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83 Cards in this Set
- Front
- Back
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Renewable Resource
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One whose stock level can be maintained over a period of time
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Non-Renewable Resource
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One whose stock level is decreased over time as it is consumed
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PPF Curve
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Shows the maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully and efficiently employed
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Specialisation
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Occurs when an individual or firm concentrates on the production of a limited range of goods and services
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Division of Labour
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One form of specialisation, where individuals concentrate on the production of a particular good or service - production is broken down into a series of tasks, conducted by different workers
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Advantages of the Division of Labour
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Worker becomes highly skilled
No time is wasted in moving from one job to another Capital equipment can be used continuously in production Less time required to train workers More choice of jobs for workers |
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Disadvantages of the Division of Labour
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Monotony - high turnover of staff - increased recruitment/selectino costs
Easier to replace skilled workers with machines Interdependence in production - if one group of workers goes on strike it could halt production across the whole industry |
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Free-market economy
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Decisions on production are left to the operation of the price mechanism
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Mixed economy
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Decisions on production are made partly by the private sector and partly by the government
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Centrally planned economy
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Decisions on production are made by the government
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Scarcity
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Arises because there are insufficient resources to provide for human wants
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Opportunity Cost
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The value of the next best alternative foregone
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Factors of Production
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Inputs used in the production of goods and services, they are finite
Land Labour Capital Enterprise |
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Positive Statement
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Concerned with facts and is value-free, can be tested as true or false
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Normative Statement
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Concerned with value-judgements
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Product Market
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The goods or services which the consumer derives utility from
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Commodity Market
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The raw materials or minerals used in the production of goods and services
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Why the demand curve is downward-sloping
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The substitution effect
The income effect |
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Shifts in the demand curve
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Price of complimentary goods
Price of substitute goods Change in fashions/tastes Increased advertising Increase in real incomes Decrease in income tax Increase in population size/change in age structure Increase in credit facilities |
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PED
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The responsiveness of demand to a change in price
PED = percentage change in QD / percentage change in price |
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Total Revenue
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The total payments a firm receives from selling a given quantity of goods or services
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Determinants of PED
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Availability of substitutes
Luxury and necessity goods Proportion of income spent on the good Addictive/habit-forming goods The time period Brand image |
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YED
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The responsiveness of demand to a change in real income
YED = percentage change in demand / percentage change in Y |
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XED
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The responsiveness of demand for good B to a change in price of good A
XED = percentage change in demand for good B / percentage change in price of good A |
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Substitute goods
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In competitive demand
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Complementary goods
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In joint demand
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Why the supply curve is upward-sloping
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Profit
Rising production costs |
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Shifts in the supply curve
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Improvements in technology
Reduction in labour costs Reduction in capital costs Reduction in transport costs Discovery of new resources Increase in rival firms Reduction in indirect taxation Increase in government subsidies |
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PES
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The responsiveness of supply to a change in price
PES = percentage change in QS / percentage change in price |
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Determinants of PES
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Level of spare capacity
State of the economy Level of stocks of finished goods in a firm Perishability of the product The ease of entry to an industry Time period |
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Equilibrium
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A balance in the market, with no tendency for price or output to change
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Consumer Surplus
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The extra amount of money consumers are prepared to pay for a good or service above what they actually pay
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Producer Surplus
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The extra amount of money paid to producers above what they are willing to accept to supplya good or service
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Functions of the Price Mechanism
