1.1 The Market System

Question 1

What is the economic problem?

Answer 1

SCARCITY

all countries resources are finite/scarse but people have infinite wants

demand is greater than supply

Question 2

Finite

Answer 2

having an end or a limit

Question 3

Infinite

Answer 3

without limits

Question 4

Needs

Answer 4

basic requirements for human survival

Question 5

Wants

Answer 5

people’s desires for goods and services

Question 6

Basic economic problem

Answer 6

allocation of a nation’s scarce resources between competing uses that represents infinite wants

Question 7

Scarce resources

Answer 7

amount of resources available when supply is limited

Question 8

Allocate

Answer 8

to decide officially that a particular amount of money, time, etc. should be used for a particular purpose

Question 9

To overcome the basic economic problem, 3 important decisions have to be made = what are they?

Answer 9

What to produce?

How to produce?

For whom to produce?

Question 10

Distribution

Answer 10

act of sharing things among a large group of people in a planned way

Question 11

What happens when we approach solving the economic problem?

Answer 11

indivisuals, firms and governments are forced to make a choice => so will face a cost once their choice is made. This cost arises because a sacrifice has to be made when making a choice

Question 12

Choice

Answer 12

deciding between alternative uses of scarce resource

Question 13

Sacrifice

Answer 13

something valuable that you decide not to have, in order to get something that is more important

Question 14

Opportunity cost

Answer 14

cost of the next best alternative given up when making a choice

Question 15

Expenditure

Answer 15

spending by government, usually a national government

Question 16

Production Possibility Curve (PPC)

Answer 16

line that shows the different combinations of two goods an economy can produce if all resources are used up => deciding which goods to produce and the concept of opportunity cost can be illustrated by PPC curve

it is assumed that a country produces consumer and capital goods so:
x-axis ~ capital goods
y-axis ~ consumer goods

Question 17

PPC are used to show 5 things

Answer 17

1. the maximum production potential of an economy (shows the most efficient use of resources => inside curve is inefficient and outside the curve is unattainable with current resources)
2. fully employed and unemployed resources (points along the curve are when resources are employed so is operating to its maximum potential but points inside the curve shows unemployed resources so are not operating to maximum potential)
3. opportunity cost (when economy shifts, goods are sacrificed to produce another)
4. positive and negative economic growth (if countries produce more shifting PPC outwards and if productive potential falls PPC shifts inwards)
5. possible and unattainable production (shows all the possible combinations of the maximum output using all of its resources, outside the curve is unattainable with the current resources)

Question 18

Capital goods

Answer 18

those purchased by firms and used to produce other goods such as factories machinery, tools and equiptment

Question 19

Consumer goods

Answer 19

those purchased by households such as food, confectionery, cars, tablets and furniture

Question 20

Why is the choice between different combinations of consumer or capital goods important?

Answer 20

if a country produces more capital goods, it will probably be able to produce more consumer goods in the future. This is because capital goods are used to produce consumer goods. However, by doing so there will be fewer consumer goods today and some people will have less in the long term

Question 21

4 Causes of positive economic growth

Answer 21

TEER

• new technology (as time passes, new technology is developed and so will benefit businesses. This can also be used to increase productive potential as they are faster and more reliable in production so can therefore produce more output)
• improved efficiency (over time resources can be used more efficiently as there can be developments of new production methods to replace old ones and more output can be produced with fewer resources)
• education and training (a countries economy can boost productive potential by educating and training the population. This is because the proportion of educated workers increases and so can carry out their tasks more efficiently that require: reading, writing, evaluation, communication and critical thinking. But a country should find the right balance between academic and vocational education)
• new resources (finding new resources may enable them to produce more => PPC shifts outwards)

Question 22

3 Causes of negative economic growth

Answer 22

PPC shifting inwards represents negative economic growth, where a countries productive potential falls which may be caused:

• by resource depletion => when a country runs our of a natural resource such as oil or coal but potential can also fall due to change in weather patterns
• if a large number of qualified/skilled workers leave the country abroad. This can be because workers may earn more money in the other country
• Wars, conflict and natural disasters may also cause negative growth

Question 23

Economic growth

Answer 23

increase in the level output by a nation

Question 24

Vocational

Answer 24

training that teaches you the skills you need to do a particular job

Question 25

Variables

Answer 25

something that affects a situation in a way that means you cannot be sure what will happen

Question 26

Assumptions

Answer 26

things that you think are true although you have no definite truth

Question 27

Irrational and rational

Answer 27

irrational - not based on clear thought or reason

rational - based on clear thought or reason

Question 28

Assumptions of consumers

Answer 28

consumers aim to MAXIMISE BENEFIT

• economists assume they will chose the course of action which gives them the greatest satisfaction
• economists assume consumers will always make a rational decision

Question 29

Assumptions of businesses

Answer 29

businesses aim to MAXIMISE PROFIT

• economists assume they will chose the course of action which has the best financial results to make as much profit as possible
• owners are assumed to make rational financial decisions about their business

Question 30

Maximise

Answer 30

to increase something such as profit, satisfaction or income as much as possible

Question 31

Revenue

Answer 31

money that a business recieves over a period of time, especially from selling goods or services

Question 32

3 Reasons why consumers may not always MAXIMISE BENEFIT

Answer 32

• consumers are not always good at calculating their benefit (because it is hard to quantify the satisfaction gained by consumption)
• consumers have have habits that affects their ability to make rational choices (over time consumers may build loyality to a particular brand so once they get used to the brand, they may continue to buy their goods out of habit. Even when other brands in the market offer better value so some brands may raise prices)
• consumers are sometimes influenced by behaviour of others (people may be influenced by their parents, friends, peers or from the media so may copy their purchases in order to fit in or from pressure of others)

