Econ

• What are the 6 characteristics of money? (PUDDLE)

  Portability- Portability is that money must be able to go wherever such that it is easy to transport as people travel.

  
  

  Uniformity/can't be counterfeited- Uniformity of money calls for a standardization of money so that it looks the same and can't be faked of counterfeited

  
  

  Durability- Durability of money is such that it can be used over and over again; hence it must survive wear and tear for long periods.

  
  

  Divisibility- Money must be easily divided into smaller denominations to enable a person to buy different products.

  
  

  Limited supply/valuable- Money must be available only in limited quantities to maintain its value

  
  

  (Easily) Acceptible- Everyone must be able to accept money in exchange for goods or services
• What are the four factors of production?

  'Land' - all natural resources including oil, fish, soil, forests. The reward for land is rent.

  'Labour' - the skills of the workforce and the quantity of labour they produce. The reward for labour is wages.

  'Capital' - investment in man-made aids to production including buildings, factories, computers. The reward for capital is interest.

  'Enterprise - the risk-taking role of business owners undertaken in the pursuit of profit. Can be considered as a specialised form of labour. The reward for enterprise is profit.
• What is the fundamental economic problem?

  
  

  What is meant by scarcity?

  
  

  What are the three basic questions? (explain them)

  There are finite resources and infinite wants, so we must make choices. What to produce, how and for whom.

  
  

  A situation in which wants and needs are in excess of the resources available

  
  

  What to produce?- because we can't produce everything, we need to decide what to produce and in what quantities.

  How to produce?- We need to consider how resources are used in order to receive the best outcome/maximum use of the resources available. However, this may conflict with other economic concerns, such as equality and environment.

  For whom to produce?- because we can't satisfy all the wants of the population, decisions must be made on how many of each persons wants are to be satisfied.
• What is a normative statement

  
  

  What is a positive statement


  It is a statement that contains a value judgment and cannot be tested

  
  

  It is a statement that is objective and is testable
• What is the PPC?

  
  

  What does a movement along the PPC imply?

  A production possibility curve shows the maximum potential output an economy can produce if all resources are fully and efficient utilised.

  
  

  Movement along the PPC implies an opportunity cost in terms of the output of one good foregone to gain the output of another
• What is economic growth?

  
  

  What is actual economic growth?

  
  

  What is potential economic growth?

  Economic growth is a long-term expansion of the productive potential of the economy, shown by an increase in real GDP/national output

  
  

  Actual economic growth can also be known as demand side economic growth because it is affected by changes in the demand in an economy. It is an increase in output as measured by real GDP/ national income. It can be achieved by shifting AD (Aggregate demand) to the right by increasing AD, by influencing any of the factors of aggregate demand.

  
  

  Potential economic growth deals with the supply side of the economy. It is an increase in the productive capacity (potential). An increase in the short term/long term aggregate supply will cause potential economic growth. The short term deals with costs of production and the long term is affected by changes in the quality and quantity of the factors of production.
• What is opportunity cost?

  The value of the benefit foregone when choosing the next best alternative
• What is meant by constant and increasing opportunity cost? 2 Diagrams

  Constant opportunity costis an economic situation in which every additional unit of capital goods that are produced requires the sacrifice of the same amount of consumer goods.

  
  

  Increasing opportunity costis an economic situation in which, as you continue to increase production of one good, the opportunity cost of producing that next unit increases.
• What is division of labour?

  
  

  What is specialisation?


  The breaking up of the production process into separate tasks, whereby worker specialise in one or two tasks

  
  

  Specialisation is when a nation or individual concentrates its productive efforts on producing a limited variety of goods where they have an advantage over others
• What are the advantages of division of labour?

  
  

  What are the disadvantages of division of labour?

  Advantages

  - Division of labour is usually quicker and cheaper than having one person complete the whole good themselves

  - It allows workers to become more specialised and proficient in their given task, leading to an improvement in the quality of the finished product and an increase in productivity

  
  

  Disadvantages

  - Increased interdependence; if one worker is ill then the whole production line fails

  - Job dissatisfaction

  - Inability to be flexible as workers gain little skills, so if they become unemployed it will be hard to find a new job
• What are the advantages of specialisation?

  
  

  What are the disadvantages of specialisation?

