
Important to have diversified product range to appeal to variety of people
Products with high YED and low PED increase profit margins
51
Cross elasticity of demand (XED)
Measure the responsiveness of good x following a price change in good y
52
XED equation
XED = % change quantity of good x / % change price of good y
53
Substitute goods and XED
Products in competitive demand
Increase in price of one leads to increase in demand for other
XED positive
Inelastic means weak substitutes
Elastic means strong substitutes
54
Complementary goods and XED
Products in joint demand
Fall in price of one leads to increase in demand for other
XED negative
Inelastic means weak complements
Elastic means strong complements
55
Uses of XED
Shows impact of rivals pricing strategies on demand for own products
Pricing strategies for complementary goods
56
Supply
The quantity of goods and services a firm is willing to produce at a given price in a given time period
57
Why does the supply curve slope upwards?
Profit motives
Production costs
New entrances to the market
58
Causes of a shift in the supply curve
Subsidies
Taxes
Technology
Production costs
59
Joint supply
When an increase or decrease in the supply of one good leads to an increase or decrease in supply of another good
60
Price elasticity of supply (PES)
Measures the responsiveness of supply to a change in price
61
PES equation
PES = % change quantity supplied / % change price
62
Factors affecting PES
Spare production capacity
Stocks of finished products
Perishability
Ease and cost of factor mobility
Time period
Production speed
63
Market equilibrium
When the supply and demand for a good or service is equal
64
Excess supply
When supply is greater than demand
65
Excess demand
When demand is greater than supply
66
Market
Place or platform where buyers and sellers meet to exchange a product
67
Adam Smith and the invisible hand
Concept where without intervention in a free market an equilibrium will be determined in the supply and demand for goods
68
Functions of the price mechanism
Allocate
Ration
Incentivise
Signal
69
Allocative function
The market mechanism allocates scarce resources by raising the price of scarce ones and decreasing the price of plentiful resources meaning only those who can afford them can have them
70
Rationing function
When there is a shortage of a product price will rise and deter customers from buying it
71
Signalling function
Changes in price provide information to both producers and consumers about changes in market conditions
72
Incentivising function
The price mechanism creates incentives to satisfy demand
When the price of a good increases there is a greater profit motive and a greater opportunity costs for business not producing the good
73
Consumer surplus
Difference between the total amount that consumers are willing to pay for a good or service and the amount they actually do
74
Value
What we get from consuming a good or service
75
Price
What we pay for the right to consume something
76
Producer surplus
measure of producer welfare
Difference between the price producers are willing and able to supply a good or service and the price they actually sell it for
77
Market failure
Occurs when a freely functioning market operating without government intervention fail to deliver and efficient or optimal allocation of resources
78
Economic efficiency
Society making optimal use of scarce resources to satisfy wants and needs
79
Allocative efficiency
Level of output that maximises total welfare
80
Productive efficiency
When firm is operating on the lowest point of their cost curve
81
Social efficiency
Socially efficient level of output and or consumption that occurs when marginal social benefit = marginal social cost
82
Dynamic efficiency
Occurs over time and is linked to the pace of innovation within a market and improvements in a range of choice for consumers as well as the reliability, quality and performance of the product
83
Product innovation
Small scale and frequent changes to the characteristics and performance of a good or service
84
Process innovation
Changes to the way the production process takes place
85
Negative externalities
Externalities refer to the unintended side effects or consequences of an economic activity or transaction that affects third parties who are not directly involved
(overproduction, overconsumption)
86
Negative production externalities (example)
Fossil fuels
Noise pollution
Pollution from fertilisers
Industrial waste
Methane emissions
Overfishing
87
Negative consumption externalities (example)
Vehicle pollution
Household waste
Noise pollution
Traffic congestion
Gambling addictions
Obesity costs
Air pollution from smokers
88
Marginal private costs (MPC)
Internal costs to producer or consumer from suppling or consuming one extra unitM
89
Marginal private benefit (MPB)
Satisfaction gained by the individual through producing or consuming 1 extra unit
90
Marginal external cost (MEC)
Cost to third parties
91
Marginal social costs (MSC)
total cost to society
92
Solutions to reduce negative externalities
Pollution permits
Property rights
Taxation
93
Advantages of pollution taxes
Internalises externality
Uses price mechanism to change incentives
Raises tax revenue for gov
94
Disadvantages of pollution taxes
Low price elasticity of demand means may not change behaviour
Risk of tax evasion / avoidance
