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Economics > Year 12 Microeconomics > Flashcards

Year 12 Microeconomics Flashcards

1
Q

What is a public good?

A

A good that leads to market failure, and this depends on whether it is non-excludable, non-rejectable or non-rivalrous

(e,g a good that is non-excludable and non-rivalrous)

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2
Q

What’s the difference between traditional economic theory and behavioural economic theory?

A

Behavioural:
-> Many factors which restrict consumers’ ability to be rational.
-> e.g. asymmetric informatin, processing data, time available.
Traditional:
-> Economic agents are utility maximisers and are rational.

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3
Q

Some biases of behavioural economics…

A
  • Rules of thumb
  • Anchoring
  • Social norms
  • Bounded rationality
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4
Q

How can governments use behavioural economic theory within their policies?

(Choice architecture)

A

Default option - Individuals more likely to select the ‘default option’, e.g. automatic enrolment into a scheme
Framing - Presenting a choice to make it seem more appealing e.g. £1 daily as opposed to £7 weekly.
Nudges - Nudge people into decisions e.g. smoking areas do not ban smoking completely, but can nudge people into quitting.
Restricted choice - People’s choices being restricted e.g. less options
Mandated choice - People have to and must make a decision.

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5
Q

Define behavioural economics:

A

This looks at social, psychological and emotional factors made involved decision-making to try and gain a more accurate idea of how economic agents act.

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6
Q

How is YED calculated?

A

% change in QD /
% change in income

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7
Q

How is XED calculated?

A

% change in QD of A /
% change in Price of B

(Substitutes have a positive YED, and complements have a negative YED)

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8
Q

How is PED calculated?

A

% change in QD
divided by
% change in P

HINTSB

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9
Q

How is PES calculated?

A

% change in QS
divided by
% change in P

PSSST

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10
Q

Demand acronym…

A

P - Population
A - Advertising
S - Subsidies
I - Income tax
F - Fashion/trends
I - Interest rates
C - Complementary goods

PASIFIC

These SHIFT demand.

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11
Q

Supply acronym…

A

P - Productivity
I - Indirect taxes
N - No. of firms
T - Tech
S - Subsidies
W - Weather
C - Costs of production

PINTSWC

These SHIFT supply

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12
Q

PED acronym…

A

H - Habit forming
I - Income proportion (How much of your income it takes)
N - Necessity v luxury
T - Time between switching between products ( elastic (short-run) and inelastic (long-run).
S - Substituability
B - Brand loyalty

HINTSB

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13
Q

PES acronym…

A

P - Production lag
S - Substitutability of FoPs
S - Stock lvl
S - Spare capacity
T - Time period

PSSST

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14
Q

How can the demand and supply of oil be impacted?

A
  • Rise in living standards can increase oil demand, and vice versa.
  • Value of the US dollar, if their value is low, demand for oil will rise as it will become cheaper.
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15
Q

What can affect short-run oil supply?

Oil hs inelastic demand and supply.

A
  • Supply-side shocks e.g. war.
  • This will cause inflation, leaving less disposable income.
  • This will mean less tax receipts for the govt, making oil more pricey and this will lower supply.
    -> This budget deficit may lead to a BoP deficit due to not enough money to make imports.
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16
Q

How does supply and demand affect housing?

A
  • Housing price is mainly determined by demand factors e.g. high living standards and consumer confidence can cause a rise in demand for houses.
  • Short-run PED and PES for housing are inelastic
  • If house prices rise, and many houses are bought, this will up people’s assets, increasing consumer confidence + investment.
  • Also, more construction jobs will be available.
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17
Q

Define productivity…

A

Output per factor employed

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18
Q

Do fixed costs vary?

The costs of a firm

A

No, not in the short-run.

In the long-run, all costs are variable.

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19
Q

How are total costs calculated?

A

TC = TFC + TVC

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20
Q

How are avg costs calculated?

As well as AFC and AVC?

