(1) Chapter 5 - The Market Mechanism, Market Failure and Government Intervention in Market

Question 1

What are the 4 functions of price

Answer 1

• Signalling function
• Incentive function
• Rationing function
• Allocative function

Question 2

Define SIGNALLING FUNCTION OF PRICES

Answer 2

Prices provide information to buyers and sellers

Question 3

Define INCENTIVE FUNCTION OF PRICES

Answer 3

Prices create incentives for economic behaviour (higher prices encourage firms to supply more)

Question 4

Define RATIONING FUNCTION OF PRICES

Answer 4

Rising prices exclude demand for a product

Question 5

Define ALLOCATIVE FUNCTION OF PRICES

Answer 5

Allocating scarce resources away from markets showing excess supply and into markets where there is excess demand

Question 6

Define MARKET FAILURE

Answer 6

Misallocation of of resources in the economy, either completely failing to provide a good/service or providing the wrong quantity

Question 7

Define MISSING MARKET

Answer 7

Where there is no market because of the functions of prices have broken down

Question 8

Define a PRIVATE GOOD (+ an example)

Answer 8

A good that is excludable and rival (an orange)

Question 9

Define a PUBLIC GOOD (+ an example)

Answer 9

A good that is non-excludable and non-rival (a radio programme)

Question 10

What two defining characteristics do PRIVATE GOODS possess?

Answer 10

• Private property rights: preventing other people from using the good
• Rivalry: when one consumes the good it cannot be consumed by another

Question 11

Define a QUASI-PUBLIC GOOD (+ an example)

Answer 11

A good that is not fully non-rival and/or where it is possible to exclude people from consuming it

Question 12

What is an EXTERNALITY

Answer 12

A special type of public good which third parties receive it without an option

Question 13

Define POSITIVE EXTERNALILTY

Answer 13

An externality when consumed/produced causes a benefit to a third party, the social benefit is greater than the private

Question 14

Define NEGATIVE EXTERNALITY

Answer 14

An externality when consumed/produced causes a cost to a third party, the social cost is greater than the private

Question 15

What is a PRODUCTION EXTERNALITY

Answer 15

An externality (positive or negative) generated during the production of the good/service

Question 16

What is a CONSUMPTION EXTERNALITY

Answer 16

An externality (positive or negative) generated during the consumption of the good/service

Question 17

What is a MERIT GOOD (+ an example)

Answer 17

Social benefits exceed the private benefits, value judgements are used to decide if a good defines as one eg. Healthcare

Question 18

What is a DEMERIT GOOD (+ an example)

Answer 18

Social costs exceed the private costs eg Tobacco

Question 19

What is a SUBSIDY

Answer 19

A payment made by the government/authority, usually to producers for each good they can produce

Question 20

Define IMMOBILITY OF LABOUR

Answer 20

Unable to move from one job to another, usually because they need training or the cost of moving

Question 21

Define GEOGRAPHICAL IMMOBILITY OF LABOUR

Answer 21

When workers find it difficult/impossible to move jobs for reasons such as higher housing prices

Question 22

Define OCCUPATIONAL IMMOBILITY OF LABOUR

Answer 22

When workers cant move jobs because they lack/cannot develop the skills needed for the new jobs

Question 23

Define EQUITY

Answer 23

Fairness/Justness

Question 24

Define INEQUITY

Answer 24

Unfairness/Justness

Question 25

Define REGULATION

Answer 25

Imposition of rules which restrict the freedom in markets

Question 26

Define TAX

Answer 26

Compulsory payment from the society for governments to use to pay for their activities. Also to achieve other objectives like reduce the consumption of demerit goods

Question 27

What is a PRICE CEILING

Answer 27

A price above which it is illegal to trade, they can distort markets by creating excess demand

Question 28

What is a PRICE FLOOR

Answer 28

A price below which is illegal to trade, they can distort markets by creating excess demand

Question 29

What is GOVERNMENT FAILURE

Answer 29

When government intervention reduces economic welfare. leading to an allocation of resources that is worse than the free market

Question 30

Explain the government failure leading to black markets

Answer 30

When the government controls the prices too much creating excess demand where producers/sellers want to fulfil, so they’ll sell their products for higher prices

Question 31

Explain further side effects of government supervision

Answer 31

When people find alternate ways to buy/consume goods using alternate methods to overcome the government rules eg. avoiding the taxes of tobacco/alcohol by buying it abroad where taxes are less, which could lead to pollution from journeys