Studied by 2 people
what is the basic economic problem?
there are unlimited wants but scarce resources
what is opportunity cost?
the cost of the next best alternative when a choice is made
what is the production possibility frontier (PPF)?
the various combinations of 2 goods or services that can be produced with given factors of production
demand definition
the quantity of goods or services that consumers are willing and able to buy in a given time period
what is the law of demand?
there’s an inverse relationship between price and quantity demanded
ceteris paribus meaning
when all economic factors remain the same
which non-price factor can affect demand?
population, advertising, substitute’s price, income, tastes, interest rates, competition’s price
supply definition
the quantity of a good or service producers are willing and able to produce at a given time
what is the law of supply?
there’s a direct relationship between price and quantity supplied
which non-price factor can affect supply?
productivity, indirect tax, number of firms, technology, subsidy, weather, costs of production
free market definition
any place where buyers meet suppliers to exchange goods and services free from government intervention
what is market equilibrium/ market clearing?
where demand = supply
how do you stay in equilibrium?
allocate resources efficiently, ration resources, signal excess demand or supply, incentive to change output to increase profits
what are the 4 functions of the price mechanism?
signalling, incentivising, rationing, allocating
what is consumer surplus?
difference between price willing and able to pay and the price they dually pay (below the D curve and above the P line)
what is producer surplus?
difference between the price producers are willing and able to pay and the price they actually receive (above S curve and below the P line)
what is joint demand?
when products are usually bought together so demand is affected the same e.g. printers and ink, razors and blades
what is derived demand?
when the demand for the product changes so the demand for the input changes too e.g. cars and aluminium, holidays and airline tickets
what is composite demand?
when two products require the same input so one of them will have a lower supply e.g. cheese and butter
what is joint supply?
when the change in supply for one good causes the same change in supply for another e.g. honey and beeswax, crude oil and petroleum
what is price elasticity of demand and it’s formula (PED)?
the responsiveness of quantity demanded given a change in price: %change in QD / %change in P (always negative)
what are the different PED’s? (same for PES)
price elastic: >1, price inelastic: <1, perfectly inelastic: 0, unit price elastic: 1, perfectly elastic: ∞
what affects the PED?
number of substitutes, percentage of income, luxury or need, addictive, time
if the product is more price inelastic, would you increase or decrease price to increase profit?
increase (elastic is opposite)
what is price elasticity of supply (PES) and it’s formula?
responsiveness of quantity supplied given a change in price: %change in QS / %change in P
what affects the PES?
production log, stocks, spare capacity, time
what is cross elasticity of demand (XED) and it’s formula?
responsiveness of quantity demanded given a change in price of another: %change in QDa / %change in Pb
what is income elasticity of demand (YED) and it’s formula?
responsiveness of quantity demanded given a change in income: %change in QD / %change in Y
what are normal goods?
also known as luxury goods like named brands
what are inferior goods?
when income falls, demand rises e.g. own brand goods like Tesco’s own
cons of using elasticities for business use
only estimates, assumes ceteris paribus, varies along the demand curve
what is indirect tax?
expenditure tax that increases costs of production and can be passed onto consumers
what is direct tax?
tax on income that can’t be transferred e.g. income tax
why have indirect taxes?
to raise government revenue, to solve market failures e.g. cigarette industry
what is a subsidy?
money grant to firms by the government to reduce costs of production and incentivise an increase in output
what is minimum price (price floor)?
a fixed price enacted by the government usually set above the equilibrium market price to protect producers from volatility, and solve market failures
what is maximum price (price ceiling)?
a fixed price enacted by the government usually set below the equilibrium market price to increase affordability of necessities
what is allocative efficiency?
maximisation of society surplus and social benefit, where resources follow consumer demand
what are private costs?
producer’s cost of production
what are the assumptions of allocative efficiency?
many buyers and sellers, perfect information, no barriers to entry
what is market failure?
