Microeconomics

Flashcards

1: What is the basic economics problem?

Resources are limited while desires are infinite decisions must be made about how to allocate resources

1: What is a want?

Peoples desires for goods and services

1: What are needs?

Basic requirements for human survival

1: What is an opportunity cost?

The value of next best alternative foregone

1: What does a PPC show?

Different combinations of two goods that an economy can produce.

1: What does the slope of PPC mean?

Opportunity Cost

1: What requirements must be met for an economy to be on PPC (maximum output)

1. All resources are used

2. Productive effeciency

1: What is happening to the economy if the PPC shifts right?

Economics growth, improved output

1: What causes economics growth (improved output)?

1. New technology

2. Improved efficiency

3. Education and training

4. New resources (input)

2: What does rational mean

Based on clear thought or reason

2: What is assumed for all rational consumers in an economy?

Consumers always chose the greatest satisfaction or benedit

• Will never pay more than neccesary

• Will always buy of highest quality

2: What is assumed for all rational businesses?

Businesses will always maximise profit

• Will never pay more than neccessary

• Will charge highest price market can stand

2: What are 4 reasons consumers cannot maximise benefits?

1. Failure to quantify benefits

2. Lifestyle habits - Tend to change over time

3. Lack of information

2: What are 4 reasons businesses cannot maximise profit?

1. Non Profit - NGOs Charities

2. Individual Profit - Managers aim for highes pay instead of highest profit

3. Short Term Target - In the short term, businesses may aim to raise awareness or focus on consumer loyalty

4. Lack of information

3: What is effective demand?

Desire to buy a product or service that is backed up by ability to pay.

Amount of good consumers are willing to pay for or how much would be bought at a given price

3: Price and demand has a _____ relationship. 

Inverse, demand falls when price increases. (law of demand)

3: What causes the law of demand? 

A lower price means that the same good is more cost effective than it's alternatives therefore the demand increases as consumers switch to cheaper good. 

4: What factors shift the demand curve? (6)

1. Advertisement

2. Income fluctuations

3. Changes in fasion and taste 

4. Price of substitutes

5. Price of compliments 

6. Demographics

5: What is supply?

The amount of good producers are willing and able to offer at a given time

5: Price and supply has a _____ relationship. 

Positive, supply grows when price increases. (law of supply)

5: What is the profit motive? What causes law of supply?

When price increases, the profit margin of that good increases therefore suppliers shift resources and produce more. 

6: What shifts the supply curve? 

1. Production costs

2. Indirect tax

3. Subsidies

4. Changes in technology

5. Natural Factors: Climate, Natural Disasters...

7: When is market in equilibrium? 

Supply = Demand 

7: When price is higher than equilibrium, there is excess (supply/demand) 

Supply

3/5: What does the slope of a supply/demand graph measure?

Elasticity

7: When price is lower than equilibrium, there is excess (supply/demand) 

Demand 

8: What does PED measure? 

Price elasticity of demand measures the responsiveness of demand to a change in price. 

8: State formula of PED

PED = %Δ Quantity Demanded / %Δ in Price

8: PED < 1 = ?

Inelastic

8: PED > 1 = ?

Elastic

8: PED = 0 = ?

Perfectly inelastic, demand is always same no matter price. 

8: PED = ∞ = ?

Perfectly elastic

8: What are the determinanats of PED (4)?

1. Avaliability of substitutes. More substitutes means higher elasticity

2. Degree of necessity. Essential goods have inelastic demand 

3. Price. An expensive good is naturally more elastic because it is a higher proportion of income for the consumers

4. Time. PED is more elastic over time as consumers find viable substitutes. 

9: What does PES measure? 

Price elasticity of supply measures the responsiveness of supply to a change in demand. 

9: State the formula for PES.

PES = %Δ in Supply / % Δ in Price

9: PES < 1 = ? 

Inelastic

9: PES > 1 = ?

Elastic

9: PES = 0 = ? 

