Theme 1 (1.1)(1.2) Flashcards
(99 cards)
1
Q
What are the main determinants of supply
A
Price (p), Cost of Production (Land, Labour and Capital), Weather (for agricultural products), Natural Disasters, Technology
2
Q
What does a point on a supply curve show?
A
It shows the amount that will be supplied at each price level in a market
3
Q
What would shift the supply curve for oil to the right?
A
If minimum wage in countries with oil reserves goes down then cost of wages and therefore production for the industry will go down and so there will be a higher supply and it will shift.
4
Q
Define Price Elasticity of Supply
A
PES measures the responsiveness of supply to a change in price.
5
Q
What is meant by equilibrium
A
Equilibrium is where supply =demand, it is a steady state where there is no tendency to change, unless there is an exogenous shock that pushes the market out of equilibrium.
6
Q
what is the Market Clearing Price
A
The price at which the quantity supplied equals the quantity demanded: no excess. excess supply causes the price to drop until market clearing is reach, excess demand causes the price to rise until market clearing is reached. Adam smith called this the invisible hand of market forces.
7
Q
In a competitive market, what effect would it have on supply if a new supplier entered the market
A
supply would increase and price would fall
8
Q
what is meant by joint demand or complimentary goods
A
goods that are consumed together
9
Q
give an example of two goods in joint demand
A
razors and shaving foam
10
Q
what is the impact on complimentary goods if there is an increase in market supply of one of them
A
if there is an increase of price in one, it will be less demanded meaning the other good is less necessary and also then demanded less
11
Q
what is meant by composite demand
A
when one good is demanded for 2 or more different purposes
12
Q
give an example of 2 goods in composite demand
A
milk is used for drinking and making cheese/yoghurt/butter. Sunflower seeds used for bread and making oil/biofuel.
13
Q
what is the impact on both products if there is a rise in demand for one of the goods that something is in composite demand for e.g. milk - butter or cheese
A
if their is an increase in demand for cheese, then there is less milk available for making butter so the supply of butter will fall
14
Q
what is derived demand
A
when the demand for a good is driven by the demand for another good
15
Q
give an example of a good whose demand is derived from another product
A
labour, where the demand for apps causes demand for computer programmers as they can make apps. Similarly, the demand for steel is derived from the demand for cars and construction
16
Q
what is the impact on both goods (reference derived demand) if there is an increase in market demand of the good
A
if the demand for cars increases then there will be more demand for steel used to make cars
17
Q
what is joint supply
A
when one good is a by-product of another good
18
Q
give an example of two products in joint supply
A
beef and leather
19
Q
what is the impact on both products (reference joint supply) if there is an increase in supply of one of the goods.
A
In order for the supply of either beef or leather, more cows must be killed which increases the supply of the other. So an increase in the supply of one of the goods increases the supply of both goods
20
Q
What are the three functions of the price mechanism and explain what each means
A
- Rationing - When goods become more scarce, the price rises, this acts to dampen down demand for this good, so that only people who can afford it will continue to demand it, this is a from of rationing as now the product will not run out (Ceteris Paribus)
- Incentives - As the price of a product rises, the supply also rises as a higher price means more of a profit margin for producers so there is more incentive for them to produce as much as they can
- Signalling - A price rise sends a signal to a market to produce more of that good as it is becoming relatively scarce. This signal diverts factors of production from other goods to reduce scarcity in another area.
21
Q
Define consumer surplus
A
consumer surplus is the difference between the price a consumer is willing to pay and the price they actually pay (the area above market price and below demand)
22
Q
Define producer surplus
A
producer surplus is the difference between the price a producer is willing to accept and the price they actually do accept (the area below market price and above the supply curve)
23
Q
Where on a supply and demand diagram is consumer surplus
A
below the demand curve (negative gradient curve) and above the market price. the area is a triangle with the hypotenuse facing upwards
24
Q
where on a supply and demand diagram is producer surplus
A
above the supply curve (positive gradient curve) and below the market price. the area is a triangle with the hypotenuse facing downwards.
