Economics A-level Prep
Name the non-price factors that will shift the demand curve?
(MNEMONIC PASIFIC) Population Advertising Substitutes price Income Fashion Interest Rates Complement's price
Why is the demand curve downward sloping?
1. Income Effect- As prices increase, people are less able to buy the same quantity of goods. Demand Contracts. 2.Substitution Effect- As prices increase, other goods/services become more competitive so we switch our consumption.
What are the disadvantages of the price mechanism?
1. Inequality in income and wealth is likely 2.There will be an under-provision of merit goods and under-production of demerit goods.
Explain the methodology that economists use to tackle Economics
1. Observe human behaviour 2.Form hypothesis of how consumers spend. 3. Make predictions from hypothesis. 4.Use evidence to test predictions that either falsify or support the hypothesis.
What are the problems with opportunity cost?
1. Often, not all alternatives are known. 2. Some factors don't have alternative uses. 3. There may be a lack of information on alternatives. 4.Some factors (eg. land)can be hard to switch to an alternative use,
Why are price and quantity supplied directly proportional?
1. The Profit motive. If the price goes up, there is a greater profit possibility. 2. If the quantity goes up, the costs increase as well so price has to increase to maintain the profit margin.
What are the advantages of the price mechanism?
1.Resources will be allocated efficiently to satisfy consumer wants and needs. 2. It can operate without workers 3. Consumers decided production. 4.Prices are kept to a minimum as resources are used as efficiently as possible.
What assumptions are made with the Demand and Supply model?
1.Supply and demand are independent of each other. 2. Ceteris Paribus. 3.All markets are perfectly competitive.
What is a market defined as in economics?
A Market is anywhere where buyers and sellers can exchange goods and services.
What is the difference between a change in quantity demanded and a change in demand?
A change in quantity demanded is a response to a price change and a change in demand is a response to a non-price change. Therefore, a change in quantity demanded refers to movement along the curve whereas change in demand means the entire demand curve shifts.
What is Pareto efficiency?
A condition in which no change is possible that will make some members of society better off without making some other members of society worse off. (Referring to the diagram, when we move from A to B, we help customers who want Item B but would also be harming customers who want Item A.)
What practical measures can a firm take to shift the entire PPF?
A firm can help to better train their employees (Quality of Labour) or simply, hire more employees(Quantity of Labour). They could also buy new equipment (Quantity of Capital).
What is a competitive market?
A market in which there are many buyers and sellers. No single customer or producer can influence the allocation of resources by the market or the price the goods and services.
What is a Veblen good?
A veblen good increases in demand when the price increases. This is unusual as usually price and demand are inversely proportional. Yet veblen goods increase in demand when price increases.
What are the four functions of the price mechanism that help to rid disequilibrium?
ACRONYM 'ARSI' Allocating scarce resources Rations away any excess supplies or demand. Signals that price is too high. Incentives to change the price and increase profits. (NOT IN THIS ORDER)
What is a market economy?
All economic agents are assumed to be rational which means they are rational and make decisions that are best for themselves. These decisions are based on economic incentives.
What points on a PPF are unattainable?
All points that are that are outside the curve are said to be 'unattainable' given the factors of production at the firms disposal. 'In the image, E is unattainable'.
What is allocative efficiency?
Allocative efficiency refers to a situation in which the production satisfies consumer demands.
What is the law of supply?
An increase in price results in an increase in quantity supplied
What is a extension/expansion of demand?
As we decrease the price, the quantity demanded increases. Referring to the diagram. a move from A to B is called an 'extension of demand'.
What crucial assumption do we make when drawing the Demand Curve?
Ceteris Paribus-All things remain equal. This means only the price influences demand, rather than other factors.
What are complementary goods and substitute goods?
Complementary goods are goods that are often used together so they're in joint demand. Substitute goods are those which are alternative to others. Eg. Coce is an alternative to Pepsi.
What choices do the Government have?
Decide how much to intervene in the way producers and consumers act.
What choices do the Consumers have?
Decide what they want to buy and how much their willing to pay for it.
What choices does the Producers have?
Decide what to make and how much their willing to sell it for.
What is derived demand?
Demand for a good or factor of production used in making another good/services.
What naturally happens to disequilibrium in a free market?
Disequilibrium never lasts in a free market because the market has functions that will 'root out' excess demand and supply.
What is Economics defined as?
