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Theme 1 Flashcards

1
Q

What is meant by rational decision making?

A

Making choices to maximise utility from buying and consuming goods and services

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2
Q

What are the assumptions of rational decision making?

A

Consumers aim to maximise utility
Firms aim to maximise profits

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3
Q

Define the term demand

A

The quantity of a product that consumers are willing and able to buy at a given price in each time

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4
Q

Explain the demand curve

A

Shows the relationship between the price of an item and quantity demanded over a period

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5
Q

Explain the difference between a movement along the demand curve and a shift in the demand curve

A

Movement along the demand curve is caused by a change in price
A shift in the demand curve is caused by a change in one or more factors other than price

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6
Q

Define price elasticity of demand

A

Measures the responsiveness of quantity demanded for a product after a change in price

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7
Q

The formula to calculate PED is

A

% change in QD / % change in P

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8
Q

What does it mean if PED = 0

A

Demand is perfectly inelastic and demand does not change when the price changes

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9
Q

What does it mean if PED is between 0 and -1

A

Demand is price inelastic

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10
Q

What does it mean if PED = -1

A

Demand is unit price elastic

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11
Q

What does it mean if PED > 1

A

Demand is perfectly elastic
Quantity demanded will fall to 0 if price rises

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12
Q

3 factors that are likely to make products have price inelastic demand

A

Lack of substitutes or competition
Addict goods
A small percentage of income

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13
Q

3 factors that are likely to make products have price elastic demand

A

Abundance of available substitutes
Luxury good
Large proportion of income

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14
Q

Define income elasticity of demand

A

Measures the relationship between a change in demand following a change in the real income of consumers

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15
Q

The formula to calculate YED is

A

% change in demand / % change in income

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16
Q

What does it mean if YED < 0

A

Inferior good
Demand falls as income rises

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17
Q

What does it mean if YED is between 0 and 1

A

Normal necessity
Rise in demand is less than proportionate to income
Demand is income inelastic

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18
Q

What does it mean if YED > 1

A

Luxury goods and services
Demand rises more than proportionate to a change in income
Demand is income elastic

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19
Q

3 products likely to be inferior

A

Own label discounters
Public transport
Economy class travel

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20
Q

3 products likely to be normal

A

Electronics
Clothing
High end restaurants

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21
Q

Define Cross elasticity of demand

A

Measures the responsiveness of demand for good x following a change in the price of good y

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22
Q

The formula to calculate XED is

A

% change in demand for good x / % change in the price of good y

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23
Q

What does it mean if XED < 0

A

Complement good
An increase in the price for good x will lead to a decrease in demand for good y

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24
Q

What does it mean if XED > 0

A

Substitute good
An increase in the price of good x will lead to a rise in demand for its substitute

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25
Define the term supply
The quantity of a good or service producers are willing to supply at a given price
26
Define the supply curve
Shows a relationship between market price and how much a firm is willing and able to sell
27
Explain the difference between a movement along the supply curve and a shift in the supply curve
A movement is due to a change in price A shift is due to any other factor excluding price
28
4 factors that would cause a shift in the supply curve
Changes in production costs Changes in technology Government taxes or subsidies Changes in climate (agricultural industries)
29
price inelastic supply curve and a price elastic supply curve
Inelastic - Supply curve is flatter Elastic - Supply curve is steeper
30
Define price elasticity of supply
Measures the relationship between change in quantity supplied and a change in price
31
Formula to calculate PES
% change in QS of X / % change in price of X
32
What does it mean if PES > 1
Supply is price elastic
33
What does it mean if PES < 1
Supply is price inelastic
34
What does it mean if PES = 0
Supply is perfectly inelastic
35
3 factors that are likely to make products have price inelastic supply
Lack of spare capacity Low level of stock of raw materials and finished products Short term
36
3 factors that are likely to make products have price elastic supply
Spare capacity Plentiful level of stock of raw materials and finished products Long term
37
How does excess demand occur
When Quantity demanded exceeds available supply
38
How does excess supply occur
When supply is greater than demand and there are unsold goods in the market
39
Define price mechanism
The means by which decisions of consumers and businesses interact to determine the allocation of resources
40
Explain the price mechanism function of Rationing
Prices ration scarce resources when demand outweighs supply Leaving only those willing and able to pay to buy
41
Explain the price mechanism function of signalling
Prices adjust to demonstrate where resources are required They rise and fall to reflect scarcities and surpluses
42
Explain the price mechanism function of incentives
Through choices consumers send information to producers about their changing nature of needs and wants
43
Disadvantages of the use of the price mechanism to allocate resources
May be inequality in income and wealth In a free market there is an under-provision of public goods which require government intervention
44
Difference between positive and normative sta
Positive statements can be tested by referring to evidence Normative are subjective statements
45
Define externalities
spill-over effects from production or consumption for which no appropriate compensation is paid to third parties
46
What is market failure
Occurs whenever a market leads to a misallocation of resources.
47
Define Negative externalities
Costs to 3rd parties as a result of the actions of producers
48
Define Positive externalities
Third parties benefit from the spill-over effects of production/consumption
49
Give 3 examples of activities and the associated negative externality
Factories producing air pollution Industrial waste Noise pollution
50
Give 2 examples of activities and the associated positive externality
Health services eg. NHS Nursery provision eg. Early years education
51
Define consumer surplus
The difference between the price consumers are willing and able to pay for a good/service and how much they actually pay
52
Define producer surplus
The difference between the price producers are willing and able to supply a good/service for and the price they actually receive
53
Define indirect tax
Tax imposed by government that increased supply costs for producers
54
2 examples of indirect taxes
VAT Plastic bag charge
55
Distinguish between ad valorem and specific indirect tax
Ad valorem - % tax Specific - set amount per unit
56
Define public goods
Beneficial to society but are not provided by private firms Non excludable and Non rivalrous
57
Examples of public goods
Police services Public service broadcasting Parks
58
Explain the concept of free-rider problem
Individuals benefitting from a public good without contributing to the cost of the good Because public goods are non excludable
59
Subsidies
This is an amount given by the government to encourage production or consumption of a good that generates positive externalities
60
Non rivalrous
One persons consumption does not affect the consumption of someone else
61
Non excludable
One person cannot be excluded from consuming the good
62
Government failure
Government intervened in a market and does not achieve the objectives they set out to achieve
63
Define regulation
Intervention to tackle market failure by direct action to command and control behaviour
64
Define traceable pollution permit
Controlling pollution based on a market for permits that allow firms to pollute up to a limit
65
Advantages of a tradable pollution permit
Firms will have an incentive not to pollute Overall level of pollution can be controlled by government
66
Disadvantages of a tradable pollution permit
Must be sanctions in place for firms who pollute beyond permitted level Firms who can afford to buy permits can pollute as much as they want

Economics (9 decks)

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