A

AC = TC / Q
AFC = TFC / Q
AVC = TVC / Q

AC is also known as ATC.

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21
Q

How do you calculate labour productivity?

A

Output / Total no. of workers

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22
Q

How is MC calculated?

(marginal cost)

A

Change in TC / Change in Q

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23
Q

What point is productively efficient?

MC is shaped like a Nike tick.

A

MC = AC
-> Also where lowest AC can be met.

MC falls then rises due to the law of diminishing reurns.

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24
Q

What marginal product, and its link with MC?

MP is the additional output from adding one extra factor input.

A

AS MP rises, MC falls and vice versa.

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25
Q

Define the law of diminishing marginal returns…

Only applies in the short-run.

A

When a variable FoP rises, and other FoPs stay the same, the extra output is MP.

(marginal product).

26
Q

Law of diminishing returns

A
  • Eventually, continously adding units of one FoP will limit addiional output and MP fall as input rises.

Only applies in the short-run.

27
Q

What are some internal economies of scale?

EoS are the cost advantages of production on a large scale.

A
  • Managerial
  • Risk- bearing
  • Financial
  • Technical
  • Marketing
  • Purchasing
28
Q

What are some external EoS?

EoS are the cost advantages of production on a firm.

A
  • Public transport improvement + Road network/railway network improvement
  • Qualifications can be offered to big local employers.

Can lead to monopoly power…

29
Q

Some diseconomies of scale…

(Internal and external)

A

Internal:
-> Loss and wastage
-> Miscommunication
-> ‘Them and us’ - Different interests between different parts of the firm.

External:
-> Raw material price may rise due to high demand.

30
Q

How can high fixed costs create large EoS?

A

-> Expensive equipment can be effective at reducing cost for producing each unit e.g. robot-based assembly lines.

31
Q

When do SRAC curves move?

A

When ALL FoPs change.

32
Q

What do external changes cause on a curve?

A
  • This causes LRAC to shift up or down
    -> Up during diseconomies of scale due to production costing more, and vice versa.
33
Q

How is TR calculated?

A

TR = P x Q

34
Q

The 3 increasing returns to scale are…

These describe the effects of increasing production

A
  • Increasing, constant and decreasing.

LRAC is minimised at the MES, where the lowest possible AC can be met.

35
Q

How is average revenue calculated?

A

AR = TR / Q

36
Q

How is MR calculated?

(marginal revenue)

A

Change in TR / Change in Q

37
Q

How is profit calculated?

A

TR - TC

TR = TC is profit and TR> TC is supernormal profit.

38
Q

Why does a price-taker have a perfectly elastic demand curve?

(Firms)

A
  • If the firm’s price rises, quantity sold would be zero, and a firm would not lower their price they can sell at a higher price.
39
Q

Why does AR = MR on a price taker?

Perfectly elastic!

A
  • All units sold bring in the same revenue as eachother, making it equal.
  • Total revenue rises in line with sales when average revenue is constant.
40
Q

When is TR maximised?

A

When PED = -1 and MR = 0.

41
Q

Name some of a firms objectives…

(Firms’ objectives)

A

-> Profit maximisation (may be an objective for the long-run)
-> Revenue maximisation (may be an objective for a new firm in the short-run) where** MR = 0**
->** Sales maximisation** where AR = AC (Highest output level in the long-run and higher than this would cause a loss.
-> Maximising profit in the long-run would mean giving up short-run profit.

42
Q

TR at its maximum when MR = …

A

MR = 0

MR occurs at the midpoint of the AR curve

43
Q

What is the divorce of ownership from control, and what can it lead to?

A

-> Where those deciding the conduct of a firm are those who own it, due to different shareholders.
-> This can lead to the principal-agent problem, a shareholder pays an agent to act in their interests, but instead, the agent acts in their own self-interest.

44
Q

What’s one thing the price mechanism does?

