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101 Cards in this Set
- Front
- Back
What is Microeconomics |
Decisions of individual economic agents, households or firms |
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What is the economic problem and what does it lead to. |
When there are unlimited wants but finite resources. It leads to an opportunity cost as consumers have to make choices |
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Define opportunity cost. What kind of good does not have an opportunity cost |
Next best alternative foregone. Free goods don't have this. |
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What is a positive statement |
A statement that can be tested or rejected by referring to available evidence |
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What is a normative statement |
A valued judgement about what ought to be |
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What is assumed about the nature of decision making |
It is assumed to be rational as buyers want to maximise utility and sellers want to maximise profits |
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Define utility |
The satisfaction gained from consuming a good or service |
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Define demand |
The quantity of goods and services which will be bought at any given price over a period of time |
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What is effective demand |
It is shown by the demand curve, and is the amount that consumers can afford to buy and will buy at any given price |
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What is the law of demand |
The inverse relationship between demand and price |
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What is diminishing marginal utility |
The benefit gained from consuming a good reduces the more of it you buy |
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What thing causes a movement along the demand curve |
A change in price |
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What 5 things can cause a shift in the demand curve |
A change in the price of another good A change in income Seasonal Factors (weather etc.) Population Tax level |
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What is the difference between the individual and market demand curve |
Individual is a curve displaying demand for 1 product Market displays market demand |
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Define supply |
The quantity of goods or services that sellers are prepared to sell at any given price over a period of time |
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What one factor causes a movement along the supply curve |
A change in price |
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What causes a shift in the supply curve |
A change in the costs of production New technology Taxes and subsidies Price of other goods A change in regulation |
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What is the price mechanism |
A series of interrelationships linking producers and consumers resulting in resources being allocated accordingly |
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What are the 3 roles of the price mechanism |
Signalling (which factors of production should be moved in and out of) Incentives (rising prices attract more resources) Rationing (scarcity means not everyone can have what they want) |
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Give 2 advantages and 3 disadvantages of the price mechanism |
Adv (consumer sovereignty, efficiency) Disadv (asymmetric info, time lag, monopolies, rationality of consumers) |
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Define consumer surplus |
The difference between the price consumers are willing to pay and what they actually pay |
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Define producer surplus |
The difference between the price at which producers are willing to supply a good and the market price they are given |
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How will an increase in demand affect the consumer surplus |
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How will a fall in supply affect the consumer surplus |
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Define complements |
In demanding one good you are likely to demand another |
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Define substitutes |
When one good can easily replace another |
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What is derived (joint) demand |
When a good is demanded because it is needed to produce another good |
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What us composite demand |
When a good is demanded for two or more distinct purposes |
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What is joint supply |
When a good is supplied for two different purposes |
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Give 3 reasons why consumers do not act rationally |
Consideration of other people's behaviour (herd like mentality) Habitual behaviour (not wanting to risk something new) Weakness at computation (they can't work out the best buys) |
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Describe price elasticity of supply (definition, equation, description) |
Responsiveness of demand to a change in price % Change in demand / % Change in price More than 1 = elastic demand Less than 1 = inelastic demand |
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Equation for total revenue |
Price per unit × quantity sold |
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Give 5 things that will effect the PED of a good |
Is it a necessity Number of substitutes Brand loyalty Income Habits |
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Give 3 ways that a firm can make demand more inelastic |
Product differentiation Buying a competitor Price fixing |
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Describe Price Elasticity of supply |
Responsiveness of the quantity supplied to a change in price % change in supply / % change in price Less than 1 = inelastic More than 1 = elastic |
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Why does elasticity vary over time |
As in the short run it is hard for firms to change their supply |
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Give 2 products that have elastic supply and 2 with inelastic supply |
Elastic - anything made in factories Food and Drink Inelastic - crops Raw materials |
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Give 3 factors that affect elasticity of supply in the SR and the LR |
Access to labour Access to machinery Stock levels Technology Improvements in labour Economies of Scale |
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Describe YED |
Responsiveness of demand to a change in income % change in demand / % change in income Positive = normal Negative = inferior |
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Describe Cross elasticity of Demand |
Responsiveness of demand for one product to a change in price of another product % change in demand for X / % change in price of Y Positive = substitute Negative = complement |
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What is a giffen good |
A good that increases in demand when it's price increases |
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LEARN |
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Define a progressive tax and give an example |
A progressively larger proportion of income is paid in tax as income rises E.G income tax or corporation tax |
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Define a regressive tax and give an example |
A smaller proportion of income is paid in tax as income rises E.G VAT or Congestion Charge or Excise duties |
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What are Adam Smiths 4 principles of taxation |
Equity Convenience Economy Certainty |
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Define an indirect tax and what are it's two types |
A tax on expenditure. Can be Specific (amount paid changes with quantity bought e.g excise duties) Or Ad Volorem (increases in proportion to the value of the tax base e.g VAT) |
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Draw the incidence of a specific tax |
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Draw the incidence of an Ad Volorem tax |
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Define a subsidy |
A grant usually provided by the government n order to encourage suppliers to increase productivity |
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Draw the incidence of a subsidy |
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When is there a greater incidence of tax on the consumer and when is there a greater incidence of tax on the producer |
Consumer = inelastic demand or elastic supply Producer = elastic demand or inelastic supply |
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Define productive efficiency |
When firms produce goods or services at a minimal average cost |
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Define allocate efficiency |
When resources are distributed in such a way that no consumer could be made better off without another being made worse off |
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Define dynamic efficiency |
When resources are allocated efficiently over time |
