microeconomic concepts

1. Advantages of - Efficiency increases 11. Consumer - How much a buyer is prepared to pay minus
Specialisation - Increases exports surplus how much they actually do
- Employment increases - Calculate the area of triangle (top surplus
- Quality of product increases price minus market price, timesed by market
- Cost of product decreases quantity then halved)
- Profits increase - Difference between consumer surpluses is
- Quantity increases difference in triangle areas
2. Aggregate - Consumption is the biggest component 12. Cost-benefit - Method of assessing the social costs and
Demand - If C rises then assuming Ceteris Paribus, so analysis benefits of a big investment project
will AD - Applies a monetary value of every cost &
benefit
3. Allocative - Where an economy produces goods that
- Social Benefits minus Social Costs
Efficiency consumers demand - only happens when
- Limitations (eval): difficult to measure,
social welfare is maximised (meeting the
unanticipated costs, future uncertain costs,
consumers wants)
information failure, opinionated
4. Asymmetric - When the consumer doesn't have the
13. Cross - The extent to which demand for one product
Information information that the producer has
Elasticity of changes in response to change of another
- Used to suppliers advantage
Demand (XED) product
5. The Basic - The allocation of scarce resources between - %change in Qd of product A / %change in
Economic competing users price of product B
Problem - What goods and services should an
14. Demand - The willingness and affordability to buy a
economy produce?
product at a certain price level
- How should goods and services be
produced? 15. Demerit - Social cost of consumption > private cost of
- Who should get the goods and services Goods consumption
produced? - Over-provided (profit incentive) and over-
consumed (cheap, ST pleasure) in free
6. Calculating - Private costs + External costs = Social
market
the costs
- Cigarettes, burning fossil fuels
externality - Private costs effect the consumer/producer
when they consume/produce the product 16. Direct Taxes - Taxes on incomes and wealth
- Private benefits + external benefits = social - Income tax, Corporation tax, Inheritance
benefits tax, capital gains tax, national insurance
contributions
7. Causes of - More availability of resources
Economic - Increase in Labour Force 17. Disadvantages - Can't produce other products
growth - BR increase, DR decrease of - Increases reliance of imports
- Migration Specialisation - Limited skills
- Women in work - Structural Unemployment
- More Capital per worker - Training
- Discovery + extraction of more resources - Output can be disrupted by weather,
- Improvements in organisation of workforce disease etc
- Advances in technology - If demand suddenly goes down due to other
competitors or taste changes
8. Causes of - Law of unintended consequences
- Demand may remain high but supply cannot
Gov Failure - Decisions solely for political interest
physically increase
(Trouble) - Low value for money from investment (could
decrease productivity, bureaucracy costs, 18. Division of - Leads to greater skill and productivity than
over-staffing) Labour before
- Policy myopia (see only ST effects not LT) - Need to match skills with equipment (E.G:
- Disincentives arising e.g. benefits technology may need to be brought in to aid
- Information failure the production process which may increase
- Cost of regulation outweighs benefits e.g. costs in the short term)
smoking
19. Economic - Resources that are scarce
9. Ceteris - All other things are equal/remain the same Goods - E.G: Fossil Fuels
Paribus
20. Elastic XED - Close substitutes
10. Command - The government decides how resources are - Close complements
Economy allocated
21. Equilibrium - Where demand meets supply marks the
market price