Economics is considered a social science because it looks at the behaviour of humans and their use of scare resources.
What does the distance between the supply and demand on the graph represent?
Excess demand if below the equilibrium point and excess supply if above the equilibrium point.
What is an increase in supply called?
Expansion/Extension of Demand.
How does considering incentives influence who firms produce for?
Firms will produce products for those who are willing to pay for them.
How does considering incentives influence how firms produce goods?
Firms will try to produce goods in the most efficient way possible to maximise their profits.
How do the four mechanisms rid disequilibrium?
Firstly, the company receive a signal that price is too high as the shelves become stacked(No sales). Then, they receive an incentive to change price to increase profit. Then this helps to ration the excess supply as there are no extra resources. Therefore, we have efficiently allocated our scarce resources.
What are free goods?
Free goods are not limited in supply and so do not have an opportunity cost when they are consumed. These goods are not scarce and so will not have a price. An example is air.
How do costs of production in general affect supply?
If the costs of production increase for example, a firm is unable to produce the same amount of products for the original price. This will result in an increase in price in order to maintain the profit margin.
How can we shift the PPF to aid only one of the items on a micro-PPF?
If we increase the quantity or quality of our factors of production that favour 1 object, we increase the output of only 1 object. Referring to the diagram to move from A to B, we would increase the quantity or quality for the means of production that aid motor vehicles and not food.
What are the non-price factors affecting supply?
Indirect Tax Productivity Number of firms Technology Subsidies Weather
Why might economic decisions not always make economic sense?
Individuals may act based on normative statements, moral views, political judgement etc.
What does economic growth do the Macro-PPFs?
It causes a shift in the PPF as the maximum output has increased.
What does a change in price cause on the demand curve graph?
It causes movement along the curve (Not a shift of the curve).
What does price elasticity of supply and price elasticity of demand influence?
It influences the size of changes in the equilibrium price and quantity caused by supply and demand curve shifts. In an elastic supply curve, shifts will have a larger effect on quantity than price.
What are possible reasons for productive inefficiency?
It is possible that the means of production have not been used as effectively as possible. So we have unemployment of labour or capital.
What does a 'contraction of demand' refer to?
It refers to the price increasing which means less quantity is demanded. Referring to the diagram, a move from A to B is 'a contraction of demand'.
What are the four factors of production?
Land, Labour, Capital and Enterprise
Exam Question: State and explain three factors of production which would be necessary for opening a new restaurant. (6)
Land- The restaurant would need to be somewhere so 'land' is needed. Labour- The actual building of the restaurant requires labour. However, it's general upkeep would need cleaners etc. So labour is needed. Enterprise- Entrepreneurship is needed as someone is needed to take a risk and start a new restaurant.
What is the law of demand?
Law of demand states that there is an inverse relationship between price and quantity demanded.
What is market equilibrium?
Market equilibrium is the point at which the supply and demand curves intersect Market equilibrium is the price and quantity where the market will naturally go to.
What does 'Land' include?
Non-renewable resources such as natural gas, oil and coal. Renewable resources, materials, water and animals.
What's the difference between normal and infury goods?
Normal goods are goods that demands rise as incomes rise. For example, luxury clothes are normal goods. Infury goods are goods that as incomes rise, demands will decrease. For example, eg. cheap clothings.
What are Normative statements?
Normative Statements are subjective statements which contain a value judgement.
Why are normative statements important?
Normative statements are important because value judgement influence decision making and government policy.
What is a Positive statement?
Positive Statements are objective statements that can be tested by referring to the available evidence.
What is another term for a market?
Price mechanism.
How does considering incentives influence what people produce?
Producers will try to make goods that the firm can make a profit from.
Who are the '3 agents' in an economy?
Producers-firms or people that make goods or provide services. Consumers-people or firms who buy the goods and services. Governments- a government sets the rules that other participants in the economy must follow. However it also is a consumer.
What are two examples of economic activity?
Production of goods and provision of services.
What is productive efficiency?
Productive Efficiency describes the situation in which we use all our factors of production to get maximum production. Anything on the line is 'productive efficiency'. (In the image B,D and C are productively efficient).
What is productive inefficiency?
Productive inefficiency is when we do not use all the factors of production. Anything within the curve is said to be 'Productively inefficient'. (In the image, (A) is productively inefficient).
Basic economic problem
Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce.
What two things do PPFs illustrate in economics?
Scarcity and choice in economics.