25
What happens to producer surplus if demand rises, reference a diagram
As you go from P1 to P2 (Market price has risen to expunge excess demand), the area illustrating producer surplus rises in size and therefore producer surplus rises as the supply curve stays the same but the market price has risen which enlarges the boundaries of the area
26
define indirect tax
an indirect tax is one where the liability can be passed on to a third party
27
give 2 examples of indirect taxes
VAT and Excise Duty tax are paid by the producer, but they can pass on some of the liability for the tax onto consumers in higher prices. VAT therefore indirectly affects consumers and is known as consumption tax
28
describe through use of a diagram the impact on supply of an increase in VAT
An increase in VAT will increase the cost of production for the firm which shifts the supply curve of the product to the left. because VAT is a % of the selling price, the amount of tax paid per product increases as the price of the product increases. This is why the shift makes the new supply curve steeper rather than just a parallel shift (the shift is skewed). The vertical difference between the old and the new supply curve at the new equilibrium gives you the unit cost of the tax. This amount multiplied by the units sold gives you the tax revenue to the government. At the new equilibrium, the tax revenue would be the area worked out by vertical height between the supply curves X the horizontal length up toward the new quantity. (see diagrams on slides for help)
29
what is the impact on supply of excise duty
excise duty is paid at the same rate regardless of what the selling price is. this is why the shift is parallel rather than skewed
30
where on a supply and demand diagram is producer and consumer incidence
The area above the old equilibrium price and below the new equilibrium price is the consumer tax burden.
The area between the old equilibrium price and the price that the producer gets to keep is the producer tax burden (see slides for help)
31
where is the area on a s+d diagram representing tax revenue to the government
the consumer and producer tax burden added together= total tax revenue. or new quantity supplied x unit cos of tax = total tax revenue
32
what happens to producer incidence if demand is elastic and VAT increases.
if the demand is elastic and VAT increases then the burden of tax falls mainly on the producer. this is because consumers in the market will not accept a price rise, so price will not rise significantly following an increase in tax. Nevertheless the tax must be paid so producers must pay it by cutting profit margins.
33
what happens to consumer incidence if demand is inelastic and VAT increases
if the demand is inelastic and VAT increases then the burden of tax falls mainly on the consumer. as the consumers in the market will accept a price rise, and increase in VAT means the producer can continue passing this burden on to the consumer therefore the consumer incidence will increase.
34
define subsidy
A subsidy is a payment from the government to a producer, subsidies are usually paid as an amount per item produced e.g. £1 per tonne produced of wheat
35
what is the impact on supply of a subsidy
there will be increased supply and the supply curve will shift to the right
36
where on s+d diagram is the cost to the government of a subsidy
the area worked out by the new quantity X the vertical height between the old and new supply curves at the new equilibrium.
37
how are consumers affected by a subsidy
price falls so consumers benefit from an increase in consumer surplus. the benefit to consumers can be calculated as the decrease in price multiplied by the new quantity supplied
38
how are producers affected by a subsidy
producers also benefit as the price they receive + the unit subsidy means that they effectively take home an even higher price per unit sold. The benefit is the difference between the price originally received and the new price multiplied by the number of units sold.
39
how is the government affected by a subsidy
there are significant costs to the government of a subsidy. Governments usually subsidise products and services that benefit society in some way and which help achieve their own goals. However subsidies have an opportunity cost and they are also frowned upon by the WTO (world trade organisation) as they give British producers an unfair advantage over international competitors. They are known as Non-Tariff Barriers so they must be used with caution.
40
How might other people's behaviour alter a consumer's choices
-social/peer pressure= in a situation where you are part of a society you may make consumption decisions based on peer pressure (e.g. alcohol/ legal highs, fashion purchases) rather than your inherent utility from consuming a good.
41
how might a habitual consumption be irrational
You might always buy the same order from a fast food place for example, even when there is seasonal offers that you may enjoy better and sometimes as well for a cheaper price, just to not break a habit.
42
give an example of where a consumer cannot make a rational choice due to lack of information or computer skill.
bounded rationality is where consumers are rational to a point but these lacks limit them. They will use heuristics or rules of thumb to make decisions instead
43
is giving to charity rational
It may seem irrational as it is a form of consumption that results in no utility gain to the donator. It is only rational when giving to charity provides more pleasure (through helping others) than consuming the sacrificed goods would have provided, or if peer pressure is such that a refusal would ostracise someone from society. In the first way, giving to charity or seemingly altruistic behaviour is not irrational.
