Theme 1: Introduction to markets and market failure Flashcards Preview

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Flashcards in Theme 1: Introduction to markets and market failure Deck (33):
1

Normative statement

Subjective and value based

2

Positive statement

Objective and fact based

3

Opportunity cost

The cost of any choice in terms of the next best alternative foregone

4

Capital good

Any good used to increase future levels of production

5

Consumer good

Satisfies the wants and needs of the consumer directly

6

4 functions of money

1. Medium of exchange
2. Store of value
3. Unit of account - allows the value of something to be expressed in an understandable way so that it can be compared
4. Standard of deferred payment

7

Pros and cons of free market economy

+ ensures competition
+ consumers' demand determines pricing
- market failure
- inequality
- economic instability

8

Pros and cons of command economy

+ considers the effect of externalities and looks to achieve the common good
+ greater equality (in theory)
- lack of competition, efficiency and incentive

9

Price elasticity of demand

percentage change in quantity demanded divided by percentage change in price

10

Income elasticity of demand

percentage change in quantity demanded divided by percentage change in income

11

Cross elasticity of demand

percentage change in quantity demanded of X divided by percentage change in price of Y

12

Inferior good

Demand for the good declines as income increases e.g. staple goods

13

Normal good

Demand increases when income increases

14

Luxury good

A good that is not necessary for living but may be desired amongst those with higher incomes.

15

3 factors affecting demand elasticity

Availability of substitutes, necessity, time (may be able to afford a good in the short run, but buying it everyday in the long run is unaffordable)

16

XED of substitutes

The closer the substitute, the more elastic the XED

17

Complementary goods XED

The closer the complementary good, the more elastic the XED

18

Unrelated goods XED

0

19

PES

Percentage change in quantity supplied divided by the percentage change in price

20

Factors that affect elasticity of supply (4)

Spare production capacity, stocks of finished products and components, the ease and cost of factor substitution/mobility, time period and production speed

21

Short run

At least one input is fixed and the quantities of other inputs can be varied.

22

Long run

A period of time in which the quantities of all inputs can be varied

23

3 functions of price

1. Rationing - when there is a shortage of a product, price will rise and deter some consumers from buying the product.
2. Incentive - through their choices, consumers send information to producers about the changing nature of their needs and wants.
3. Signalling - adjust to demonstrate where resources are required/not.

24

Producer surplus

The difference between what producers are willing and able to supply a good for and the price they actually receive.

25

What two shifts of S and D lead to increases in producer surplus

Increase in S, increase in D

26

Consumer surplus

Difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay

27

What is the relationship between PED and consumer surplus

When demand is perfectly elastic, consumer surplus is zero because the price that people pay matches exactly what they are willing to pay

28

What will be the effect of increases in S/D on consumer surplus

Increase in S, fall in consumer surplus, increase in demand increase in consumer surplus

29

Social cost/benefit

Private cost/benefit + externality

30

Private cost

The cost paid for a good by the consumer or firm

31

Externality

Effects on a third party arising from the consumption/production of a good or service for which no appropriate compensation is paid.

32

3 aspects of a public good

1. Non-excludability - the benefits from pure public goods cannot be confined to those solely who have paid for it (free rider problem)
2. Non-rivalrous - consumption by one consumer does not restrict the consumption of others, MC=0
3. Non-rejectable - cannot be rejected by individuals

33

Asymmetric information

Where one party in an economic transaction possesses greater material knowledge than the other party.