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What does the PPF demonstrate |
The maximum amount of goods or services that can be produced in a given period with available resources |
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Give 3 things that can cause an outward shift in the PPF and 3 things that could cause an inward shift |
Outward: Immigration Subsidies Improvements in technology Inward: Regulation External shocks Decrease in factors of production |
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Define specialisation |
When a firm or country focuses on the production of a limited range of goods |
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Define division of labour |
Splitting the production process into a number of smaller operations with each being the special task of a group of workers |
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Why is the PPF curved |
Because not all factors of production are equally suited to the production of both types of good |
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Give 3 advantages and 3 disadvantages of specialisation |
Adv Costs down Profits up Necessary training down Disadv Flexibility down Demotivation up Occupational immobility |
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Give 4 functions of money |
Store of value Method of exchange Measure of value Method of settling debt |
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Describe the free market system (definition, who supports it, 3 advantages and 3 disadvantages) |
A system with no government interference, the price mechanism is its main feature. Supported by Hayek and Smith Adv - no regulation (efficiency) Competition Choice Disadv - No public services Inequality Profit motive |
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Describe the command economy |
Exclusive reliance on the state Supported by Marx Adv - Provision of public services No profit motive Less inequality Disadv - Lack of choice Low quality service No competition |
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Describe the mixed system |
Elements of both the other forms of economy Supported by Keynes Adv - provision of public services Competition Choice Disavd - regulation in private sector Monopolies can form |
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Briefly explain the cobweb theory |
Farmers adjust supply according to current prices, but their change in supply will only be in the long run, so the time lag creates fluctuating price and supply levels |
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Give 6 ways in which the government can intervene to affect the equilibrium |
Buffer stocks Quota Set aside Subsidies Minimum price Maximum price |
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Describe market failure |
When market forces (price mechanism) fail to achieve an economically efficient equilibrium |
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What 2 things can lead to market failure |
Failure associated with the market structure Failure associated with the market mechanism |
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What are 3 types of market failure |
Public goods (the price mechanism fails to provide some goods and services) Externalities (the effects on a 3rd party not involved in an economic decision. There can be external costs and benefits) Information gaps (asymmetric informarion between economic agents) |
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Give 3 other forms of market failure |
Inequality, immobility of factors, market power (monopolies) |
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What is a free good and uo2 does it link to market failure |
A good that is not scarce so is widely available to everyone, and has no opportunity cost Some would argue that no good is entirely free |
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Describe a public good (definition, two types, a problem with it) |
A good that cannot be provided by the market Can be quasi public (roads) or pure public (defence) the free rider problem, where someone can benefit without directly contributing |
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What is non excludability |
Once a good has been produced for the benefit of one person, others cannot be stopped from benefitting from it |
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What is non rivalry |
As more people consume a good it does not reduce the amount available to others |
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What is a merit good |
A good that is provided in part by the private sector but not entirely, so the state provides the rest. The private and external benefits are underestimated by consumers |
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What is a demerit good |
A good provided by the market which cost others something in their quality of lives |
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Give 6 ways that the government can intervene to deal with market failure |
Nationalisation Subsidised provision Regulation Privatisation PPP PFI |
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Define asymmetric information |
When one economic agent has more information than the other |
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How can the government reduce asymmetric |
Encourage the use of watchdogs Provide information for consumers |
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What is the market failure associated with occupational immobility |
Workers may have job specific skills or be unwilling to move from an area to find work, creating structural unemployment |
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Define private cost |
Costs internal to an exchange and are paid by an individual economic agent e.g price of good paid |
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Define external cost |
Costs from production that are external to an exchange and that the price mechanism fails to take into account. |
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Social cost |
Costs to society of an economic decision (private plus external cost) |
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Define private benefit |
Benefits internal to an exchange received by an individual economic agent |
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External benefit |
Benefit received by a third party not involved in an economic decision. It is not taken into account by the price mechanism. |
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Social benefit |
Benefits to society of an economic decision (private plus external benefits ) |
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Give 2 external costs and 3 external benefits of production |
Benefits - jobs Tourism Research and Development Costs - pollution Congestion
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Draw an external costs diagram |
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Draw an external benefits diagram |
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Give 3 types of intervention that can reduce external costs |
Tradeable permits Extended property rights Regulatiom Indirect taxes State provision |
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Draw an incidence of specific tax diagram |
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Draw a maximum price diagram below the equilibrium |
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Draw a minimum price above the equilibrium diagram |
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Give 3 advantages and disadvantages of regulation |
Adv - reduce externality, reduce asymmetric information, less consumer exploitation Disadv - can create government failure, expensive to set up, can impact growth |
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Give 3 advantages and disadvantages of tradeable permits |
Adv - internalises externality, tax revenue, can be reduced over time Disadv - prices up, hard to get right, could create monopolies |
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Give 3 advantages and disadvantages of state provision |
Adv - maintain service, reduce externalities, equality Disadv - opportunity cost for government, inefficiency, less choice |
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Give 3 advantages and disadvantages of subsidies |
Adv - lower prices for consumers, lower costs for producers, incentives to invest Disadv - expensive, opportunity cost, inefficient if firms rely on subsidies |
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Give 3 advantages and disadvantages of min max pricing |
Adv - reduce inequality, stabilise market, stops producer/consumer exploitation Disadv - may have no effect if set at wrong level, distorts market, lead to excess supply/demand, damage developing world |
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Give 2 advantages and disadvantages of state provision of information |
Adv - reduce asymmetric information, reduce consumption of demerit goods Disadv - cost to government, can be ignored |
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Define government failure |
When intervention leads to a net welfare loss rather than a welfare gain |
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What 4 reasons are there for government failure |
Distortion of price signals (min max pricing) Unintended consequences (e.g smuggling or dependence on subsidies) Excessive administration costs Information gaps |