These are my full 120+ cards for Edexcel A Economics Theme 1: Introduction to Markets and market failure. These are converted to text from Anki but going to file => import will give you the exact same Anki cards as the ones that I use. Incredibly detailed flashcards, containing key evaluations t...
How are assumptions made for economic models (what is deduction, induction) -
Assumptions about the behaviour of economic agents must be made to create economic
models<br><br>Assumptions are made following 2 approaches:<br><br>1)
<b>Deduction</b>: start with a hypothesis (e.g create a model on investment based
on a theoretical view of firm behaviour)<br>2) <b>Induction: </b>collect evidence
(e.g create a model on housing market by examining data when devising assumptions
about house buyers)
What is rationality and utility for <b>consumers </b>like? - In classical and
neoclassical economics, decision makers are expected to be rational<br><br>- for
consumers this means buying products that maximise <b>utility </b><u>on a limited
income</u><br><br>- <b>utility: </b>the satisfaction or benefit derived from
consuming a good
what is rationality and utility for <b>firms</b> like?- For firms, rational
economic decisions also involve maximising utility<br><br>- Utility for firms is
taken to be profit<br><br>- Maximising profit is axcheived through producing as
efficiently as possible and making things that consumers both <u>need</u> and
<u>want</u>
What is rationality and what do economics agents require to make rational
decisions? <b>Rationality: </b>using all the information you have available to
make optimal choices<br><br><u>Economic agents require 3 things to make rational
decisions:</u><br>1) Time<br>2) Information<br>3) The ability to process
information
What is <b>behavioural economics</b> ? - <u>behavioural
economics</u> is a school ofeconomic thought based on evidence and
observations to develop assumptions of economic decision making<br><br>- This means
it uses an <u>inductive</u> approach rather than the
<u>deductive</u> approach used in <u>Classical and
Neoclassical</u> economics<br><br>- Behaioural economics assumes individuals
have <b>bounded rationality: </b>individuals wish to maximise utility but are
unable to do so due to a lack of time, information, ability to process information
what aspects of human behaviour prevent rational decision making? "- bounded
reality is the assumption that individuals wish to maximise utility but cant
because of a lack of time, info and lack to process info<br><br><u>Several aspects
of human behaviour prevent rational decision making</u><br>1) <b>Habitual Behaviour
/ Consumer intertia</b>: Habitual behaviour is a constant pattern of behaviour
followed by a person. Consumer inertia is the tendency to continue using or buying
a product even when superior options exist (as they are ""used"" to it)<br><br>2)
<b>People are influenced by the behaviour of others: </b>follow societal norms.
Consumers more likely to queue up for restaurant with long queue than empty queue.
Also may be peer pressured into cigarettes for example<br><br>3) <b>Consumer
weakness at computation: </b>Consumer may find it difficult to calculate the
probability of something happening when making purchasing decisions. So they are
unable to exercise self control. For example, they spend more in short term even if
they know saving means they can consume more in long run. Another example is
underestimating long term health consequences of eating proccessed meats"
What are rational decisions like with <b>governments</b> - Rational economic
decisions involve maximising utility. Utility for governments is <u>social
welfare</u><br><br>- Governments are voted in by public and work for public so
should aim to maximise their satisfaction by taking decisions that increase social
welfare
what is meant by demand? Demand is the <u>quantity</u> of a given good or
service that consumers are <u>willing and able to buy</u> at a given
<u>price</u> over a given <u>time period</u>
What is the relationship between price and quantity (law of demand)? How is this
shown on a demand curve "- Ceteris paribus, as the price of a good
<u>increases</u>, quantity demanded <u>decreases</u><br>- Conversely, as the price