May hit lower income families more
95
Positive externalities
Exist when third parties benefit from spill over side effects of production or consumption
(underproduction , underconsumption)
96
Positive consumption externalities (examples)
Health care
Face masks
Vaccines
Cycle schemes
Public libraries
Free school meals
Museums
97
Solutions to positive externalities
Subsidies
Regulation
State provision
Maximum price controls
Information provision
98
Demerit goods
Goods that are considered to be bad for an individual or society
Cause negative externalities
Over consumed in a free market
99
Examples of demerit goods
Fast food, drugs, alcohol, vapes, gambling, tobacco
100
Solutions to demerit goods
Negative advertising
Minimum pricing above equilibrium
Banning products
101
Merit goods
Goods that are considered to be good for an individual or society
Cause positive externalities
Under consumed in a free market
102
Examples of merit goods
Health programs
Education
Bike schemes
Public libraries
Museums
Galleries
Free school meals
Vaccinations
103
Solutions to the underconsumption of merit goods
Increase provision
State provision
Subsidies
Information
Campaigns
Advertisements
104
Information failure
occurs when people have inaccurate or incomplete data and therefore make potentially 'wrong' decisions
105
Examples of information failure
Tanning salons
Addiction to painkillers and drugs
Second hand markets
106
Types of information failure
Asymetric
Moral Hazard and adverse selection
107
Asymetric information failure
When somebody knows more than someone else in the market
108
Moral hazard
Occurs when insured consumers are likely to take greater risks as they know that insurance will pay
109
Adverse selection
High insurance prices create a missing market with low risk customers
e.g. health insurance
110
Policies addressing information failure
Compulsory labelling on food products
Improved nutritional information
Anti speeding ads
Campaigns raising awareness of drunk driving
Campaigns on dangers of gambling
Consumer protection laws
Industry standards
111
Heuristics
Mental shortcuts we use to make a decision
112
Heuristics - price quality
Consumers assume high price items are better quality
113
Heuristics - Familiarity
Consumers will choose brands thay are familiar with
114
Heuristics - Brand loyalty
Consumers will stick with same brand if it has always delivered quality and satisfaction
115
Heuristics - Availability
When consumers recall instances of seeing a product or brand frequently they will be more likely to buy it
116
Public goods
Market failure occurs when the production or consumption of a good or service is neglected and there is a 'missing market'
Non excludable, non rival, non rejectable
117
Non excludable
Benefits of the good cannot be confined to only those who have paid
118
Non rival
One individuals enjoyment doesn't reduce or diminish anothers enjoyment
119
Non rejectable
Collective supply means people cannot not use it and recieve its benefits
120
Public good examples
Flood defences
Crime control
Reduced disease from vaccinations
Irrigation systems
121
Private goods
Goods and services that are excludable, rival and rejectable and consumers pay for what they consume
122
Excludable
Sellers can easily prevent individuals who haven't payed for the good from consuming it
123
Rival
When one person consumers a private good it reduces the quantity available for someone else
124
Quasi public goods
A near - public good with come of the characteristics
125
The Free rider problem
People who consume the good but don't pay for it
126
Examples of free rider problem
Open space
Fare dodging
Fly tipping
Open access wifi
Tax evasion
127
Solutions to the free rider problem
Tax
Government provision
Appealing to altruism
Making public goods private
Legislation
128
Global public goods
Goods that benefit every country irrespective of who provides them
129
Examples of global public goods
Vaccines
Security from war
Eradication of disease
Measures to protect ozone layer
Measures to reduce climate change
130
Public bads
Goods and services that have negative effects on people and communities leading to a loss in social welfare
131
Complete market failure
when the market doesn't supply the good at all, there is a missing market
132
Partial market failure
When the market functions but supplies the wrong quantity of a product or at the wrong price
133
Monopolies
Ability of businesses to control the market and set price above a level that would exist in a highly competitiev market
134
Pure monopoly
Single seller dominating the market
e.g. transport
135
Working monopoly
any firm in with greater than 25% of sales in a market
e.g. tesco
136
Oligopoly
A few dominant firms in the market
e.g. costa
137
Duopoly
Two firms in a market who take the majority of demand
e.g. coke, pepsi
138
Horizontal integration
Where 2 firms join at the same stage in the production process in the same industry
e.g. 2 car manufacturers merging
139
Forward vertical integration
Occurs when a business merges with another business further forward in the supply chain
e.g. brewers owning pubs
140
Backwards vertical integration
Occurs when a firm merges with another business at a previous stage in the supply chain
e.g. Bakery owning a wheat processor
141
Conglomerate
When two firms in different industries merge
142
How do firms keep monopoly power?