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22. Eval of - Imperfect knowledge: e.g. just how much CO2 34. (Functions of Price - Prices ration scarce resources when
Negative is responsible for climate change Mechanism) - D outweighs S
Externalities - Quantifying/measuring external costs: how do Rationing Function - Shortage = prices rise = only those
you put monetary value on certain products willing and able to pay can buy product
(pollution) - Auctions are a way of allocating
- Size of welfare loss: estimate (based on resources and clearing a market
above info) - difficult for gov to make correct
35. (Functions of Price - Adjust to demonstrate where/where
decisions
Mechanism) - not resources needed
23. Eval of - Imperfect knowledge: e.g. difficult to measure Signalling Function - Prices rise & fall to reflect scarcities
Positive the LT benefits of education and surpluses
Externalities - Quantifying/measuring external benefits: - High demand = prices rise = signal for
putting a monetary value on flu vaccination and suppliers to expand production (meet
not getting the flu higher demand)
- Difficult to get gov intervention right: estimate - Excess supply = prices fall =
(based on the above info) for gov to make eliminates surplus
decisions to increase the potential welfare gain
36. (Functions of Price - Consumers send information to
24. Examples of - Education: student loan, grants Mechanism) - producers about changing nature of
subsidies - Heating Transmission of needs and wants through their choices
- Farming preferences - Higher prices = incentive to raise
- Rail travel output because profit for S increases
- Home insulation scheme - Low demand (recession) = supply
decreases because S cut back on
25. Excess - High demand and low supply (price too low for
output
Demand producers to sell and make big profit)
- The bit below the equilibrium on the graph 37. Government Failure - Government intervention leading to a
(Double) further increase in inefficiency/net
26. Excess - Low demand and high supply (price too high
welfare loss/misallocation of resources
Supply for consumers to afford)
- Why: issues with information,
- The bit above the equilibrium on the graph
incentives, income distribution
27. Externality - The cost or benefit of an economic activity - E.g. EMA (incentives), CAP (price out
which is NOT reflected in the price but is farmers in 3rd world)
passed onto society/third party
38. Impact of an - Size of tax per unit = size gap
28. Factors - Migration indirect tax between supply lines along the
affecting - Bonuses changed line (P1 & Q1)
supply of - Minimum wage - Area of this line to y axis = total tax
labour - Substitute occupations revenue
- Training - Area below this is producer revenues
29. Finite - Limited resources 39. Imperfect - Making decisions based on incorrect
30. Free Goods - Resources that are not scarce Information information leading to a misallocation of
- E,G: Water, air, intellectual ideas, by- resources
products - Consequences: Burden on NHS,
obesity
31. Free Market - The allocation of resources is left to market
Economy forces 40. Incidence of an - Same graph as for a specific/unit tax
- +ve: Acts within self-interest, saves time & indirect tax except that the S1 curve pivots away
money (no implementation), high competition from the S curve because the tax is
(inc productivity), Consumer Sovereignty levied
(consumers get what they want, not what the - Therefore size of the tax changes as
central planners tell the S to make) the gap widens
- -ve:
32. Free-Rider - Someone who receives the benefit of a good,
Problem but allows others to pay for it
- Consequence: no one wants to pay for it so
no demand curve
33. Functions of - Describes the means by which millions of
price decisions taken by consumers and businesses
mechanism interact to determine the allocation of scarce
(FoPM) resources between competing users

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41. Incidence of 52. Maximum - Gov sets a maximum price below the equilibrium
a Prices price so producers can't raise price above it
specific/unit (ceiling - Mostly for necessity goods
tax prices) - Consumer benefit, firms lose out - excess
demand
53. Max Price
Diagram
(ex.
demand)

