Economics- Markets in Action

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  • Created by: Maddy
  • Created on: 04-05-13 17:17
Name and define the 4 factors of production
Land- natural resources in an economy, Labour- quantity and quality of human resources, Capital- man made aids to production, Enterprise- willingness to take risks and organise production
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What are 'wants'?
Items that are wanted unlimitedly and would include things like designer clothes and computers, whereas basic needs include things like food, shelter and clothing.
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Define 'scarcity'
A situation where there is insufficient resources to meet all wants.
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What is 'opportunity cost'?
The cost of the next best alternative, which is foregone when a decision is made.
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What is 'specialisation'?
The concentration by a worker, firm, region, or whole economy on a narrow range of goods and services.
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What is 'exchange'?
The process by which goods and services are then traded.
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What are some benefits of specialisation?
1) Increases overall volume of output of goods and services by allowing countries to specialise on what they are most efficient at producing 2) Widens range of goods available in an economy (the UK would not have tropical fruits without this)
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What are some disadvantages of specialisation?
Encourages reliance on certain resources and industries, this can cause problems for a number of reasons: bad weather can wipe out harvests, tastes of consumers may change quickly, Resources are finite & may run out, political factors may stop trade
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What is 'division of labour'?
The breaking down of the production process into separate tasks allowing labour to specialise.
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What does division of labour effectively improve? What problems can division of labour cause for workers?
It is an effective way of improving productivity (the output produced per worker). It can cause a lack of motivation of workers as their jobs become monotonous.
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What does a production possibility frontier/curve show?
A PPF shows the maximum quantities of different combinations of output of two products, given current resources and state of technology.
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What does an outward shift in the PPF show? What about an inward shift?
An outward shift of the PPF shows that the productive capacity of the economy has increased. An inward shift shows that productive capacity of the economy has decreased.
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What does an outward rotation of the PPF show?
An outward rotation of the PPF shows and increase in capacity to produce one good, while the conditions for producing the other good remain the same.
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What 2 main reasons might cause an outward shift in the PPF?
1) More resources or economic growth- an increase in productive capacity of the economy 2) Technological change- allowing more to be produced using the same quantity of resources
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What is a market economy?
The market economy allows resources to be allocated by the forces of supply and demand.
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What is a command economy?
The command economy is where the government has a central role in all decisions made – resources are state owned and allocated centrally.
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What is a mixed economy?
The mixed economy is an economic system where resources are allocated through a mixture of the market and direct public sector involvement.
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How is allocative efficiency achieved?
Allocative efficiency is achieved in a market where consumer satisfaction is maximised – scare resources are being used to produce those goods and services that consumers actually demand.
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Define a 'market'?
A market is where or when buyers and sellers meet to trade or exchange goods.
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How are prices determined at markets?
Prices are determined by the price system – if producers put more of their product on the market we would expect the price to fall, while if consumers demand more of the product we would expect prices to rise.
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Define 'demand'
Demand is the quantity of a product that consumers are willing and able to purchase at various prices over a period of time.
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What is the difference between notional demand and effective demand?
Notional demand is the desire for a product and effective demand is the willingness and ability to buy a product.
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What is the relationship between price and quantity demanded?
There is an inverse relationship. The lower the price the more will be demanded, the higher the price the less will be demanded.
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What is the only thing that will cause a movement along the demand curve?
Changes in the price for a product.
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How does consumer income affect demand?
For normal goods, an increase in a consumer's disposable income would be expected to lead to an increase in demand. For inferior goods, an increase in income would be expected to lead to a decrease in demand.
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How does the price of other products affect demand?
If the price of a substitute increases, we would expect demand to increase. If the price of a complement increases, we would expect demand to decrease.
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How do tastes and fashion affect demand?
As people's tastes change, certain products would go in and out of fashion, causing an increase of decrease in their demand.
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What affect will consumer income, the price of other products and tastes and fashion have on the demand curve?
They will cause a shift in the demand curve.
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What 4 things that affects demand will cause the demand curve to shift to the right?
1) Increase in consumer income 2) Fall in price of complements 3) Rise in price of substitutes 4) positive change in tastes and fashion
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What 4 things that affects demand will cause the demand curve to shift to the left?
1) Fall in consumer income 2) Rise in price of complements 3) Fall in price of substitutes 4) Negative change in tastes or fashion
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What is 'consumer surplus'?
Consumer surplus is the extra amount that a consumer is willing to pay for a product above the price that is actually paid.
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What happens to consumer surplus when price a) increases and b) decreases?
a) Consumer surplus will be reduced b) Consumer surplus will increase
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How do you calculate total expenditure (by the consumer) or total revenue (for the consumer)?
Price x Quantity demanded
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Define 'supply'
The quantity of a product that producers are willing and able to provide at different market prices.
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What is 'profit'?
Profit is the difference between total revenue and total costs.
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How will suppliers normally make the decision on how much to supply?
Generally suppliers will make the decision on how much to supply based on what will maximise their profits.
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What is the only thing that will cause movement along the supply curve?
Changes in the price of a product.
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How do costs of production affect supply?
Any increase in a firm’s costs of production (either through raw materials or labour costs) will affect their profits and cause supply to decrease.
