The whole course Flashcards
(141 cards)
1
Q
What are positive statements?
A
Objective statements that can be tested by referring to the available evidence, true or false
2
Q
What are normative statements?
A
Value judgement, opinions
3
Q
What can value judgements be affected by?
A
- Upbringing
- Own experiences
- Information
- Social/beliefs
4
Q
What are economic goods?
A
Over a period of time, only a limited amount of resources are available
5
Q
What are free goods?
A
Goods that are available at any given time, in any chosen amount
6
Q
What is the basic economic problem?
A
Economic resources are scarce, whilst human wants are infinite
7
Q
What are the three parts to the economic problem?
A
- What is to be produced
- How is production to be organised
- For whom is production to take place
8
Q
What is a PPF?
A
Shows for each level of output of one good, the maximum amount of the other good that can be produced
9
Q
What shape is the PPF?
A
Concave which shows that the opportunity cost of production rises as more of a good is produced
10
Q
What are the points outside the PPF?
A
Impossible with the current resources available
11
Q
What is productive efficiency?
A
Where all resources are used as efficiently as possible to produce the maximum possible output
12
Q
What is allocative efficiency?
A
Where production aligns with consumer demand to maximise customer satisfaction
13
Q
What are the 4 factors of production?
A
- Land
- Labour
- Capital
- Enterprise
14
Q
3 economic agents
A
- Consumers
- Governments
- Producers
15
Q
Benefits to a free market economy
A
- Efficiency
- Entrepreneurship
- Choice
16
Q
Drawbacks of a free market economy
A
- Inequalities
- Non profitable goods may not be made
- Monopolies
17
Q
Benefits of a command economy
A
- Maximise welfare
- Low unemployment
- Prevent monopolies
18
Q
Drawbacks of a command economy
A
- Poor decision making
- Restricted choice
- Lack of risk taking
19
Q
What is a command economy?
A
An economy where governments, not markets, determine how to allocate resources
20
Q
What is a free market?
A
A market where there is no government intervention
21
Q
What is specialisation?
A
Where people and firms make specific goods for others
22
Q
What is the division of labour?
A
Type of specialisation where production is split into different tasks and specific people are allocated to each task
23
Q
Define demand
A
The quantity of goods and services that will be bought at any given price over a period of time
24
Q
Explain demand curve
A
As price rises, quantity demanded will fall
25
What is effective demand?
Shows how much would actually be bought at that price, not how much consumers would like to buy given unlimited resources
26
What factors affect demand?
- Advertising
- Changes in the price of other goods
- Changes in population
- Changes in fashion
- Changes in legislation
27
How do consumers make decisions?
By considering the utility gained from consuming an extra unit whilst also considering the opportunity cost
28
What is utility?
The level of satisfaction from consuming goods and services
29
What is marginal utility?
Benefit gained from consuming one additional unit
30
What is the law of diminishing marginal utility?
For each additional unit gained the marginal utility decreases
31
What is consumer surplus?
When a consumer pays less for a good than the amount they've prepared to pay for it, this amount of money is surplus
32
What is price elasticity of demand?
Measures the responsiveness of the quantity demanded of a good or service to its change in price
33
Values for PED
0 = Perfectly inelastic
0-1 = Inelastic
1 = Unit elastic
>1 = Elastic
34
What factors affect price elasticity of demand?
- Number of close substitutes
- Degree of necessity
- Peak and off peak demand
- Whether the product is subject to habitual consumption
35
What is INNS and EELS?
Inelastic necessity no substitutes
Elastic expensive lots of substitutes
36
What is asymmetric information?
One party having more information than the other in transaction
37
Why do consumers not always make fully rational decisions regarding every purchase made?
- Limited time
- Not all info is available at time of purchase
- Too much data to analyse
38
What is anchoring?
Where the consumer heavily relies on the first piece of information received when making decisions
39
What is income elasticity of demand?
Measures the relationship between a change in quantity demanded for good x and a change in real income
40
YED Values
Normal/necessities = 0-1
Luxury goods = >1
Inferior goods = Negative
41
What is meant by supply?
The quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period
42
Why is the supply curve upward sloping?
As a products price rises, the business would tend to be more willing to make it
43
What can cause shifts in the supply curve?
- Lower costs of production
- Bad weather
- Technology
44
What is price elasticity of supply?
The responsiveness of quantity supplied to changes in price
45
Using diagrams, what letter is made for perfectly inelastic?
I
46
Using diagrams, what letter is made for perfectly elastic?
E
47
Determinates of price elasticity of supply?
- Availability of substitutes
- Time
48
What is the equilibrium?
Where the price equals the amount consumers would be willing to buy
49
What is meant by rationing?
