Economics 1.1 Market System

Flashcards about the Market System, Economic Assumptions, Demand and Supply Curves, Elasticity, Mixed Economy, Privatisation, and Externalities.

What is the basic economic problem?

The problem of scarcity due to finite resources and unlimited wants.

What is the difference between needs and wants?

Needs are basic requirements for human survival, while wants are people's desires for goods and services.

What three decisions must countries make to overcome the basic economic problem?

What to produce, how to produce, and for whom to produce.

What is opportunity cost?

Cost of the next best alternative given up when making a choice.

What does a Production Possibility Curve (PPC) show?

Shows different combinations of two goods that can be produced if all resources are fully used.

What are the reasons for positive economic growth?

New technology, improved efficiency, education and training, and new resources.

What is economic growth?

Increase in the level of output in a nation.

What can cause negative economic growth?

Resource depletion, weather patterns, and emigration of skilled workers.

What are the two assumptions economists make about rationality?

Individuals aim to maximise benefit, and businesses aim to maximise profit.

Why might consumers not always maximise their benefit?

Difficulty calculating benefits, buying habits, and influence of others.

Why might producers not always maximise their profit?

Delegation of decisions, alternative business objectives, charitable operations, and social enterprises.

What is demand?

The amount of goods/services consumers are willing and able to buy at a given price.

What is effective demand?

Shows how much would be bought at any given price.

What is the shape of a demand curve?

It slopes down from left to right.

What relationship does the demand curve show between price and quantity demanded?

Price and quantity demanded have an inverse relationship.

What happens when there is a price change in terms of the demand curve?

There is a movement along the demand curve.

What happens when there is a change in any other factor affecting demand besides price?

There is a shift in the demand curve.

What factors may shift the demand curve?

Advertising, income, fashion and tastes, price of substitutes, price of complements, and demographic changes.

What are normal goods?

Goods for which demand will rise if income rises or fall if income falls.

What are inferior goods?

Goods for which demand falls when income rises or rise if income falls.

What are substitute goods?

Goods that are bought/used as an alternative to another but perform the same function.

What are complementary goods?

Goods purchased together because they are consumed together.

What is supply?

The quantity of goods that producers are willing and able to sell at a given price/at a given time.

What is the shape of a supply curve?

It slopes up from left to right.

What relationship does the supply curve show between price and quantity supplied?

Price and quantity supplied have a proportionate relationship.

What happens when there is a price change in terms of the supply curve?

There is a movement along the supply curve.

What happens when there is a change in any other factor influencing supply besides price?

A change in any other factor, such as production costs, will be shown by a shift in the supply curve.

What type of supply curve happens if the supply of a product or service may be fixed?

vertical

What factors may shift the supply curve?

Costs of production, indirect taxes, subsidies, changes in technology, and natural factors.

What are indirect taxes?

Taxes levied on spending (such as VAT, value-added tax) and duties.

What is a subsidy?

Money given to businesses by the government in the form of a grant.

What is the equilibrium price?

Price at which quantity supplied and quantity demanded are equal.

How do you calculate Total Revenue?

Price x Quantity

What is excess demand (shortage)?

Where demand is greater than supply and there are shortages in the market.

What is excess supply (surplus)?

Where supply is greater than demand and there are unsold goods in the market.

What is price elasticity of demand (PED)?

The responsiveness of demand to a change in price.

What is price inelastic demand?

Where a change in price results in a proportionally smaller change in the quantity demanded.

What is price elastic demand?

A change in price results in a greater change in the quantity demanded.

What is the formula for calculating price elasticity of demand (PED)?

% change in quantity demanded / % change in price

What factors affect PED (SPLAT)?

Availability of substitutes, proportion of income spent on a product, degree of necessity, and time.

When is a product price inelastic, what is the value of elasticity?

When the product is price inelastic, it means that the value of elasticity is greater than 1 (PED < -1).

What is price elasticity of supply (PES)?

The responsiveness of supply to a change in price.

What is price inelastic supply?

A change in price results in a proportionally smaller change in the quantity supplied.

What is price elastic supply?

A change in price results in a proportionally greater change in the quantity supplied.

What is the formula for calculating price elasticity of supply (PES)?

% change in quantity supplied / % change in price

What factors influence PES (MAST)?

Mobility of FoPs, availability of resources, spare capacity and time.

What is income elasticity of demand (YED)?

The responsiveness of demand to a change in income.

What is the formula for calculating income elasticity of demand?

% change in quantity demanded / % change in income

What are necessities?

‘Basic goods’ that consumers need to buy.

What are luxury goods?

Goods that consumers are likely to buy if they can afford them, spending on these types of goods is often called discretionary expenditure (non-essential spending / optional spending).

How will demand change for normal goods when income increases?

For normal goods, when an increase in income results in an increase in quantity demanded, the value of income elasticity will be positive.

How will demand change for inferior goods when income increases?

For inferior goods, when an increase in income results in a decrease in quantity demanded, the value of income elasticity will be negative. This shows that quantity demanded and income have an inverse relationship.

What is an economic system?

A system that attempts to solve the basic economic problem: decision makers in an economy have to decide what to produce, how to produce and for whom to produce.