What is the problem that economists run into that scientists do not when they conduct experiments?
Scientists set up experiments so that only 1 variable changes. Yet this is not possible in the real world.
What determines the equilibrium price and quantity?
Supply and demand.
What does supply mean?
Supply is the quantity of a good/service that producers are willing and able to produce at a given time.
What is a trade-off?
The alternative you face if you decide to do one thing rather than another
What does microeconomics focus on?
The choices made by individuals and businesses.
What is opportunity cost?
The cost of the next best use of your time or money when you choose to do one thing rather than another
What is consumer surplus?
The difference between the price customers are willing and able to pay for a good and service and what they actually pay.
What does macroeconomics focus on?
The economy as a whole.
How do non-price affect the Supply curve?
The entire curve shifts either to the left or the right.
When we have concave PPFs, what occurs as you move further along the curve?
The factors of production become more suited to 1 variable. This means we have the law of increasing opportunity cost whereby increasing production of 1 object results in a greater foregone production of another.
What are market forces?
The free interaction of supply and demand.
What is the purpose of economic activity?
The purpose is to increase people's economic welfare by creating outputs that satisfy their various needs and wants.
What is demand?
The quantity of goods that the consumers are able/willing to buy at a given price in a given time.
What is price elasticity of demand?
The responsiveness of demand to a change in price.
What is price elasticity of supply?
The responsiveness of supply to a change in price
What is labour?
The work done by people.
How does price related factors affect the Supply curve?
There is movement along the supply curve.
How can we increase production if we are already 'Productively efficient'?
They can reallocate resources to help specialise in one item and increase its production. However, this would mean that we decrease another item's output. Referring to diagram, if we wanted to increase production of butter, we can reallocate resources and move from D to C.
What do the non-price factors cause in relation to the demand curve graph?
They cause a shift of the graph (Not movement along the curve)
What do PPFs show from a micro-perspective?
They show the maximum level of production of 2 goods/services given a certain level of factors of production. They also show the different combinations of 2 goods/services that can be produced given certain factors of production.
What do PPFs show from a macro-perspective?
They show the maximum level of production of ALL goods/services given a certain level of factors of production. They also show the different combinations of ALL goods/services that can be produced given certain factors of production.
How do economists solve the problem of multiple variables in an economy?
They use the assumption known as ceteris paribus which is Latin for 'all other things remaining equal'.
If demand shifts to the left, how does this affect the point of equilibrium?
This causes a reduction in both price and quantity
If the supply curve shifts to the left, how does this affect the point of equilibrium?
This causes an increase in price and decrease in quantity.
If the demand curve shifts to the right, how does that affect the point of equilibrium?
This causes an increase in quantity and price.
If the supply curve shifts to the right, how does this affect the point of equilibrium?
This causes an increase in quantity but a decrease in price.
What is Economic activity?
This involves combining the factors of production to create outputs that people can consume.
Can we determine allocative efficiency from a PPF?
We are unable to determine allocative efficiency simply from looking at a PPF. We have to know what consumer demand is (We cannot know this from a PPF).
How do we increase production if we are 'Productively Inefficient'?
We can employ all the factors of production that are not being used. For example, we can use idle capital or unemployed labour.
How do we increase efficiency of both items if we are already 'productively efficient'?
We can increase both the 'quantity and quality' of the means of production. This would help shift the entire curve further out which would increase production of both items/services.
What are 3 three fundamental questions that arise because of the Basic economic problem?
What to produce? How to produce it? Who to produce it for?
What is the law of increasing opportunity cost?
When all resources are being used (during productive efficiency), an increase in the production of one good will lead to greater forgone production of another good.
What is composite supply?
When demand for a product can be satisfied by the supply of two or more goods that are substitutes.
What is disequilibrium?
When the demand does not equal the supply
What is joint supply?
When the production of one good or service involves the production of another. This is also an example of markets being interrelated.
What is competitive supply?
When two or more alternative goods can be produced from the same factors of production.
What happens when we have linear PPFS?
When we have a directly proportional relationship between the two goods/services, we have a constant opportunity cost because the factors of production never become more suited to one variable.
What is Enterprise?
Willingness to take a Risk to make a profit
Is it possible to have economic activity without income being produced?
Yes. Doing homework for example, is still economic activity as we combine factors of production to create an output.
What is Capital?
man-made aids to production. This includes Equipment used in producing goods and services.
