Markets in action questions

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  • Created by: sarah
  • Created on: 21-04-14 20:06
What is the economic problem?
scarce resources but unlimited wants and needs
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What are the factors of production?
Labour, Land, Capital, Entrepreneurship
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What is real capital?
Real capital is something man made which is used to make money or provide a service.
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What is entrepreneurship?
A person with the ability to organise resources, who takes a risk in order to provide a device or product and make a profit
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What is a positive economic question?
A question which has no value or judgement. E.g. why do people use money?
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What is opportunity cost?
Sacrifice of next best alternative, when making a choice in a given time
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What is a normative economic question?
A question with value or judgement, what ought to be E.g. should people use money?
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What can you say about points along the PPF?
• Resources are being used to maximum potential • All equally efficient • Maximum potential you can achieve
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What does PPF/PPC show?
Shows the limit to what you can produce and sacrifice, in a given time, with two products
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What does it mean if gradient of PPF is constant?
There is a uniform opportunity cost
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What can cause PPF curve to shift to the right?
• Economic growth, • improved resources/skills, • technology, • labour productivity, • government subtitles
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What can cause PPF curve to shift to the left?
Exhausted resources e.g. war and natural disaster (times of economic decline)
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Why Is PPF usually concave?
The law of diminishing returns (Not all resources will benefit the production of the product to same extent)(Investing in one may benefit the production of the other)
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What can cause a decreasing marginal return?
• Limited space, • overcrowded conditions, • distraction
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What is specialisation?
Concentrating workers, firms, areas or countries on a particular product or task, narrowing the range of products, in aim to increase quality and quantity of that product
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What does it mean if a country has an absolute advantage in producing a product?
That they have a more efficient production process for that product, and are more capable in its production. Trading in this will be beneficial to them.
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What is the name of the specialization of labor?
Division of labour
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What are the advantages of the division of labour?
• Lower cost per unit (less training and equipment needed) • Higher productivity (more skilled, quick training, higher quality)
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What are the disadvantages of the division of labour?
Workers get board (reduces efficiency and quality). Has to be done in a large scale (to make it affordable and to appreciate benefit). Reduced firm flexibility (only large scale orders –reject sunrise businesses). Occupational immobility
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What is latent demand?
Consumers have willingness to buy but no purchasing power (or vice versa)
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What is joint demand?
An increase in the demand for one good with an increase in demand for another complementary good
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What is competitive demand?
An increase in demand for one good causes a decrease in demand for the other
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What is derived demand?
The demand for a product has increased as a result of an increase in demand for another.
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What does a demand curve show?
The relationship between price and quantity demanded for a good
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What is the pattern of a normal demand curve?
As price goes down, product becomes more desirable so quantity demanded increases
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What is a good of ostentation?
A good that becomes more attractive at a higher price
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What is an increase in demand?
Shift of whole curve to a position (right) where more is demanded for the same price
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What is decrease in demand?
Shift of whole curve to a position (left) where less is demanded for the same price
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What is an expansion in demand?
Movement along the same curve to a position where more is demanded at a lower price
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What is a contraction in demand?
Movement along the same curve to a position where less is demanded for a higher price
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What causes a shift in demand to the right?
fall in interest rates, successful advertisement, fall in income tax, change in fashion, contraction in demand for competitive goods, change in consumer population (tourism)
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How does an increase in interest rates affect demand?
When interest rates increase borrowing decreases, so spending decreases, so demand falls and curve shifts to the left
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How does an increase in income taxes affect demand?
Higher income tax means less disposable income, and less consumption, so demand falls and shifts to the left
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How does an expansion in demand for competitor goods effect demand?
People will choose competitor good, instead and so demand will decrease (shift to the left)
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What is the pattern for a normal supply curve?
As price increases suppliers are more willing to supply and so the quantity supplied increases (positive correlation)
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What is excess supply?
Supplying more than equilibrium (where demand is met with supply) and so there is unsold stock
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What is excess demand?
Demand is more than equilibrium (where demand is met with supply) and so stock is sold too quick and too cheap
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What causes a shift in supply?
Cost of production, Change in labour productivity, Interest rates, Indirect tax, Change in profit margin, subsidies, natural disaster, seasonal effects, advances in technology
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How does an increase in interest rates affect supply?
Higher interest rates mean higher cost to finance production, so supply decreases (shift to left). And for same price less is supplied
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What is meant by cost of production?
Wages, raw materials, and rent
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How does a change in the productivity of labour effect supply
More productive labour means more is produced for the same cost so supply increases (shifts to the right)
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How does advances in technology effect supply?