Perfectly inelastic, the supply is constant no matter the price

9: What are the determinanats of PES (4)?

1. Avaliability of FOP, excess resources that can be put into production make the good elastic

2. Quantity of stocks, goods that can be stored are more elastic

3. Spare capacity, firms with spare space and machinery are elastic

4. Production time, long the time, the less elasticity

10: What does YED measure? 

Income elasticity of demand measures the responsiveness of demand of a good to a change in consumer income. 

10: What are the two types of normal good what do each of the mean? (YED)

Neccessity: A normal good that consumers regard as basic to daily survival

Luxury good: A normal good that is non-essential.

10: What is an inferior good?

A good for which demand falls as consumer income rise.

Because consumers switch to higher-quality superior substitutes.

10: Describe the YED of a luxury good

YED > 1 (increases substantially) 

10: Describe the YED of neccesities

0 < YED < 1 (increases but not much) 

10: Describe the YED of inferior goods

YED < 0 the higher the income, the lower the demand

10: State the formula for YED

%Δ Demand / %Δ Income

11: What is an economy?

A system that attempts to solve economics problem 

11: What is the private sector? 

Part of the economy owned by individuals or small parties

11: What is the Public sector? 

The part of the economy owned by government 

11: What are the 3 types of private sector firms? 

1. Sole trader: One individual runs the whole business

2. Partnerships: Two or more individuals working together to run a business

3. Company: Shareholders own the business, and hire employees

11: Who controls the public sector firms? 

Government 

11: What are the goals of firms in the private sector? 

Profit, or other aim

11: What are the goals of the public sector? 

1. Bring satisfaction to public and improve social welbeing

2. Minimising costs 

3. Profit (rarely) 

11: What are the 3 types of economies? 

1. Mixed economy - Private + Public sector

2. Market economy - Almost entirely Private

3. Command economy - Public sector 

11: What happens when there is market failure?

Ineffecient use of resources

11: What causes market failure? (5)

1. Externalities - Failure to account for costs are considered market failure

2. Lack of competition - Monopolies lead to exploitation

3. Missing Markets - Failure to provide public goods and/or merit goods.

4. Lack of infomation - Without free flow of infomation, it is impossible to implement laws of supply and demand.

5. Factor mobility - Waste of resources when changes must be mad

11: What is a merit good?

Goods that are underprovided, and underconsumed by the free market due unseen value of positive externalities.

11: What is a public good, and what are it’s characteristics (2) ?

Goods or services that are non-excludable and non-rivalrous, which the free market fails to provide.

Non - excludable means that once provided nobody can be prevented of the use of the good meaning if firm attempts to charge the users, there will be free riders who don’t pay. Therefore nobody will be willing to pay and the firms will be unwilling to provide the good.

Non - rivalrous means that consumption of the good doesn’t diminish the supply.

12: What is privatisation?

Selling government controlled firms to private investors

12: What are the forms of privatisation (Unimportant)

1. Sale of Nationalised industries

2. Contracting out - Higher efficiency

3. Sale of land and property - Giving the choice to buy rented homes and land

12: What are the 3 reasons for privatisation?

1. Generate short term revenue

2. Higher effeciency - Profit motive for innovation and higher effeciency

3. Reduce political inteference - Firms decisions no longer restrained by government incentives

12: What are the effects of privatisation on consumers? Pros and Cons

1. Pros: Private sectors face pressure and are incentivised to raise quality

2. Cons: Private sectors charge the highest price the market can stand due to no government protection

12: What are the effects of privatisation on employees? Cons

1. Jobs are lost to reduce costs

2. Remaining staff work more for the same price

12: What are the effects of privatisation on businesses?

1. Gains profit motive

2. Firms now face natural competition

3. May diversify to different markets and industries

4. Increased foreign investment

12: What are the effects of privatisation on businesses?

1. Revenue

2. Lower management cost / subsidies

3. Risk of hostile takeovers