Year 1 Micro Flashcards
(78 cards)
1
Q
Define Positive statement
A
A positive statement is an objective statement which is based on evidence and can be proven to be true or false
2
Q
Define Normative statement
A
A normative statement is a statement based on value judgements and personal beliefs
3
Q
Define Value Judgement
A
A value judgement is a statement of how good or bad you think an idea is
4
Q
Define Division of Labour
A
Division of Labour is when the production process is broken down into many separate tasks
5
Q
Define Specialisation
A
Specialisation is when an individual, firm, or government focuses on the production of a specific range of products or services.
6
Q
2 Pros of specialisation
A
- Higher Labour productivity
- Lower export prices
7
Q
4 Cons of specialisation
A
- Boredom
- Deskilled labour, which can lead to occupational immobility
- Resource depletion
- Overdependence on other country’s exports
8
Q
List 4 Functions of Money:
A
- Medium of Exchange
- Store of Value
- Unit of account
- Standard of deferred payment
9
Q
Define the Free Market Economy
A
The Free Market Economy is an economy which has no government intervention, where resources are allocated by the price mechanism
10
Q
3 Pros of the Free Market
A
- Profit incentive motivates people to fulfill shortages
- Higher quality and QTY of goods/services
- Competition leads to lower prices
11
Q
2 Cons of the Free Market
A
- Wealth concentrated in the top 1% of households as they keep buying up the factors of production, so wealth inequality continues to grow
- Development of monopolies causes the exploitation of consumers.
12
Q
Define the Command Economy
A
The Command Economy is an economy where all of the resources are owned by the government and the government controls the allocation of resources
13
Q
2 Pros of the Command economy
A
- Increased social equality as everyone earns the same wage
- Government owns monopolies so consumer exploitation can be avoided
14
Q
4 Cons of the Command economy
A
- Deskilled labour as there is a lack of incentive to learn new skills as everyone earns the same wage
- Less innovation due to lack of competition
- Lack of allocative efficiency as there are often surpluses and shortages
- Poor allocative efficiency leads to the rise of black markets
15
Q
Define the mixed economy
A
The mixed economy is a blend of the free-market and the command economy, where individuals, firms, and the government own factors of production and distribute scarce resources.
16
Q
Define Rationality
A
Rationality is when economic agents are able to consider the outcome of their choices and select the option which benefits them the most.
17
Q
Define Marginal Utility
A
Marginal utility is the extra utility gained from an additional unit of a product.
18
Q
Define the Law of Diminishing Marginal Utility
A
The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility from the previous unit.
19
Q
2 reasons for the demand curve being downwards sloping
A
- Price is inversely correlated with demand
- As additional units are consumed, the utility derived falls
20
Q
Define PED
A
PED is price elasticity of demand and measures the change in QTY demanded as a result of a change in price.
21
Q
Interpret PED Values
A
0 -> Perfectly Inelastic
0-1 -> Relatively inelastic
1 -> Unitary elastic
Over 1 -> Relatively elastic
22
Q
4 Factors which influence PED
A
- Availability of substitutes
- Addictiveness of the product
- Price as a proportion of income
- Time period (People will look for substitutes in the long run)
23
Q
Interpret YED values
A
0-1 -> Normal good
Over 1 -> Normal Luxury
Less than 0 -> Inferior good
24
Q
Define XED (Cross elasticity of demand)
A
XED measures the change in QTY demanded of one good as a result of a change in price of another good
25
Interpret XED Values
Less than 0 -> Complimentary goods
Over 0 -> Substitutes
0 -> Unrelated goods
26
Interpret PES Values
0 -> Perfectly price inelastic
0-1 -> Relatively price inelastic
Over 1 -> Relatively price elastic
27
3 Factors which influence PES
1. Mobility in factors in production
2. Availability of raw materials
3. Ability to store goods
28
Define the Market equilibrium
Where supply is equal to demand
29
Define the Price Mechanism
The Price Mechanism is the interaction between supply and demand to allocate scarce resources
30
3 Functions of the Price Mechanism
1. Rationing
2. Signalling
3. Incentives
31
Define price rationing
Price rationing is when only those who can afford to pay for the good can receive them
32
Define price signalling
Price signalling is when prices provide information to producers where resources are required
33
Define price incentives
Price incentives is when producers reallocate resources from other markets to maximise their profits when they see a rise in prices.
34
Define Consumer surplus
Consumer Surplus is the difference between the amount the consumer is willing to pay for a product and the price they actually pay.
35
Define Producer surplus
Producer surplus is the difference between the amount that the producer is willing to sell a product for and the price they actually receive.
36
Where is consumer surplus located?
Below demand, above market price
37
Where is producer surplus located?
Above supply, below market price
38
Define Indirect Tax
An Indirect Tax is paid on the consumption of goods and services
39
Define Producer Subsidy
A producer subsidy is a per unit amount of money given to a firm by the government
40
What do rational agents do?