When technology advances, less resources are needed to produce same amount and so supply increases
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In terms of the demand and supply curve, what two things can cause an increase in the price of equilibrium?
An increase in demand Or A decrease in supply
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What is the effect of increase in tax?
Less can be supplied for the same purchasing price, so supply decreases (shifts to left)
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How do you calculate total revenue?
Price x Quantity sold
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What is consumer surplus?
The sum of consumers that are willing to pay a higher price than the price its being sold (value product higher), and are there for are getting a good deal.
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What is the marginal consumer?
The consumer that values the product at the price it’s being sold, they are there for the last consumer willing to buy the product at this price.
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What is producer surplus?
The difference between the lower price a producer is willing to accept and what it is actually paid
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What does Price elasticity of demand measure?
How responsive demand is to change in price
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How do you calculate PEoD?
(%∆QD)/(%∆P)
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What is meant by perfectly/totally inelastic?
PED = 0
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What is meant by inelastic?
0
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What is meant by unitary elastic?
PED=1
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What is meant by elastic?
1
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What is meant by perfectly/totally elastic?
PED=∞
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When the gradient of a PED curve is steeper what does it mean?
The product is more inelastic, less elastic.
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What factors make a product more elasticity?
close substitutes, low cost of switching, not a necessity, long time period following price change, a non-habitual consumption, a high % of income, broad range of choice (for alternatives)
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What does cross elasticity of demand measure?
The extent to which the demand for one product changes in response to another
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How do you calculate cross elasticity of demand?
(%∆QD of product A)/(%∆P of product B)
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What does it mean if the cross elasticity of demand between to products has a positive value? CED>O
The products are substitutes for each other and are in competitive demand (e.g. the price of B increase due to a contraction in demand, so demand for A increases)
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What does it mean if the cross elasticity of demand between to products has a negative value? CED
The products are in joint demand. (E.g. price of B falls due to an expansion in demand and so the price of A increases)
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What does income elasticity of demand measure?
The extent to which the demand changes in response to change in income
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How do you calculate income elasticity of demand?
(%∆QD )/(%∆Y)
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What does it mean if the income elasticity of demand between has a negative value? YED
The product is an inferior good. (There for increase in income means decreases demand and vice versa)
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What does it mean if the income elasticity of demand between has a positive value? YED>O
It is a more luxury good (There for increase in income increases demand and vice versa)
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How do you calculate price elasticity of supply?
(%∆QS )/(%∆P)
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What does it mean if PES > 1?
Supply is price elastic, so suppliers are able to change supply quicky when demand changes, making the price change less.
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What does it mean if PES < 1?
Supply is price inelastic so suppliers cannot quickly react to a change in demand, so price change is high
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What does it mean if PES = 0?
Supply is perfectly inelastic, so when demand increases, suppliers do not change demand and so price changes greatly
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What does it mean if PES = ∞?
Supply is perfectly elastic, so suppliers can quickly change supply when demand changes, keeping price the same.
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What factors make PES more elastic?
- Quick production process - Occupationally mobile capital/resources - Large Stocks - Spare production capacity
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What is the buffer stock scheme?
buy supplies when harvest is plentiful, and store for when harvest is down
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What is productive efficiency?
Average cost of production is at its lowest
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What is allocative inefficacy?
When retailers sell at a higher price to get a higher unfair profit
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What is monopoly?
When a retailer directs the price of goods
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What is the name for a single buyer?
Monopsony
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what is market failure?
when markets fail to deliver an efficiant allocation of resources, resulting in a loss of economic and social wellfair
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what is a merit good?
a good that's benefits are grater than consumer realizes and market reflects, and product is under sold. the product has positive externalities
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can you give an example of a merit good?
vacination
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how can welfare loss be reduced for merit goods
reduce information failure, by giving information about benifits of consuming good
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what is a demerit good
a good that is currently being oversold, consumers do not realize the negative eftect of good
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can you give an example of a demerit good?
fast food (junk food)
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how can welfare loss be reduced for demerit goods
goverment reduces information failure by informing consumers of the negative effects of goods with an aim to reduce the demand
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what is positive producer externalities
the production of a good has possitive effects on another firm whoes cost has been reduced as a result. the producer is therefor paying a price higher than they should
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give an example of a situation with positive producer externalities
purifying water for chemical factory, has benefit effects on fishermen
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how can welfare loss be reduced for a situation with possitive producer externalities
substadies can help lower production costs and get MPC to meet MSC causing an expansion in demand
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define scarcity
limited resources which are insufficient to meet unlimited wants and needs
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define externalities
An action taken by one economic agent (consumer or suplier) that has an effect on other people/third parties/those not directly involved
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