- Incidence = who carries the burden of the tax

- Area of P & Q = producer revenue
- S1 moves supply line up after tax is added
moving the producer revenue to the area of X
(where is intersects S) & q1
- Area above between P1 and X is the incidence
of the tax which is split into producer (bottom, x
54. Merit - Margainal social benefits > marginal
to p) and consumer (top, p to p1) burden
Goods private/social costs
42. Income - When the demand for a good changes by a - Under-provided (no profit incentive) and under-
elastic greater proportion than income consumed (expensive, uncertainty for LT effects)
- Luxury goods - Education, NHS, cycling, museums, vaccines
43. Income - The responsiveness of a change of quantity 55. Minimum - Gov sets min price above equilibrium preventing
elasticity of demanded to a change in income Prices producers from setting price below equilibrium
demand - %change in Qd / %change in Y (floor price
(YED) prices) - Demerit goods, CAP, minimum wage
- Consumers lose out - prices higher
44. Income - When the demand for a good changes by a
- Eval: producers could lose competition
inelastic smaller proportion than the income
therefore profits
- Necessity goods
56. Min Price
45. Index - Used to compare data over a period of time
Diagram
Numbers - (New value / Base Year value) x 100
(ex.
46. Indirect - Taxes on expenditure supply)
Taxes - Included in the price of a good when the good
is sold to the consumer
- Betting & gaming, VAT, landfill tax, air
passenger duty, stamp duty, excise duties,
insurance premium tax
47. Inelastic - Distant substitutes
XED - Distant complements
48. Inferior - Negative YED
goods (YED) - If our income rises, our spending decreases 57. Mixed - Some resources allocated by government and
on these goods Economies some by market forces
- Value goods
- Negative YED 58. Negative - External cost on the third parties from some
Externality form of economic activity (litter dropped from
49. Infinite - Unlimited resources/wants someone's food)
50. Information - Free market assumes perfect info therefore - Come about due to Market Failure (due to a
Failure resources allocated efficiently misallocation of resources - firm overproduces
- When consumers are provided with inadequate because it doesn't pay for external costs),
information so that incorrect purchasing natural disasters, underconsumption
decisions are made
51. Interpreting - Positive 0-1 = distant (weak) substitutes
XED - Positive >1 = close (strong) substitutes
- Negative 0-1 = distant (weak) complements
- Negative <-1 = close (strong) complements
- Zero = independent goods - no relationship
between them

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59. Negative 66. Positive - External benefit gained on the third party from
Externality Externality some form of economic activity (e.g. smell of
diagram fresh bread)
- Come about because they are under-consumed
in the fm due to a mis-allocation of resources (mf)
- Individuals see the private benefits so consume
whilst benefiting third parties
67. Positive
Externality
- Distance between MSC & MPC = external diagram
costs
- Red triangle = welfare loss (due to
overproduction in fm)
- Q* = fm level of production
- Q(tip of triangle) = social optimum level of
production
- MPB increases as Q increases if there is a
tax imposed
60. Normal goods - Positive YED
(YED) - If our income rises, our spending increases - MPB increases as Q increases if there is a tax
on these goods imposed
- Necessity goods (income inelastic) 68. Positive - Statements that can be proved using data and
- Luxury goods (income elastic) Statements verification
- Positive YED
69. Price - Very responsive to a change in price
61. Normative - Judgments that are based on opinion which elastic - Flat (horizontal) curve
Statements can't be verified by data or further - Many substitute goods
investigation - Luxury goods
- Contains "ought", "better", "should" and "fair" - Large proportion of income spent on the good
62. Opportunity - The value of the next best alternative - More elastic in the long term
Cost foregone - PED is greater than 1

63. Opportunity Total Lost / Total Gained 70. Price - The responsiveness of DEMAND to a CHANGE in
Cost Formula elasticity PRICE
of demand - %change in Qd / %change in P
64. PES elastic - Very responsive to a change in price
(PED)
- Flat curve
- Resources easily available 71. Price - Responsiveness of supply to a change in price
- Can be stored for a long time Elasticity - %change in Qs / %change in P
- Low cost of production of Supply
- Low unemployment (PES)
- Easy to switch resources and goods 72. Price - Not very responsive to a change in price
produced inelastic - Steep (vertical) curve
- Short production time - Not many substitutes
- Longer time period under consideration - Necessity good
- Elastic in the long term - Only a small proportion of income spent on good
- PES more than 1 - Brand loyalty
65. PES inelastic - Not very responsive to a change in price - More inelastic in the short term
- Steep curve - PED is less than 1
- Completely vertical = completely PES 73. Price - The means by which millions of decisions taken
inelastic Mechanism by consumers and businesses interact to
- Resources aren't easily available determine the allocation of scarce resources
- Can't be stored for a long time between competing users
- High cost of production
- High unemployment 74. Private - Goods and services that involve excludability
- Hard to switch between resources and Goods (not having the money to buy) and rivalry
goods produced (available for one person but not available once
- Long production time they've consumed it)
- Shorter time period under consideration - E.g. Chocolate, Limited edition ferrari
- Inelastic in the short term
- PES between 0 and 1