A
  • Signals changes in price, demand and supply.
  • e.g. high price may indicate high demand.
45
Q

Define consumer surplus and producer surplus:

A
  • Consumer surplus is when a consumer pays less for a good then the amount they were prepared to pay for it.
  • Producer surplus is when a producer receives more than the price they were willing to accept.

-> Consumer surplus above equilibrium and producer surplus below equilbrium.

46
Q

Define market failure…

A

This occurs when there’s a misallocation of resources within a market, and leads to society suffering as a result.

MPB, MSB,overconsumption, etc.

47
Q

What is a public good?

A
  • A public good is used collectively and leads to market failure
  • e.g. firework displays or lighthouses.
  • The main traits a public good has are that its non-excludable and non-rivalrous, and maybe non-rejectable.
  • Some goods may be a quasi-public good, as they contain traits of a private and public good.
  • e.g. terrestrial TV is excludable, but non-rivalrous and rejectable.

Private goods are excludable as they require payment.

48
Q

Pros and cons of subsidies…

A
  • Can support domestic industry, and may be able to exploit EoS.
  • Subsidising a merit good will make it cheaper and increase demand for it.
  • However, oppoptunity cost, can cause inefficiency within production.
49
Q

Pros and cons of setting maximum prices:

(Price controls)

A
  • Allows more people to purchase a good, reducing income inequality
  • Prevent monoplies from exploiting consumers.
  • HOWEVER, rationing scheme may be required to limit consumption, and excess demand can create a black market.
50
Q

Pros and cons of min. prices

(Price controls)

A
  • Can limit consumption of demerit goods e.g. cigs
  • Can restrict monopsony power.
  • HOWEVER, opportunity cost and destroying excess goods is a waste of resources.

(A monopsony is a single buyer).

51
Q

What are some factors of govt. failure/govt. intervention?

A

-> Conflicting policy objectives
-> ‘Red tape’ may decrease supply and demand due to lengthy process of purchase.
-> Market distortions e.g. producers will overproduce if they’re guaranteed a min.price.
-> Regulatory capture.
-> Administrative costs in attaining information. -> Costs could be used for other things.
-> Unintended consequences e.g. People avoiding insurance or tax evasion

52
Q

What causes upward/downward shifts on LRAC curves?

A
  • External changes
53
Q

Define market failure…

A
  • When a misallocation of resources occurss, causing society to suffer as a result.
  • Complete market failure means no market exists e.g. national defence.
  • Partial market failure when the price of quantity supplied of the good/service is wrong
54
Q

Define consumer surplus and producer surplus…

A

Consumer surplus - When a consumer pays less than the amount that they’re prepared to pay for it.
Producer surplus - When a producer receives more for a product than the price they’re willing to accept.

55
Q

What is a normal good?

A
  • A good that whicjh people demand more of if their real income rises.
  • This will cause the demand curve to shift right

(e.g DVDs)

56
Q

What is an inferior good?

A
  • A good which people will demand less of if their real incomes rises.
  • This will cause the demand curve to shift left.

(e.g. cheap clothing)

57
Q

What is derived demand?

A
  • Demand for a good or FoP used in making another good or service.
  • e.g. rise in demand for fencing will boost demand for wood.
58
Q

What are complementary goods?

A
  • Goods that are often used together, e.g. strawberries and cream
  • A rise in strawberries’ prices, strawberries’ demand will fall, and cream demand will fall.

(These goods are in joint demand)

59
Q

What are substitute goods?

A
  • Goods that are alternatives to eachother e.g. beef and lamb
  • A rise in price of one good will lower the demand for it and will boost demand for the substitute, and vice versa.
60
Q

Objectives of firms…

A
  • Profit max. (MC = MR)
  • Revenue max. (MR = 0)
  • Sales max. (AR = AC)
  • Profit may be JUST a LONG-TERM objective
  • Other objectives involve benefit to society etc…
61
Q

Define government failure…

A
  • When governemnt intervention causes a misallocation of resources in a market.

Economics (16 decks)

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