Barriers to entry
Economies of scale
Vertical integration
Brand loyalty
Patent protection
143
Benefits of monopolies
Supernormal profits can be invested to provide better quality products
Gov spending increases as corporation tax is high
Set up businesses abroad
Research and development increases
Improves a country's export competitiveness
144
Concentration ratios
Used to determine oligopolies abd us the % of market share taken up by the largest firms
145
Solutions to market failure of monopolies
Price controls
Prohibiting mergers
Breaking up monopolies
Nationalisation
De - regulation
146
Immobility of factors of production
occurs when it is difficult for factors of production to move to different areas of the economy
147
Occupational immobility
Occurs when there are barriers to factors of production between industries
e.g. have wrong skills
148
Geographical immobility
The inability of labour to move from one are to another for work
e.g. jobs and or people in wrong place
149
Why is immobility a problem?
Structural unemployment
Persistent poverty
Loss of efficiency
Loss of social welfare
150
Solutions to immobility
Stimulate work incentives
151
Inequality
An unequal distribution of income and wealth
152
Income
Flow of money going to factors of production
153
Wealth
The current value of a stock of assets owned by someone or society as a whole
154
Gini coefficient
Measure of income inequality
155
Causes of rising inequality
Tax system less progressive than 20 years ago
High company profits and executive pay
Regressive effects of high inflation
Widening rural urban divide
Market failures in education and housing
156
Impacts of inequality
Social unrest
Civil disobediance
Poverty cycle becomes embedded
Merit goods underconsumed as not affordable to whole population
Loss of allocative efficiency
157
Government correction of inequality
Welfare state transfers
State provided services
Higher minimum wage
Higher rates of income tax
Investment in training
Child care subsidies
158
Government failure
When intervention in the market leads to a deeper market failure or a new failure occurring
159
What may government failure lead to ?
An inefficient allocation of resources
Worsen the original market failure
Cause other market failures
160
Regulatory failure
Government failure arising from the process of regulating markets to ensure markets run efficiently and fairly
161
Disadvantages of regulation
May limit innovation
Capping prices may prevent new firms entering the market
Expensive
May be heavily influenced by businesses and become lenient
162
Law of unintended consequences
Once legislation is put in place businesses that are affected may attempt to work around the policy and this leads to the development of shadow/black markets
163
Dangers of quick fix solutions
Problems arise when governments look for short term quick solutions which then may have a greater impact on the economy or society in the long term
164
Political self interest
Policies that are seen to benefit the consumer but actually are more beneficial to the government or policies that are not put in place to solve the market failure as this market failure benefits the government e.g. alcohol and revenue
165
Poor value for money from government spending
Introduced the private finance initiative which is a controversial policy designed to get the private sector to fund and run public projects
166
Incentives to bypass official markets
When policy and legislation leads to the creation of shadow/ black markets
167
What does the success of a government policy depend on ?
State and success of economy at the time
What other policies are operating
Elasticity of demand
How consumers respond
Value judgements