44
What is meant by asymmetric information
The buyer and seller have different levels of information
45
Give 3 examples of markets with asymmetric information
Doctors/ dentists
Second hand car sale
Luxury watches
Restaurants
46
How does info gaps lead to market failure
Consumption or production will be based on not all the facts, leading to mistakes that mean it is over or under produced/consumed so there is an inefficient allocation of resources
47
How does asymmetric information give rise to adverse selection
Adverse selection is when ‘good’ consumers drop out of the market as the behaviour of others in the market makes prices rise beyond the price at which good consumers are willing to pay. This is due to asymmetric information as for example insurance, seller doesn’t know how safe a healthy customer will actually be as buyer has more information, so the seller will set the price too high for the peaches to want to buy it leaving only lemons in the market, this is inefficient as some people don’t then have insurance
48
How does asymmetric info give rise to moral hazard
Moral hazard is when the free market gives incentives for people to behave in a sub-optimal way. E.g. if someone knows they are covered for insurance against theft, then they will be less careful with their belongings which leads to more burglaries. Same with healthcare
49
Give 3 reasons governments intervene in markets
To correct market failure
To improve the performance of the UK economy, especially in relation internationally
To address politically and morally unacceptable situations like some countries not providing free healthcare
50
How can government intervention lead to an increase in economic welfare
By correcting market failure, e.g. taxing a good with negative externalities, this encourages the market to provide the socially optimum quantity of the good rather than over producing which is what the free market equilibrium would have
51
Name the 4 main methods for governments to intervene in markets
Regulations
Price control
Direct provision
Taxes and subsidies
52
Name 3 kinds of price control
Buffer stocks
Max price
Min price
53
Draw a diagram and explain how max prices work
A max price keeps a good affordable, it will be below the equilibrium, this also creates excess demand e.g. rent prices in New York
54
Draw a diagram and explain how min prices work
Min price will be above the equilibrium, and as producers will get a definite price they will over produce causing excess supply. E.g, national minimum wage
55
Draw a diagram and explain how buffer stock systems work
A price ceiling and a price floor are introduced to make the prices fluctuate only between these two points. Government buys the product when the price is getting too low and sells when it’s getting too high
56
Advantages and disadvantages of buffer stock schemes
Good: keeps income stable, keeps output and employment stable, encourages investment and can be a profit making scheme if they buy low sell high.
Bad: price floor often set too high so the government are always betting never selling, this would make the cost of buying too much and not worth it, the gov cannot control the international price unless govs cooperate on it, cost of storing products is high and some perish, most schemes break down long term
57
Give 4 examples of government regulation
Restrictions on where product can be sold e.g. liquor license
Age limit for alc and cigarettes and weapons
Coverage of cigarettes in store
Legislation controlling info on packaging
Where the product can be consumed e.g. smoking areas
Maximum purchase quantities
58
Give 2 reasons for direct provision of goods by the gov
If the good is a public good or quasi public good that has no profitability. If the good is a human right like healthcare and therefore also is a merit good.
59
Draw a diagram to illustrate the effect of subsidies on a market and what they are
Acts to offset the costs of production and encourages greater supply and lower prices for consumer, often merit goods. Shifts supply to the right. Total spending on the subsidy is equal to the subsidy per unit multiplied by the level of output.
60
What could be appropriate intervention for a merit good
Subsidy
Maximum price
Possibly direct provision
Possibly regulations to make consumption compulsory e.g. car insurance
61
What is appropriate intervention for a demerit good
An indirect tax
Minimum price
Regulations and legislation
Possibly total ban
62
What’s an appropriate intervention for a negative and positive externality in production
Negative: and indirect tax, a carbon emissions trading scheme
Positive: subsidy
63
What would be appropriate intervention where there is asymmetry of info
Food package info
Calorie requirement on menus
Trade descriptions act etc which protect consumer
Requirement for a license e.g. dentists and BmA
64
What would be a good gov intervention where there is a missing market
```
State schools (state provision)
Paying a private sector to provide it
```
65
How do pollution permits work
Polluting up to the specified permit point is free, heavily increases the cost of production as they have to buy more permits
66
What is meant by internalising an externality
Where the third party cost is transferred to the buyer or seller, in this way it is less or not anymore a third party cost.
67
impacts of tax on consumer and producer
It internalises externalities, socially optimum output can be achieved.
The more elastic Demand is or the more in elastic supply is, the greater the producer tax burden vice versa
If the demand is perfectly in elastic then the burden falls entirely on consumer vice versa
68
what is an economic model
a simplified representation of reality used to provide insight into economic decisions and events, with a limited number of variables (using ceteris paribus)
69
why can't scientific experiments be done in economics
because there are too many inconsistent variables which cause inconsistent results e.g. consumer preferences.
70
what is an example of opportunity cost for each of the economic agents
households: which tv to buy
firms: which employee, method of production or good/ service to produce
government: where to allocate benefits/ subsidies, how to regulate markets etc.
71
what is a PPF
a PPF indicates the various production possibilities at maximum efficiency of two commodities when resources are fixed, given the current state of technology.
72
what causes a PPF to shift left or right
a change in the quality or quantity of any of the factors of production.
73
what would cause a steeper or shallower ppf curve
a change in the productivity of one of the goods
74
what is the difference between capital and consumer goods
consumer goods satisfy consumers directly, while capital goods provide the means to produce consumer goods.
75
what are the functions of money
a medium of exchange, a method of deferred payment, store of value, measure of value.
76
one advantage and disadvantage of artisans in production
will be high quality due to the sense of ownership, need much more in depth and rigorous training.