What is the private sector?

Provision of goods and services by businesses that are owned by individuals or groups of individuals.

What is the public sector?

Government organizations that provide goods and services in the economy.

What are the different types of private sector organizations?

Sole traders, partnerships, and companies.

What are the aims of private sector organizations?

Survival, profit maximization, growth, and social responsibility.

What are the aims of public sector organizations?

Improving the quality of services, minimizing costs, allowing for social costs and benefits, and profit.

What is a market or free enterprise economy?

Relies least on the public sector for the provision of goods and services.

What is a command or planned economy?

Relies entirely on the public sector to choose, produce, and distribute goods.

What is a mixed economy?

Relies on both the public sector and the private sector to provide goods and services.

What is market failure?

Where markets lead to inefficiency.

Explain how externalities cause market failure.

Sometimes firms don’t take into account all the costs of production. This imposes a cost on society, such as poor air quality.

Explain how lack of competition causes market failure.

A market may fail if there is no competition and it becomes dominated by one or a small number of firms. So, the dominant firm may exploit consumers by charging higher prices.

Explain how missing markets cause market failure.

Some goods and services, called public goods are not provided by the private sector. Other goods, called merit goods are underprovided by the public sector. This is because they are so expensive that many people would not be able to afford them.

Explain how a lack of information causes market failure.

Markets will only be efficient if there is a free flow of information to all buyers and sellers. Consumers need to know everything about the nature, price and quantity of all products. Businesses also need information about the resources and production techniques used to make a product. A lack of information may result in the wrong goods being purchased or produced, or the wrong prices being paid.

Explain how factor immobility causes market failure.

For markets to work efficiently, factors of production need to be mobile. This means that FoPs must be able to move freely from one use to another. In practice, though, factors can be quite immobile.

What is non-excludability?

Once a public good is provided in the market, any individual consumer cannot be prevented or excluded from its consumption.

What is non-rivalry?

Consumption of a public good by one individual cannot reduce the amount available to others.

What is a free rider?

An individual who takes advantage of common resources without paying for them.

What is privatization?

Involves transferring public sector resources to the private sector.

What are the types of privatization?

Sale of nationalized industries, contracting out, and the sale of land and property.

Why does privatization take place?

To generate income, public sector organizations were inefficient and to reduce potential interference.

What are externalities?

When economic activities have positive or negative spillover effect of consumption or production on third parties.

What are third parties?

People who are not involved in the production or consumption of a good or service.

What are external costs of production?

Costs incurred by third parties from production and consumption.

What are external benefits of consumption?

Benefits received by third parties from production or consumption.

Give an example of Negative Production externality.

Plastic contamination in water due to its production.

Give an example of Positive Production externality.

Production of bees results in plants pollination and growth.

What is an example of negative production externality?

plastic contamination in water due to its production

What is the formula for Social Costs?

Social costs = private costs + external costs

What is the formula for Social Benefits?

Social benefits = private benefits + external benefits

What are government policies to deal with externalities?

Taxation, fines, government regulations, subsidies, and pollution permits.

What is a pollution permit?

Documentation that give firms the right to discharge a certain quantity of a polluting material into the environment.

What type of Choices, do individuals have to choose

Individuals have to choose how to spend limited budgets

Who face this Choice

Individuals, producers and governments

Give some Examples Who Made Choices

Individuals have to choose how to spend limited budgets,Producers may have to choose between spending £100 000 on advertising, training its workforce or buying a new machine,A government may have to decide whether to spend £5000 million on increasing welfare benefits, building new hospitals, providing better care for the mentally ill or building a new motorway.

Who have to deal with what economists call the basic economic problem

All countries have to deal with what economists call the basic economic problem.

Why The problem Occurs

The problem occurs because the world’s resources are scarce or finite and people’s wants are infinite.

What questions do you need to made

Because it is impossible to produce all the goods that people want, a country must decide which goods will be produced.

Questions how to produce

Goods can be produced using a variety of different production methods. The four factors of production can be organised in different ways to produce the same good.

Questions for whom to produce

There has to be a method of distribution after the good has been produced. Meaning, goods have to be shared in some way between members of production.

How does Privatisation generate income.

The sale of state assets generates income for the government.

Reason why Public Sector Organisations were Inefficient.

Some nationalised industries lacked the incentive to make a profit and often made a loss.

How does Privatisation Reduce potential interface

They would be free to choose their own investment levels, prices, product ranges and growth rates.

Example what firm has done being Privatised

Profit has increased since it’s now an important objective,Investments have increased,There have been merges (the joining together of two firms) and takeovers (one firm buying out another firm).,Some businesses have diversified (inc. the num. of goods and services it produces) into new areas.

Privatisation Advantages - The government

Huge amounts of revenue that has been generated,It no longer has to produce the goods/services,It can focus more on the business of government.

What Fines Uses for

They are used to reduce external costs

How Subsides can Encourage External Benefits

The government can offer money, such as subsidies and other financial rewards, to firms as an incentive to reduce external costs.

How Pollution Permits Encourage External Benefits:

Governments can issue a pollution permit (documentation that give firms the right to discharge a certain quantity of a polluting material into the environment) to a company.