Rational agents select the choice which presents the highest benefits
41
What 3 things are consumers likely more influenced by to prevent them being fully rational?
1. Influence of other people's behaviour (advertising)
2. Habitual behaviour
2. Consumer weakness of computation
42
What is consumer weakness of computation?
Consumer weakness of computation is when consumers cannot gather all information and decide which choice has the higher net benefits due to time constrains
43
Define Market Failure
Market Failure is when there is less than optimal allocation of resources from society's point of view
44
Define Externalities
Externalities occur when there is an external impact on a third party not involved in the economic transaction
45
Define Positive Externality of consumption
A positive externality of consumption occurs when the external impact on a third party is positive
46
Define Negative externality of production
A negative externality of production occurs when the external impact on a third party is negative
47
Define Public goods
Public goods are goods which have non-rivalry and non-excludability.
48
Define non-rivalry
Non-rivalry is when the good is consumed, it doesn't reduce the utility derived to others
49
Define non-excludability
Non-excludability is when it's impossible to provide a product without it being possible for others to enjoy
50
What are external costs
External costs occur when the social costs of an economic transaction are greater than the private costs
51
What are social costs
Social costs = Private costs + External costs
52
What are external benefits
External benefits occur when the social benefits of an economic transaction are greater than the private benefits
53
What is Marginal Private Cost?
Marginal Private Cost is MPC and is the cost of the next unit produced or consumed.
54
What is Marginal Private Benefit?
Marginal Private Benefit is MPB and is the benefit derived from the production or consumption of the next unit.
55
2 Government interventions to prevent Negative Externalities of Production
1. Indirect Tax
2. Regulation
56
2 Government interventions to promote Positive Externalities of Consumption
1. Subsidies
2. Education
57
Why does the government supply public goods?
The government supplies public goods because there is no profit incentive for firms to produce them.
58
What is the Free-rider problem?
The Free-rider problem is when consumers realise they can still access the goods without paying for them.
Overtime, firms will stop providing these goods and they will be underprovided in society (Missing market)
59
Define Perfect Information
Perfect Information is an assumption that buyers and sellers have exactly the same information about the good/service. This is symmetric information
60
Define asymmetric information
Asymmetric information is where sellers know more about the good/service than the buyer
61
2 things which would happen if there was symmetric information:
1. People would buy less goods with harmful side-effects
2. Goods with extra benefits would be sold in higher quantities
62
4 main methods of government intervention
1. Indirect taxation
2. Subsidies
3. Maximum prices
4. Minimum prices
63
Define Maximum price
A Maximum Price is set by the government below the existing free market equilibrium price and sellers cannot legally sell the good/service at a higher price
64
Why do governments use minimum prices?
Governments use minimum prices to help producers or to decrease consumption of a demerit good
65
Define Minimum Price
A Minimum Price is set by the government above the existing free market equilibrium price and sellers cannot legally sell the good at a lower price
66
What is Common Agricultural Policy?
In Agricultural markets, if a minimum price is set by the government, producers benefit as they receive a higher price.
Governments will often purchase the excess supply and export it.
67
Name 4 other types of government intervention to prevent market failure
1. Trade pollution permits
2. State provision of Public goods
3. Provision of information
4. Regulation
68
Explain Trade Pollution permits (4)
Trade pollution permits are when:
1. Governments create a pollution permit market and issue permits to polluting firms
2. More polluting firms need to buy additional permits from less polluting firms.
3. The price of the permit represents an additional cost of production
4. If the price of additional permits is more than the cost of investing in new pollution technology, firms will be incentivised to switch to cleaner technology
69
Explain State provision of Public goods
Public goods are beneficial to society and are not provided by private firms due to the free rider problem.
70
Explain provision of information (3)
1. Information gaps cause market failure
2. Governments can set up information portals to reduce asymmetric information.
3. Such as nutritional labels or education
71
Explain government regulation (4)
1. Governments create rules to limit harm from negative externalities of production
2. They create regulatory agencies to monitor that the rules are not broken
3. There are more than 90 regulators in the UK
4. Firms may fined for breaking the rules
72
Define Government Failure
Government Failure is when the government intervenes in a market to correct market failure, but the intervention results in a net welfare loss for society
73
What are 4 ways government failure can happen
1. Distortion of price signals
2. Unintended consequences
3. Excessive Admin costs
4. Information Gaps
74
Explain distortion of price signals (3)
1. The signalling function of the price mechanism is artificially altered
2. For example, a minimum price sends a signal to producers to supply more
3. In agricultural markets, this often results in an excess of perishable goods which end up going to waste
75
Explain unintended consequences
Unintended consequences are when shortages result in the rise of illegal markets.
76
Explain excessive administrative costs
Excessive admin costs occurs when regulation costs are greater than the savings in social welfare
77
Explain information gaps
Information gaps occur when decision makers do not have perfect information.
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