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How does government policy affect supply?
Increases in taxation will affect a firm's profits and cause supply to decrease. Subsidies will have the opposite effect and cause supply to increase.
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How do other factos affect supply?
Natural disasters will decrease supply. New information about a health benefits of a product may cause supply to increase.
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What is 'producer surplus'?
Producer surplus is the difference between the price a producer is willing to accept and what is actually paid.
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What will happen to producer surplus when there is a) a fall in the price and b) a rise in the price?
a) Producer surplus will be reduced b) Producer surplus will be increased
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What 4 things affecting supply will cause a shift to the right on the demand curve?
1) Fall in raw material costs 2) Reduction in the rate of indirect taxation 3) Positive technological change 4) any other positive factor
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What 4 things affecting supply will cause a shift to the left on the demand curve?
1) Increase in raw material costs 2) Increase in rate of indirect taxation 3) failed technological advance 4) Any other negative factor
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What is the market equilibrium price and quantity (also known as the market clearing price)?
The point where demand and supply meet.
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What will happen to price when supply is greater than demand?
There will be a surplus, and price will fall.
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What will happen to price when demand is greater than supply?
There will be a shortage, and price will rise.
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What might cause the equilibrium to shift?
A change in demand, a change in supply or simultaneous shifts in both demand and supply.
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What does Price Elasticity of Demand measure.
The responsiveness of quantity demanded of a product to a change in the price of a product.
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How do you measure PED?
%change in quantity demanded / % change in price
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What does a PED value of between 0 and 1 mean?
It's inelastic. This means demand is not very sensitive to changes in price, e.g. petrol, cigarettes, heart transplants.
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What does a PED value of exactly 1 mean?
It's unit elastic. This means a change in price causes and exactly proportional change in demand.
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What does a PED value of greater than 1 mean?
It's elastic. This means demand is very sensitive to changes in price e.g. luxury chocolates, holidays, cinema.
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How does availability/closeness of a substitute affect PED?
The more close the substitutes available, the more price elastic a product will be.
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How does the relative expense of the product with respect to income affect PED?
The larger the proportion of a person’s income a product takes up, the more elastic it will be.
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How does time affect PED?
Over time, as consumers are able to find out more about possible substitutes, demand will become more price elastic.
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How can you use PED?
If demand is inelastic price increases will be attractive to businesses as they will not bring about a large fall in demand. If demand is elastic a price rise will not be such a good idea as demand will drop significantly.
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What does Income Elasticity of Demand measure?
Measures how responsive demand is following a change in income.
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How do you calculate YED?
% change in quantity demanded / % change in income
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What does a positive YED value show?
It shows a normal good – as income increases, demand for the product will also increase.
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What does a negative YED value show?
An inferior good – as income increases demand decreases.
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What does a YED value greater than 1 show?
It's income elastic. Change in income produces greater than proportionate change in demand.
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What does a YED value of less than 1 show?
It's income inelastic. Change in income produces less than proportionate change in demand.
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How is YED used?
It may affect the marketing of the product as an inferior product, or luxury product.
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What does Cross Elasticity of Demand measure?
Measures the responsiveness of demand for one product following a change in the price of another related product.
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How do you calculate XED?
% change in quantity demanded of product A / % change in price of product B
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What does a positive XED value show?
They're substitutes. Consumers will chose to buy one product or the other.
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What does a negative XED value show?
They're complements. Consumers will usually buy these products together.
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What does an XED value of 0 show?
There's no relationship.
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What does a greater XED value mean?
The greater the size of the number, the stronger the relationship between the products, whether complementary or substitutes.
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How do firms use XED?
Firms will want to keep a close eye on the prices of substitute products and ensure they remain competitive.
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What does Price Elasticity of Supply measure?
Measures the responsiveness of quantity supplied to changes in price.
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How do you calculate PES?
% change in quantity supplied / % change in price
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What does a PES value of a) 0-1 b) 1 and c) more than 1 mean?
a) It's inelastic-supply isn't very responsive to changes in price b) It's unit elastic-change in price causes an exactly proportional change in quantity supplied c) It's elastic-producers can respond with a large change in supply if price rises
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How does availability of stock of the product determine PES?
If stocks can be easily stored and quickly released in response to a price rise, PES will be more elastic.
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How does availability of factors of production determine PES?
Labour will usually be more easily and quickly available to expand production, making PES more elastic, whereas if capital is required, PES will be more inelastic.
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How does the time period determine PES?
If it takes a long time for supply to be adjusted, PES will be inelastic, if this can be done quickly, PES will be elastic.
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How can PES be used?
Firms will usually try to make supply of their product as elastic as possible, so they can cash in on increases in price by selling more of their product.
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What's the problem with elasticity data?
They're estimates so there may be some inaccuracies.
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Other cards in this set

Card 2

Front

What are 'wants'?

Back

Items that are wanted unlimitedly and would include things like designer clothes and computers, whereas basic needs include things like food, shelter and clothing.

Card 3

Front

Define 'scarcity'

Back

Preview of the front of card 3

Card 4

Front

What is 'opportunity cost'?

Back

Preview of the front of card 4

Card 5

Front

What is 'specialisation'?

Back

Preview of the front of card 5
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