If supply is low then prices will be high and so rationing products to those who are prepared to pay high prices
50
What is meant by signaling?
Low price can be a signal to buy to consumers
High price can be a signal to firms to sell
51
What is meant by incentive?
Higher prices discourage customers
Higher prices encourage suppliers to supply more
52
Outcomes of cross elasticity of demand?
Complementary goods- negative outcome
Substitute goods- positive outcome
53
What is derived demand, and what curve shifts?
When the demand for one good is the result of or derived from the demand for another good
Both demand curves shift to the right
54
Example of derived demand
Increase in demand for cars will lead to an increase in demand for steel
55
What is composite demand, and what curve shifts?
When a good is demanded for two or more distinct uses
Demand for the first diagram shifts to the right, supply for the second diagram shifts to the left
56
Example of composite demand?
An increase in the demand for oil from chemical producers will result in a fall in the supply of oil to the petrol market
57
What is joint supply, and what curve shifts?
When two or more goods are produced together, so that a change in supply of one good will change the supply of the other goods with which it is in joint supply
Demand for the first diagram shifts to the right, supply for the second diagram shifts to the right
58
Example of joint supply?
An increase in the demand for beef, which leads to more beef being produced, results in an increase in the supply of leather
59
What is a monopoly?
Exists where there is only one firm or supplier in an industry
60
What is a pure monopoly?
A market with a single supplier (100% market share)
61
What is a barrier to entry?
Any obstacle that makes it impossible or unattractive for a new firm to enter into a market
62
Examples of barriers to entry
- Lower costs
- Patents and copyrights
- Brand loyalty
- Legislation
63
Types of barriers to entry
- Statutory: force of law
- Structural: Differences in production costs
- Strategic: Actions that existing firms in a market can takes to make it difficult for new firms to enter
64
Why are monopolies bad?
- Increased price decreases consumer welfare
- Less incentive to innovate/ produce new products
- Limits choice for consumers
65
What is meant by inequality?
Unequal levels of income and wealth
66
What is meant by inequity?
Is the unequal level fair
67
What is meant by absolute poverty?
Measures people living below a certain threshold and households that cannot afford certain basic goods and services
68
What is meant by relative poverty?
How much and to what extent does a household's income fall below the average income threshold for the economy
69
What is market failure?
Misallocation of resources
70
Types of market failure?
- Merit and demerit goods
- Public goods
- Lack of competition in a market
- Externalities
- Missing markets
- Information failure
- Factor immobility
- Inequality
71
What are private goods?
One where consumption by one person results in the good not being available for consumption by another
72
What are public goods?
A good or service that may be consumed by more than one person at a time and from which everybody can benefit
73
What are the 3 characteristics of a public good?
- Non excludable
- Non rival
- Non rejectable
74
What is the free rider problem?
Impossible to prevent people from receiving the benefits of the good once it has been provided
75
Where is the market failure in public goods?
Insufficient resources are put to a socially valued output resulting in inadequate provision which reduces welfare
76
What are quasi public goods?
A near public good
77
What are the two characteristics of quasi public goods?
- Semi non rival
- Semi non excludable
78
How has technology had an impact on quasi public goods?
Made more public goods into quasi public goods or private goods
79
What is a private cost and example?
The cost of doing something to either a consumer or a firm, for example the cost a firm pays to make a good
80
What are external costs and example?
Caused by externalities, for example if you dropped an empty crisp packet then that creates an external cost to the council
81
What is a social cost and how is it calculated?
Private cost + external cost, it's the full cost borne by society of a good or service
82
What is a private benefit?
The benefit gained by a consumer or a firm by doing something
83
What is an external benefit (example)?
A factory that invests in new equipment may create the external benefit of needing less electricity
84
What is a social benefit?
The full benefit received by society from a good or service
85
What is a positive externality?
Where the social benefit is greater than the private benefit
86
What is a negative externality?
Where the social cost is greater than the private cost
87
What are marginal private costs?
The internal costs to a producer or consumer from supplying or consuming one extra unit of a good or service
88
What are marginal private benefits?
The extra benefit, satisfaction or utility gained by a consumer or producer through consuming or producing one extra unit of a good or service
89
Examples of negative externalities from production
- Air pollution
- Noise pollution
- Industrial waste
90
Examples of positive externalities from production
- Open source software made freely available to other users
- Positive spillover effects from university research and development
91
Examples of negative externalities from consumption
- Drug use
- Alcohol use
92
Examples of positive externalities from consumption
Vaccines
93
What is a merit good?
Any good that has positive externalities associated with it, it is better for the consumer than they realise, at the point of consumption
94
Are merit goods under or over consumed?
Under consumed
95
What is the principle agent problem?