of a good <u>decreases</u><i>, </i>quantity demanded
<u>increases</u><br><br><u>Demand Curve<br></u><img src=""paste-
a17d6f5aef37735a136e690ba59e65a70d78e9a7.jpg""><br>A price change leads to a
,<b>movement</b> along the demand curve<br><br>- a <u>decrease</u> in price
results in an <u>extension/expansion</u> in demand.<br>- an
<u>increase</u> in price results in a <u>contraction</u> in
demand<br><br>INCOME effect: as prices go up, out income cannot stretch as far so
less able to buy that product<br>SUBSITUTION effect: as prices go up, other goods
and services become more price competitive so we switch out demand towards those
G/S"
What is the difference between a <u>movement</u> and <u>shift</u> "-
<b>Movement: </b>caused by a price change<br><img src=""paste-
a17d6f5aef37735a136e690ba59e65a70d78e9a7.jpg""><br><br>- <b>Shift: </b>caused by a
non price change (e.g more advertising)<br><br><img src=""paste-
77bec5f9270bc77dafa6464c557c7e62142e8e42.jpg"">"
What are subsitute goods and complement products? How can these (+ Population size)
affect demand? <u>Subsitute</u><br>- <b>Subsitute Goods </b>are two alternative
products that could be used for the same purpose. <br><br>- Increase of price for a
good leads to increase of demand for a subsitute good as the original good may
become too expensive so people switch over to the subsitute good which has a lower
price (+ vice versa)<br><br>- so this will lead to a rightward <b>shift </b>of
demand for the subsitute good<br><br><u>Complement</u><br>- <b>Complementary
Products</b> are products that are used together<br><br>- Increase of price of
the original good decreases the demand for both the original and the complement as
they are used together<br><br>- This will result in a leftwards
<b>movement<i> </i></b>for the original and a leftwards <b>shift </b>for
the complement<br><br><u>Population</u><br>- An increase in population increases
demand due to more people<br><br>- So increase of population will cause a
rightwards <b>shift </b>in demand for a product
What are 4 (other) conditions of demand apart from subsitutes, complements,
population 1) A <b>change in age structure</b> of a population can affect
demand<br><br>2) <b>changes in income</b> can affect demand. In general, an
increase in real income leads to a rise in demand (as more people can afford that
product)<br><br>3) <b>advertising </b>can affect demand. If a firm carries out a
successful advertising campaign, demand for that product is likely to
increase<br><br>4) <b>changes in consumer tastes / preferences</b> is likely
to affect demand. More awareness of global warming is likely to increase demand for
electric cars
What is <u>revenue</u> and <u>total revenue</u>? <b>Revenue: </b>the income
that the government or a company receives<br><br><b>Total
Revenue</b>:<b> </b>Price X Quantity
What is supply? Supply is the <b>quantity</b> of a good or service that
firms are <b>willing to sell/produce</b> at a given <b>price</b> over a
given <b>time period</b>
What is the relationship between <u>price</u> and <u>quantity supplied</u>?
How is this seen on a supply curve? "- Ceteris Paribus, as the price of a good
<b>increases</b>, quantity supplied <b>increases</b><br>- Conversely, as the price
of a good <b>decreases</b>, quantity supplied <b>decreases<br></b><br>REASON:
Profit motive. When price goes up, there is more profit to be made so they produce
more. When quantity goes up, suppliers want a higher price to cover higher cost of
production<br><br><u>Supply Curve<br></u><img src=""paste-
57ab7854c62666d332038646a034ca45d50d0b95.jpg""><br><br>Changes in price level
results in a <b>movement</b> along the supply curve<br><br>- An <b>increase
</b>in price results in an <b>extension/expansion</b> in supply<br>- A
<b>decrease </b>in price results in a <b>contraction </b>in supply"
What does the supply curve assume? The supply curve assumes two things:<br><br>1)
Firms are motivated to produce by <b>profit</b><br><br>2 The cost of producing a
unit <b>increases </b>as output increases
What are 3 Conditions of Supply? 1) <b>Changes in production costs: </b>If costs
of making a product increases, firms will put up prices to avoid making a loss.