when the free market fails to allocate scarce resources at the socially optimum level of output
what causes market failure?
self interest (externalities), information failure, free rider problem, profit motivated firms, inequality, monopolies
what is monopolistic competition?
many buyers and sellers, slightly differentiated goods, price makers, price elastic, low barriers to entry, good information
what is perfect competition?
infinite buyers and sellers, homogenous goods, no barriers to entry, perfect information
what is supernormal profit?
profit of a firm over and above their normal return
what is subnormal profit?
profit less than normal profit
what is a natural monopoly?
large fixed costs, economies of scale, 1 firm could supply the whole market
what is a duopoly?
when two firms have control over a market with little competition
what is an oligopoly?
several firms have control over the market
what are negative externalities?
costs to third parties as a result of producer’s/consumer’s actions e.g. air pollution, resource depletion/ smoking, alcohol
what are positive externalities?
benefits to third parties as a result of the actions of consumer’s/ producer’s e.g. healthcare, education/ R&D
what are merit goods?
goods deemed beneficial for consumers more than they realise and are therefore under consumed/produced e.g. healthcare and exercise
what are demerit goods?
goods deemed as harmful to consumers more than they realise and are therefore over consumed/produced e.g. cigarettes, gambling
what does non-excludable mean?
no price can be charged for the good
what does non-rival mean?
the quantity of good doesn’t diminish upon consumption
what are pure public goods and examples?
non-excludable and non-rival goods e.g. flood defences, road signs, street lights
what is the free rider problem?
the exploitation of public goods by a consumer without contributing to the cost of production
what are quasi-public goods?
have characteristics of both public and private goods e.g. roads and bridges
what is government failure?
when the costs of intervention outweigh the benefits of intervention
what causes government failure?
information failure, high admin costs, unintended consequences (black markets)
what is indirect tax?
increases the costs of production but can be passed on: to internalise externalities, solve overconsumption, promote allocative efficiency, increase government revenue
cons of indirect taxes
may have price inelastic demand, need to set tax at the right level, regressive tax, black markets
what is a subsidy?
money grant given to producers by the government to lower costs of production and encourage an increase of output
cons of subsidies
cost to the government, have to set it at the right level, don’t know how the firm will use the subsidy, may have price inelastic demand
what is regulation?
laws set by the government that has to be followed by economic agents to encourage a change in behaviour
pros of regulation
helps control markets (caps, enforcement), solves free market issues, helps welfare gain
cons of regulation
cost, have to set the right regulation, unintended consequences, equity
what is state provision?
direct provision of goods and services by the government, free at the point of consumption e.g. merit and public goods
cons of state provision
excess demand, cost, imperfect information, could be inefficient
what is information provision?
government funded information provision to encourage or discourage consumption e.g. campaigns, advertising and education
cons of information provision
cost, no guarantee of success, only long run
pros of property rights to solve market failure
incentive to not exploit common resources, negative externalities internalised, could reduce quantity to a socially optimal level
cons of property rights to solve market failure
may not be efficiently distributed, costly, equity
free market pros
allocative efficiency, encourages competition, job creation, economic growth, freedom of choice, no risk of government failure
free market cons
markets can fail, inequality, price volatility, creative destruction
what is specialisation?
the concentration of production on a narrow range of goods and services
pros of specialisation
higher output, larger range of products, allocative efficiency, higher productivity, quality improvements
cons of specialisation
finite resources, changes in consumer tastes, de-industrialisation
what is division of labour?
breaking down the production process into separate tasks upon specialisation
pros of division of labour
high productivity, specialist capital for workers, lower prices but higher quality and choice
cons of division of labour
demotivated workers (repetitive), high labour turnover, risk of long term unemployment
what is natural science?
when scientists observe aspects of the universe
what is social science?
observation of human behaviour
what are positive statements?
evidence can be used to test statements
what are normative statements?
statements that contain judgements and opinions
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Flashcard (20)