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Rationing device
Incentive device Signalling device |
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Direct tax
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Levied directly on an individual or organisation, e.g. income tax and corporation tax
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Indirect tax
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Usually levied on the purchase of goods or services
Two types: Specific (fixed amount per unit) e.g.an excise tax Ad valorem (percentage of the price) e.g. VAT |
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Subsidy
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A grant, usually provided by the government, to encourage suppliers to increase production of a good or service, leading to a fall in its price
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Derived demand
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The demand is derived from the demand for the goods and services it makes
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Determinants of the Demand for Labour
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Demand for the final product
Wage rate Other labour costs Price of other factor inputs Productivity of labour Government employment regulations |
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Determinants of the Supply of Labour
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Wage rate
Other net advantages of work Net migration Income tax Benefit reform Trade unions Government regulations Social trends |
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National Minimum Wage
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The legal minimum hourly rate of pay an employer can pay its workers
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Advantages of increasing the NMW
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Reduction in exploitation of labour/poverty
Reduction in wage inequality between men/women Reduction in voluntary unemployment Increase in labour productivity Keeps up with an increase in the cost of living due to inflation |
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Disadvantages of increasing the NMW
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Increases unemployment
Increase in inflationary pressure Ineffective means of reducing poverty |
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Market Failure
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When the price mechanism causes an inefficient allocation of resources. The forces of supply and demand lead to a net welfare loss in society
E.g. Externalities Public goods Imperfect market knowledge Labour immobility Unstable commodity markets |
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Externalities
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Those costs or benefits which are external to an exchange
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External Costs
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Costs that are external to an exchange
E.g.: In production: a chemical firm polluting a river in its waste In consumption: a person smoking tobacco |
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Private Costs
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Costs internal to the firm, which it directly pays for
E.g.: Wages Transport costs Market price paid by consumer |
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Social Costs
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Private costs added to external costs
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External Benefits
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Benefits external to an exchange
E.g.: In production: recycling of waste materials In consumption: vaccines |
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Private Benefits
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Benefits that are internal to an exchange - can be measured by the price that consumers are prepared to pay
E.g.: The revenue that a firm obtains from selling a good or service |
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Social Benefits
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Private benefits added to external benefits
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The Free-Market Equilibrium
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Supply curve: MPC
Demand curve: MPB |
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Public goods
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Display characteristics of non-excludability and non-rivalry
Under-provided due to: The free-rider problem The valuation problem |
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Private goods
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Display characteristics of rivalry and excludability in consumption
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Symmetric Information
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Consumers and producers have perfect market knowledge upon which to make their economic decisions
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Asymmetric Information
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Consumers and producers have imperfect and unequal information upon which to make their economic decisions
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Mobility of Labour
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The ability of workers to change from one job to another, both geographically and occupationally
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Frictional unemployment
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Unemployment while people search for jobs and fill them
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Structural unemployment
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Unemployment due to a mismatch of skills and location between job seekers and job providers
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Geographical immobility
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The obstacles preventing labour from moving from one area to another to find work
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Causes of Geographical immobility
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Family and social ties
The financial costs involved with moving home Imperfect market knowledge on available work Regional variations in house prices and the cost of living |
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Occupational immobility
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The obstacles preventing labour from changing their type of occupation to find work
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Causes of Occupational immobility
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Insufficient education
Insufficient training Lack of skills Lack of work experience |
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Measures to increase geographical mobility of labour
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Relaxation of planning laws
Increasing the construction of social housing Offering housing subsidies Improving the operation of job centres |
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Measures to increase occupational mobility of labour
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Increasing the provision of training schemes
Increasing the provision of further education Increasing the provision of higher education |
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Commodities
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Raw materials used in the production of goods