77
one advantage and disadvantage of a production line
cheaper training as they only need to train in one area, if one part fails then no products can be produced
78
1 + and - of free market and economist associated
+businesses have the profit motive and consumers aim to maximise satisfaction (the invisible hand- concept by Adam Smith) who said in his book Wealth of Nations that when individuals follow their self interest they indirectly promote the good of society. - the problem of missing or failing markets also inequality and externalities. *smith said government could intervene in financial markets sometimes yet Hayek said this was the main cause of failure and they should not at all*
79
command economy + and - and who is associated
Karl Marx said capitalism is unstable as workers are exploited by the bourgeoisie. + no exploitation and monopolies and full employment. - absence of profit motive reduces incentives for investment and also no competition means inefficiency.
80
what is the role of the state in a mixed economy
- to internalise externalities
- provision of public goods
- redistribution of income to create equality.
81
underlying assumptions of rational decision making
- firms aim to maximise profits
| - consumers aim to maximise utility
82
5 factors that cause a shift in the demand curve
```
1 income
2 change in preferences
3 advertising
4 price of competing goods
5 time/ seasons
```
83
diminishing marginal utility
as one consumers more units of a good, beyond a certain point the marginal utility gained each unit wanes. This causes the demand curve to be downwards sloping with a inverse relationship with price.
84
what do price, income and cross elasticities of demand show
price shows how sensitive demand is to a change in price, income shows how sensitive demand is to a change in income, and cross shows how sensitive demand is to a change in the price of another good either a substitute good or a complimentary good.
85
what are the formulae for the three elasticities of demand
```
PED= %change in demand/ %change in price.
YED= %change in demand/ %change in income.
XED= %change in demand for good A/ %change in price of good B.
```
86
price elasticity of demand numerical values meaning
(0 =perfectly inelastic) / (0 to -1 = relatively inelastic) / (-1 = unitary elastic) / (-1 to -infinity =relatively elastic)
87
income elasticity of demand (YED) numerical values meaning
positive= normal good
negative= inferior good
luxury= YED above 1
necessary good = 0-1
88
cross elasticity of demand numerical values meaning
postive - substitute
negative - complimentary
0 - unrelated
89
factors influencing elasticities elasticities of demand, mainly PED and YED
1 proportion of income spent on product.
2 availability of close substitutes.
3 whether it is luxury or necessary.
4 time, in long term it is easier to find subs and adjust behaviour.
90
significance of PED for firms and gov
firms- if demand for good is inelastic they can safely raise price for higher revenue and if demand is elastic then revenue can be increased by lowering price.
Gov - if the produce's demand is elastic then the gov can maximise tax revenue on it, but the tax burden will fall on consumers. So the gov might decide to tax goods with elastic demand so the producers will bear a larger proportion of the tax burden.
91
supply definition
the quantity a producer is willing and able to purchase at the given price and time.
92
conditions of supply which can cause a shift of the curve
1. A fall in the price of imported commodities and raw mats
2. the entry of a new producers into the market
3. advances in production technology
4. taxes, subsidies and regulations
5. weather conditions and exogenous shocks likke a drought or earthquake.
93
what is the PES formula with its numerical values
PES = %change in QS/ %change in price
0-1 relatively inelastic
1 unitary elastic
1- infinity relatively elastic
94
factors influencing price elasticity of supply
availability of producer substitutes e.g. if one of their products is in joint supply with another, time, spare capacity, availability of stock.
95
what would cause a change in the equilibrium price or output
if one of the conditions of demand or supply changes A.K.A. if one of the curves shifts
96
3 functions of price mechanism and what they are
signalling, rationing and incentives.
Rationing- the price serves to ration scarce resources when demand outstrips supply.
incentives - supply will rise when the market price rises due to the prospect of greater profits
signalling - how prices adjust to illustrate to producers where resources are required and where they are not.
97
consumer and producer surplus defs and where they are on the diagram
consumer surplus is the difference between the price the consumer is willing and able to pay and the price the consumer actually pays - between the demand curve and market price. Producer surplus is the difference between what the producers were prepared to sell the product for, and the price they actually received - between the supply curve and the market price.
98
disadvantages of price mechanism
the price mechanism especially rationing function ignore equality, as it does not consider the wealth distribution and therefore those with money have plenty buying power while those with less don’t have a choice. Also, public goods will not be provided and therefore there will be missing markets as the incentive function shows no incentive to producers for these goods.
99
3 reasons why consumers may not behave rationally
1. computational weakness, e.g. not being able to work out the best deal or being swayed by the way a choice is presented. 2. habitual behaviour, habits are hard to change without increased incentive e.g. plastic bags now costing 5p. 3. behaving in line with social norms, e.g. wearing clothes that are trending.