Less will be supplied at each price so the supply curve will <u>shift</u> to
the left<br><br>2) <b>Improvement in technology / innovation: </b>New technology
, leads to more efficiency and lower production costs. So firms will lower their
prices and supply curve will <u>shift</u> to the right<br><br>3) <b>Number of
firms in the market: </b>More firms increases supply so supply curve
<u>shifts</u> to the right<br><br><br>ALSO: indirect tax, subsidy
Define a market - A <b>market</b> is anywhere buyers and sellers meet to
exchange money for goods and services. This can be physical like in an actual shop
or non physical like online
What is a <b>shortage? </b>How is this shown on a diagram "- Excess Demand /
Shortage is where quantity demanded exceeds quantity supplied at a <u>given
price</u><br><br><img src=""paste-
c91401d15abc588a8b3ad8cd12e89385261abd6a.jpg""><br><br>- Firms put up prices from
P2 to P1 and supply more (shown by an extension along the supply curve)<br>"
What is a <b>glut</b>? How is this shown on a diagram "- A glut is also known as
Excess Supply<br><br>- Excess Supply / glut is where quantity supplied exceeds
quantity demanded at a <u>given price</u><br><br><img src=""paste-
ede29449a0c6a29de8112e0d2316e22b0c25bf58.jpg""><br><br>- Firms reduce prices from
P2 to P1 which leads to a contraction along the supply curve"
What is the <b>equilibrium price</b>? Why is this known as market clearing price
"- Equilibrium price is where the supply of goods and services
<b>matches</b> quantity demanded at a <u>given price</u><br><br>- It is known
as market clearing price as at this price the exact quantity that producers take to
market will be bought by consumers with nothing ""left over""<br><br><img
src=""paste-96742b6549097f318499664eaff8eddcbd39eca8.jpg"">"
What is Direct and Indirect tax? Give examples of each - <b>Direct </b>tax: a
tax levied directly on an <b>individual or organisation</b><br>- Examples: Income
tax, Corporation tax<br><br>- <b>Indirect </b>tax: a tax levied on a <b>good or
service</b><br>- Examples: fuel duty, beer duty, VAT
What is specific tax (give examples). What is a diagram for this like "- A
<b>specific tax</b> is a fixed amount at all prices. It causes a parallel
shift in the supply curve<br><br><img src=""paste-
2bf491601fc732464ae7d26c08b8e3cff7cd3ea6.jpg"">"
What is <b>ad valorem tax</b>? What is a diagram for this like? "- <b>ad valorem
tax</b> is usually expressed as a percentage and increases as the amount sold
increases<br><br>- because it increases as quantity increases, it causes a <b>non
parallel</b> shift in the supply curve<br><br>- Examples are VAT, important
tarrifs<br><br><img src=""paste-c3eb75d46a55656162970cbdc6234fbaf40230e4.jpg"">"
Why do government impose taxes? Governments impose taxes in order to:<br><br>1)
Raise government revenue (can be spent on schools, hospital, roads)<br><br>2)
Regulate certain economic activities (.eg smoking)
Why do governments give subsidies? What are subsidies? - Governments give
<b>subsidies </b>to firms to encourage production<br><br>- <b>subsidy: </b>money
given by the government to encourage production. They also lower production
costs<br><br><u>A subsidy leads to a right shift in the supply curve</u> (as
lower production costs)
What is shared economic incidence like? What is a diagram of it "<img src=""paste-
94b7e3896c6928a09086316bc5a70d92a81020cd.jpg""><br><br>- A government may put a $6
fixed tax on a good. But the market is competitive so the seller is concerned with
a loss of sales<br><br>- SO: the seller puts the price up by $4 and pays the
remaining $2 burden to the government themselves<br><br>- BOTH the consumer and
producer are worse off, hence shared economic incidence<br><br><b>where the burden
of tax is shared between the producer and the consumer</b>"
"What is <b>Price Elasticity of </b><u style=""font-weight: bold;"">Demand</u>?
When is Demand Price <b>inelastic</b> and Price <b>elastic</b>?" <b>Price
Elasticity</b> <b>of Demand </b>measures the responsiveness of demand given a
change in price<br><br>- Demand is <b>Price Elastic</b> when a change in price
causes a proportionally <u>larger</u> change in demand (e.g price fall of 5%
causes demand increase of 20%)<br><br>- Demand is <b>Price Inelastic</b> when
a change in price causes a proportionally <u>smaller</u> change in demand (e.g
price fall of 20% causes demand rise of 2%)
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