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Advantages of indirect taxes to correct market failure
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Polluters pay
Work with market forces - internalise the external costs Output of the good/service is reduced - the social optimum position can be achieved Funds raised for the government - can be used to clean up the environment/compensate victims |
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Disadvantages of indirect taxes to correct market failure
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Difficult to quantify the pollution and then place a monetary value on it - the social optimum position might not be achieved
Increase the costs of production for firms - less competitive Firms may relocate to other countries with less stringent taxes Demand for the good/service may be price inelastic - reduction in pollution levels may be small Revenue raised may not be used to compensate victims/clean up environment Might encourage the development of illegal markets |
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Advantages of subsidies applied to renewable energy markets
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Reduce air pollution
Helps to promote sustained economic growth Rate of consumption of non-renewable resources is reduced Work with the market - internalise the external benefits |
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Disadvantages of subsidies applied to renewable energy markets
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Opportunity cost
Firms may become efficient Wind power may be a less reliable source of energy |
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Advantages of tradable pollution permits
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Market is created for buying/selling carbon permits - internalise the external costs
Can be reduced over time as part of a coordinated plan Governments can raise funds by selling their reserve pollution permits - revenue could be used to clean up the environment/compensate victims Incentive to invest in clean technology Production costs will increase for firms that exceed their pollution allowance |
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Disadvantages of tradable pollution permits
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May issue too many
May allocate too few - reducing international competitiveness Disputes have arisen over the allocation of carbon permits Firms may pass the costs of purchasing pollution permits on to their customers - cost-push inflation Less pressure on major polluting firms to clean up their act if they can buy extra permits Firms may avoid investing in expensive technology to reduce their own emissions by funding cheaper carbon offsetting schemes Price of permits has fluctuated - firms unable to determine their investment levels Cost to the government of monitoring pollution emissions EU = just one part of the world - needs global effort Valuation of permits is an inexact science |
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Disadvantages of carbon offsetting
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Voluntary
Difficult to regulate Open to fraud Hard to obtain an accurate measure of the emissions to be offset |
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Advantages of property rights
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Use the market mechanism - owner will charge consumers/producers for using it
Takes away pressure from the government to assess the pollution Greater likelihood that property will be managed carefully Property owners can charge firms that need to pollute environment - funds can be used to clean up environment/compensate victims Firms that damage the environment without permission can be prosecuted and made to pay for clean up operations |
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Disadvantages of property rights
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Difficult for government to extend property rights
Difficult for a government to extend a property right that covers more than one country Difficult to trace the source of environmental damage Legal costs involved in prosecuting a polluter could be extremely high Difficult to quantify and place a monetary value on the use of a property right |
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Advantages of government regulations
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Simple to understand
Possible to fine or close down companies which have abused the regulations Consumer protection laws offer some redress against firms who sell shoddy/unsafe goods - may help to reduce the problem of asymmetric information |
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Disadvantages of government regulations
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Expensive to monitor
Extra costs to firms Difficult to quantify and attach a monetary value to pollution Prevent the operation of the price mechanism rather than working with it Government failure may occur if the regulations serve to misallocate resources |
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Advantages of buffer stocks
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Reduce commodity price fluctuations
Greater certainty in the market - more investment Ensure provision of commodities for consumers |
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Disadvantages of buffer stocks
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Continuous financial pressure on the agency - requires a downward adjustment of the intervention price range
Costs associated with the storage/security of stockpiles Stocks may be perishable Series of poor harvests may lead to the agency running out of stocks - market price exceeds the maximum price - system breaks down |
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Advantages of a minimum price
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Reduction of commodity price fluctuations
Farm incomes are stabalised/increased - greater investment Employment in the countryside is maintained Supply of agricultural commodities is guaranteed Surpluses can be used as a form of foreign aid to developing countries |
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Disadvantages of a minimum price
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Price of food increases
Opportunity cost Surpluses may have to be destroyed due to their perishability Surpluses may be sold in overseas markets at very low prices - crowd out local farmers Surpluses = inefficient allocation of resources Farmers guaranteed an income - become less efficient over time - less incentive to improve quality/keep costs down - government failure |
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Government failure
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When government intervention leads to a net welfare loss in society
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Examples of government failure
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High taxation on tobacco, alcohol and waste:
illegal activities increase in fly tipping disputes between households Subsidies to bus transport: waste of taxpayers money Road pricing: under-utilisation of road space unfair to low-income motorists reduce trade for businesses within the congestion charge zone Buffer stocks/minimum prices in agricultural markets: over-supply misallocation of resources waste of taxpayers money NMW: unemployment Allocation of fish quotas: depleting fish stocks dead fish being thrown back Government bureaucracy: under-investment |