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75. Problems of - Black economy: No GDP or tax 87. Signalling - Prices adjusted to where they're needed and
maximum - Happens when excess demand (shortage) Function where they're not
prices - Consumers willing to pay above max price (FoPM)
(Black) - E.g. Tickets, illegal selling of technology
88. Social - Put forward a hypothesis and gather data to
76. Producer - The market price minus how much sellers are Sciences test this
surplus prepared to accept for a good - Can't be tested easily and data is always
- Area of the bottom triangle (market price changing
minus lowest price, timesed by market quantity - Made sense of by using models and theories
then halved)
89. Specialisation - No-one worker makes the whole product.
- Difference in triangle area = change in
by division of Each worker specialises in a specific small
producer surpluses
labour part of the production process
77. Production - The max possible combinations of two goods
90. Specialisation - Specialises in making a specific type of
Possibility that a country can produce in a specified period
by producers product to satisfy the consumers wants
Frontier of time with all of its resources fully and
Definition efficiently used 91. Specialisation - Concentration by workers, firms, areas or
Definiton countries on a particular product or a few
78. Productive - Where it is not possible to produce more of
products, or a particular task or a narrow
Efficiency another good without producing less of another
range of products
good
92. Strengths of - Less income inequality
79. Public - Non-rival (infinite availability) and non-
Min Wage - Stop exploitation/cheap labour
Goods excludable (available for everyone)
(happy wage) - Multiplier effect
- E.g. Street lighting, NHS
- Inc living standards
80. Quasi-public - Goods that are to an extent non-rival and non-
93. Subsidies - A subsidy is a grant of money given by
Goods excludable
Definition government to encourage the production or
- E.g. Beaches, public parks, roads
consumption of a particular good
81. Rationing - Prices need to limit scarce resources
94. Subsidy graph
function
(FoPM)
82. Revenue - When a seller decides to raise or lower the
price of a product and how it effects how much
they earn
- Revenue = price of good x quantity sold
83. Rewards of - Land: Self-sufficient, sell, more labour, natural
Factors of resources, space to build
Production - Labour: employment, wages, experience
- Capital: efficiency, save money, better quality
- Enterprise: profit, investment
84. Scarcity - How a limited amount of resources are - Same as the specific/unit tax graph except
distributed at any given time S1 curve shifts right and the cost of the
- Not enough resources to go round subsidy is the gap between the two lines
- LEDCs suffer the most - The producer will pass some of the subsidy
to the consumer so that the price is lowered
85. Shifting the - Land: Increase in space, demolition of houses
and some benefits are passed on to the
PPF - Labour: Larger workforce, lowering income tax
consumer
encouraging people to go into work, education
- Capital: machinery saves money on worker's 95. Sustainable - Particular type of renewable resource
wages + illness Resources - These can be exploited economically and
not run out
86. Shifting the - War
- E.G: forests are renewable but only are
PPF - Natural Disasters
sustainable if they survive from other
backwards - Recession
economic activities such as farming
- Strikes
- Unemployment 96. Symmetric - When producers and consumers have
- Decrease in Productivity Information access to the same amount of information
- Fall in production about the product
- Decrease in capital stock due to lack of 97. Total - The amount buyers spend on a product
money/subsides expenditure - Quantity sold x price

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98. Transmission of - Consumers communicate to producers about their changes in wants and needs from changes in their
preferences (FoPM) choices
99. Types of indirect taxes - Specific or unit tax: tax levied on each unit sold (e.g. 1 per bottle of wine sold)
- Ad Valorem tax: tax levied as a percentage of the value of the good (e.g. VAT)
100. Weaknesses of Min Wage - Firms have to make cuts
(sad wage) - Unemployment/redundancy
- Negative multiplier
- Dec productivity
- Competition for jobs (excess supply - less jobs available)
101. Why are PPFs curved - Some resources are better at making one product than another
- Some workers aren't as skilled in different sectors
- Some machinery is better at making product than another (impact factor sustainability - difficult to
substitute factors from making product to another)

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