  Advantages

  - Allows trade and thus, standard of living will rise as employment rises

  - Allows country to specialise in what they are comparatively best at, so less is wasted and economy becomes more productive

  
  

  Disadvantages

  - There is always a possibility that the specialist skills and accumulated experience may become redundant as the economy develops

  - Individuals need to be flexible and multi-skilled, so unemployment may result due to changing consumer wants
• What is the price mechanism?

  
  

  What are the three functions and their definitions?

  
  

  What is transmission of preferences?


  The price mechanism is an economic system which allocates resources through the interactions of supply and demand

  
  

  The signalling function- Prices help to determine where and how resources should be allocated. For example, if prices increase due to rising demand, this 'signals' a message to entrepreneurs to allocate more resources to this market

  The rationing function- The price mechanism allocates scarce resources to those buyers who are prepared and willing to pay a high enough price.

  The incentive function- Prices provide an incentive to existing producers or consumers to supply/demand more or less because with a price increase, there is a higher possibility or more revenue and increased profits for suppliers and a higher incentive for buyers to purchase less.

  
  

  The automatic way in which the free market allows the ever changing preferences of consumers to be made known to producers. If it is not liked, then it is not bought, relaying the message back to producers.
• What is market equilibrium?

  
  

  What is ceteris paribus?

  Market equilibrium is a position where the market price has no tendency to change, assuming ceteris paribus, because planned demand equals planned supply.

  
  

  Ceteris paribus is an assumption that all other factors are held constant. In this way, economists can model one change at a time.
• What is a specific tax and diagram

  
  

  What is an ad valorem tax and diagram

  
  

  What is a direct tax

  
  

  What is an indirect tax

  A specific tax is one of the two types of indirect taxes. It is a tax per unit on a good or service.

  
  

  An ad valorem tax is one of the two types of indirect taxes. It is a percentage tax on a good or service.

  
  

  A direct tax is a tax on income or wealth e.g. income, corporation, council, inheritance

  
  

  An indirect tax is a tax on expenditure, collected by the producer, on behalf of the government e.g. VAT, tobacco and alcohol duty

  
• What is a marginal rate of taxation?

  A marginal tax rate is the tax rate an individual would pay on one additional dollar of income
• What is a transfer payment?


  A transfer payment made or income received without goods or services being received in return/being paid for e.g. benefit payments, pensions or subsidies
• To what extent are transfer payments beneficial?

  Yes:

  They protect the most vulnerable groups in the community. They result in less poverty and provide for a more equitable distribution of income.

  
  

  No:

  They can act as a disincentive to accept work so output in the economy might be less and this is therefore a form of inefficiency. Also, if tax is not collected and there is an elderly population then transfer payments are likely to be small, so income is not evenly distributed. As well as this, those who work or have worked in the informal sector are not covered by these schemes.
• Four types of economies and their definitions

  Free market- an economy where resources are allocated by the interactions of supply and demand, with minimal intervention by the government

  Mixed economy- An economy where resources are allocated by the interactions of supply and demand as well as government intervention

  Planned- An economy where resources are allocated by government allocation, with minimal allocation done by the price mechanism.

  Transition- where an economy moves from a centrally planned to free market or mixed
• Four sectors of the economy and their definitions

  Primary: agriculture,fishing and activities such as mining and oil extraction

  
  

  Secondary: manufacturing

  
  

  Tertiary: Services

  
  

  Quaternary: knowledge based part of the economy and the provision of info, such as research
• Characteristics of the transition process (5)

  1. Liberalisation of markets to give prices a bigger role in allocating scarce resources between competing uses

  2. Privatisation of government (state) assets - transferred to the private sector

  3. Reduction in tariff and other trade barriers so that the economy becomes more open

  4. Reduction in the scale and scope of government subsidies e.g. to loss making industries

  5. Legal reforms e.g. to protect private property rights

  6. Banking reform and interest rate liberalisation
• What are the advantages of transition economies?

  
  

  What are the disadvantages of transition economies?