Those benefitting or losing from a decision are not the same as those making the decision, the objectives for the two groups are different
96
Examples of the principle agent problem?
- Education
- Car insurance
- Life insurance
97
What is a demerit good?
Any good that has negative externalities associated with it, it is worse for the consumer than they realise at the point of consumption
98
Are demerit goods under or over consumed?
Over consumed
99
What is an immobile FOP?
One that can't easily be moved to another area of the economy
100
Example of an immobile FOP
Land
101
What are some reasons for geographic immobility?
- Large house prices, cost of living
- Reluctance to leave family and friends
- A dislike of change
102
What are some reasons for occupational immobility?
- Lack of training to do a different job
- Lack of required qualifications
- Lack of work experience
103
How do immobile factors of production lead to market failure?
As it means there's often inefficient use of resources
104
What are specific taxes?
A fixed amount that's charged per unit of a particular good, no matter what the price of the good is
105
What are ad valorem taxes?
These are charged as a proportion of the price of a good e.g. VAT
106
What are subsidies?
Money paid by the government to the producer of a good to make it cheaper than it would be otherwise
107
What are some advantages of subsidies?
- Prevents market failure as it encourages merit goods
- Increases domestic demand, which decreases imports
108
What are some disadvantages of subsidies?
- Inelastic demand means only a small increase in demand
- Opportunity cost
- Leads to excess supply
109
What is state provision?
When a nationalised industry or government department is the main provider of a good or service
110
What are some advantages of state provision?
- Ensures national output
- Promotes positive externalities
- Provides merit goods
- Fills missing markets
111
What are some disadvantages of state provision?
- Inefficient as there is no profit incentive
- Opportunity cost
- Consumers take advantage
- Lack of innovation
112
What are regulations?
Rules that are enforced by an authority and they're usually backed up by legislation
113
What are some advantages of regulations?
- Prevents monopolies
- Protects consumers
- Prevents asymmetric information
114
What are some disadvantages of regulations?
- Can create barriers to entry
- Higher business costs
- Opportunity cost
115
Why might the government set a maximum price?
If the consumption or production
of a good is to be encouraged so the good does not become too expensive to
produce or consume, they also prevent monopolies exploiting consumers
116
Why might the government set a minimum price?
If the consumption or production
of a good is to be discouraged as this ensures the good never falls below a certain
price
117
What does the government do with the excess supply from minimum prices?
- Sell very cheaply to LEDC's
- Destroy it
118
What is government failure?
Occurs when the intervention from the government leads to a loss of economic welfare rather than a gain
119
What is inadequate information (gov failure)?
Not having enough information to pinpoint what intervention is required which may lead to things such as taxes being set at an inefficient level
120
What are conflicting policy objectives?
May have negative impacts on one another as one objective may cause other elements of a firm to suffer further down the line
121
What is the law of unintended consequences?
Outcomes that are not the ones foreseen and intended by a purposeful government action, which may then deepen the existing market failure
122
What do free market economists argue (relating to gov intervention)?
Minimal government intervention in the economy as they believe that the forces of supply and demand should be allowed to operate freely to determine prices and distribution of resources
123
What is meant by invisible hand?
This concept suggests that individuals' pursuit of self interest inadvertently benefits society by allocating resources efficiently
124
What is the price mechanism?
Prices are determined by supply and demand, signalling to producers and consumers how to allocate resources effectively
125
What is meant by the short run?
Over a period of time in which at least one factor of production is fixed
126
What is meant by the long run?
Over a period of time all amounts of factors of production are variable
127
What is meant by the very long run?
There are technological changes assisting production
128
What is the total product?
The physical quantity of output produced by a given number of inputs over a period of time
129
What is average product?
Quantity of output per unit of input
130
What is marginal product?
The addition to output produced by an extra unit of input
131
What is the law of diminishing returns?
If increasing quantities of a variable input are combined with a fixed input, eventually the marginal product of that variable input will decline
132
What are some assumptions that are made with the law of diminishing returns?
- Equal quality of marginal variable factors
- Have to pay everyone equally due to the labour market
- Applicable to the short run
133
What are returns to scale?
Describe how a firm's output changes when all of its inputs (like labour and capital) are increased proportionally
134
What are increasing returns to scale?
A proportional increase in all inputs to a production process results in a more than proportional increase in output
135
What are constant returns to scale?
When output increases proportionally to increases in all inputs
136
What are decreasing returns to scale?
Occur when increasing all inputs in production by a certain percentage results in a less than proportional increase in output
137
What 'run' are fixed costs in?
Short run
138
What 'run' are variable costs in?
Long run
139
What happens to marginal costs if marginal returns increases?
Decrease
140
What are returns to scale?
How much output increases when input is increased
141
What are economies of scale?
Reduction in average cost as output increases