  Advantages:

  - Efficient allocation of scarce resources - resources tend to go where the market return is highest

  - Competitive prices for consumers and suppliers look to increase and protect their market share

  - Competition drives innovation and invention in markets which can bring higher profits for businesses and better products for consumers

  - The profit motive stimulates capital investment which encourages economies of scale and lower prices in the long run

  - Competition in the form of international trade in goods and services helps to reduce domestic monopoly power and increases choice

  
  

  Disadvantages:

  - The removal of subsidies / state aid in many countries led to a sharp rise in unemployment as unprofitable businesses shed thousands of jobs

  - Inflation increased as market subsidies and price ceilings were taken away - in some cases countries experienced hyper-inflation as prices moved towards market levels

  - In many countries, a severe recession followed in the early stages of transition

  - An underlying lack of cost and no-price competitiveness meant that many transition countries ran large trade deficits

  - Wealth and income inequalities widened

  - Many countries have experienced a brain drain of younger and skilled workers in search of better pay and conditions in richer nations
• The 4 canons of taxation (TEEC)

  Equitable - taxes should be paid by those who can afford to pay tax and evenly distributed across the economy

  
  

  Economic - the cost of the collection of tax should be minimal

  
  

  Transparent - the payer should exactly understand how much is to be paid

  
  

  Convenient - the payment should be at a time convenient to the payer
• What is consumer surplus

  
  

  What is producer surplus


  Consumer surplus is the difference between the price a consumer is willing to pay for a product and the amount they actually pay. Represented by the area below the demand curve and above the price line

  
  

  Producer surplus is the difference between the price a firm is willing to sell for and the actual price received. Represented by the area above the supply curve and below the price line

  
• What is direct provision?

  This happens when there is a misallocation of scarce resources. When the government directly controls the supply of the good or service. The government may supply merit goods and public goods directly to consumers. e.g. NHS in UK. These goods are usually provided free of charge because of the free rider problem.
• To what extent is direct provision beneficial?

  Yes:

  - It lowers inequality

  - It increases standard of living and reduces external costs through the provision of merit goods

  
  

  No:

  - Main criticism is that the market over provides where there is no direct charge so resources are not allocated efficiently.

  - Many consumers can actually afford to pay a charge, so reducing the tax burden would be a better allocation of resources
• Four types of government intervention

  Regulations

  Financial intervention: taxes and subsidies

  Government provision

  Maximum and minimum price controls
• What is a subsidy? Subsidy diagram


  A government grant, given to the producer, in order to lower the cost of production and increase output/consumption. The subsidy shifts the supply curve down vertically. Multiply this by the number of units to give total expenditure.

  
• What is price elasticity of demand?

  
  

  What is inelastic demand?

  
  

  What is elastic demand?

  
  

  What is unitary elastic demand?

  
  

  What is perfectly elastic demand?

  
  

  What is perfectly inelastic demand?

  Measures the responsiveness of quantity demanded of a good to a change in price.

  
  

  A rise in price leads to a less than proportional change in quantity demanded. PED value between 0 and -1

  
  

  A rise in price leads to a more than proportional change in quantity demanded. PED value between -1 and -infinity

  
  

  When a change in price leads to an equal proportional change in quantity demanded. PED = -1

  
  

  Perfectly elastic demand means that any change in the price would cause quantity demanded to shift to zero. The curve is horizontal and PED = infinity. E.g. applies to highly competitive markets where suppliers have no "Pricing power" such as buying foreign currency (product of pounds is exactly the same)

  
  

  Perfectly inelastic demand means that a consumer will buy a good or service regardless of the movement of price. In order for perfectly inelastic demand to exist, there can be no substitutes available. The curve is vertical and PED = 0. E.g. insulin for a diabeticSee an expert-written answer!We have an expert-written solution to this problem!
• What is price elasticity of supply?

  
  

  What is inelastic supply?

  
  

  What is elastic supply?

  
  

  What is perfectly elastic supply?

  
  

  What is perfectly inelastic supply?

  Measures the responsiveness of quantity supplied of a good to a change in price.

  
  

  A rise in price leads to a less than proportional change in quantity supplied. PES value between 0 and +1

  
  

  A rise in price leads to a more than proportional change in quantity supplied. PES value between +1 and +infinity

  
  

  Perfectly elastic supply means that any change in the product price would immediately cause the supply to shift to zero.

  
  

  A product has a perfectly inelastic supply when the quantity supplied is the same regardless of price.
• To what extent does knowledge of PED affect business decisions?

  Yes:

  - Businesses can use PED to predict how total revenue will change with an increase/decrease in price

  - Businesses can use PED to exploit the opportunities presented to them. For example, it is cheaper to buy airline tickets a few months rather than a few days before travel, because businesses know that tickets become more inelastic the shorter the time.

  - Price elasticity of demand also helps firms in devising their marketing strategies and targeting niche segments. An example is high net worth individuals whose demand for luxury is inelastic and hence hotels advertise suites to them. On the other hand, budget travelers have an elastic demand and hence are targeted for 'Standard' rooms.

  - Allows firms tax burdens to be shifted and governments to decide which products to tax

  
  

  No:

  - Businesses may not be able to switch their production efforts

  - PED only works at a given period of time because the demand of consumers change over time.

  - The producers also do not have ability to change prices as and when they like to.
• To what extent does knowledge of XED affect business decisions?

  Yes:

  - Knowing the XED of its own and other related products enables the firm to map out its market. Mapping allows a firm to calculate how many rivals it has, and how close they are. It also allows the firm to measure how important its complementary products are to its own products.

  - XED allows the firm to develop strategies to reduce its exposure to the risks associated with price changes by other firms, such as a rise in the price of a complement or a fall in the price of a substitute.

  
  

  No:

  - Some products may have no close substitutes or complement (eg alcohol as a whole) so XED is irrelevant

  - Firms may not be able to use horizontal or vertical integration due to the high financial barriers

  - XED is irrelevant in monopolistic markets
• To what extent does knowledge of YED affect business decisions?

  Yes:

  - In markets such as China and India, as incomes increase then people will demand more second cards because it is a luxury item.

  - In times of economic growth, firms should produce more normal goods in order to maximise total revenue.

  - In times of recession, firms should produce more inferior goods in order to maximise total revenue.

  
  

  No:

  - YED will change for different consumers, it is not possible to measure the change in consumers' income individually.

  - Though it can be possible to predict an economic cycle, firms have no control over the economic cycle

  - Firms may not be able to quickly reallocate their production efforts to satisfy ever-changing consumer wants
• Factors affecting PED (SPLAT)


  Substitutes/complements

  Proportion of income

  Luxury/Necessity

  Addictiveness

  Time
• Factors affecting PES (TLC)

  Time

  Laws

  Capacity
• What is cross price elasticity of demand and formula?

  
  

  What is a substitute?

  
  

  What is a complement?

  Measures the responsiveness of quantity demanded of good A to a change in price of good B.

  
  

  XED = % change quantity demanded of good A ÷ % change price of good B

  
  

  A pair of goods which are considered to be alternatives to each other by consumers. Positive XED

  
  

  A pair of goods that are consumed together. These goods are in joint demand. Negative XED
• What is joint demand?

  
  

  What is alternative demand?

  Joint demand is when the demand for one product is directly and positively related to market demand for a related good or service.

  
  

  Alternative demand is when the demand for one product is inversely related to market demand for an opposite good or service.
• What is income elasticity of demand?

  
  

  What is a normal good and YED value

  
  

  What is an inferior good and YED value

  
  

  What is a luxury good and YED value

  Measures the responsiveness of quantity demanded to a change in income

  
  

  A good whose demand increases when income increases. YED between 0-+1

  
  

  A good whose demand falls when income increases. YED between 0--1

  
  

  A good whose demand increases more than proportionately when income increased.
• What is incidence of tax and diagram

  The distribution of the burden of an indirect tax between buyers and sellers.

  
  

  Stripped area above original price is paid for by consumers

  
  

  Stripped area below original price paid for by producers

  
• What is derived demand?

  
  

  What is effective demand?

  
  

  What is latent demand?

  The demand for a factor of production that comes from the demand for the product that it is used to make

  
  

  The willingness and ability of consumers to purchase goods at different prices, rather than just a mere desire to purchase (latent demand). It shows the amount of goods that consumers are actually buying - supported by their ability to pay.

  
  

  Latent demand exists when there is willingness to purchase a good or service, but where the consumer lacks the purchasing power to afford the product.
• What is joint supply?

  When the production of one good e.g. beef leads to the production of a by-product e.g. leather