Question 33

3 Reasons why business may not always MAXIMISE PROFIT

Answer 33

• producers may have managers that maximise revenue or sales (this means that not all the decisions are made by the owners and instead may delegate decision making to others who may have different objective to their owners)
• producers prioritise caring for customers => alternate business objective (this means they may spend more money on training staff to provide good customer service, in order to exceed customer expectations. So there may be some extra costs for training to which may reduce profitability)
• producers may complete charitable work - non-profit organisation (they aim to raise awareness and money for a certain cause e.g. UNICEF)

Question 34

Enterprises

Answer 34

companies, organisations or businesses

Question 35

Delegate

Answer 35

to give part of your power or work to someone else, usually someone in a lower position than you

Question 36

Commission

Answer 36

amount of money paid to someone according to the value of goods, shares or bonds they have sold

Question 37

Demand

Answer 37

is the amount of a good that will be bought at given prices over a period of time

Question 38

Humanitarian

Answer 38

concerned with improving bad living conditions and preventing unfair treatment of people

Question 39

Administration

Answer 39

activities involved with managing and organising the work of a company or organisation

Question 40

Effective demand

Answer 40

amount of a goods people are willing to buy at given prices over a period of time supported by the ability to pay

Question 41

Demand curve

Answer 41

line drawn on a graph that shows how much of a good will be bought at different prices

has an inverse relationship

Question 42

Demand schedule

Answer 42

table of the quantity demanded of a good at different price levels - can be used to calculate the expected quantity demanded

Question 43

Inverse relationship (between price and quantity demanded)

Answer 43

when price goes up, the quantity demanded falls and when price goes down the quantity demanded rises

Question 44

Cause for movement along the demand or supply curve

Answer 44

change in price

Question 45

Shift in the demand curve

Answer 45

movement to the left or right of the entire demand curve when there is a change in any factor affecting demand except price

Question 46

6 Factors that may shift the demand curve

Answer 46

AIFSCD

• advertising (if businesses try to influence demand for their products through ads and promotions, it is likely for quantity demanded to increase)
• income (generally, if disposable income rises, demand for goods rise as more people will spend more money on normal goods. Most of the economy are normal goods but a minority are inferior goods which means quantity demanded will fall when income rise)
• fashion and tastes (over time, demand patterns change because there may be changes to the consumers fashion and tastes. e.g. clothing industries are strongly influenced by changes in fashion as many clothes bought in one season may not be in fashion next season => they can be influenced by social changes by social media)
• price of substitutes (if price of substitute lowers, demand for a product falls)
• price of complements (some goods are purchsed together by consumers. This is because the 2 goods are used together as they are complementary goods. So demand for such products are affected by the price of the complementary good)
• demographic changes (as the population grows, there will be an increase in demand for goods and services. However, the structure of the population (demography) also affects demand: age distribution, gender distribution, geographical distribution or ethnic groups)

Question 47

Disposable income

Answer 47

income that is available to someone over a period of time to spend; includes state benefits but excludes direct taxes

Question 48

Inferior goods

Answer 48

goods for which demand will fall if income rises or rise if income falls

Question 49

Normal goods

Answer 49

goods for which demand will increase if income increases or falls if income falls

Question 50

Substitute goods

Answer 50

goods bought as an alternative to another but perform the same function

Question 51

Demography

Answer 51

study of human populations and the way in which they change

Question 52

Complementary goods

Answer 52

goods purchased together because they are consumed together

Question 53

Infrastructure

Answer 53

basic systems and structures that a country needs to make economic activity possible, for example, transport, communication and power supplies

Question 54

Supply

Answer 54

is the amount of a good that sellers are prepared to offer for sales at any given price over a period of time

Question 55

Supply curve

Answer 55

line drawn on a graph which shows how much of a good sellers are willing to supply at different prices

has a proportional relationship

Question 56

Per annum (p.a.)

Answer 56

for or in each year

Question 57

Proportional relationship (between price and the quantity supplied)

Answer 57

when the price goes up, the quantity supplied also goes up and when the price goes down the quantity supplied goes down

Question 58

Shift in the supply curve

Answer 58

movement to the left or right of the entire supply curve when there is a change in conditions of supply except the price

Question 59

How will the supply curve look like when supply is fixed?

Answer 59

when the supply of goods or services gets fixed => curve has a VERTICAL line as it is impossible for sellers to increase supply even when prices rise

Question 60

Volatile

Answer 60

changing quickly and suddenly

Question 61

Ventures

Answer 61

new business activites or projects that involve taking risks

Question 62

5 Factors that may shift the supply curve

Answer 62

• costs of production (such as wages, raw materials, energy, rent or machinery. Assuming the price is fixed, if production costs rise, sellers are likely to reduce supply because profits are limited. But if costs fall, the quantity supplied would increase as production becomes more profitable. The availability of resources will also affect supply as if there is a shortage of some factors of production - LAND, LABOUR, CAPITAL - it will make it difficult for producers to supply the market as costs may rise)
• indirect taxes (they are taxes on spending. VAT (value added tax) or duties, when imposed or increased, curve shifts to the left because they represent a cost to firms and so if reduced shift to the right as cost lowers. Governments use this to raise revenue for government expenditure and to discourage consumption of certain harmful goods to humans or to the environment)
• subsidy (sometimes the government may give money to businesses in the form of a grant which is called a subsidy. They can be given to firms to encourage them to produce a particular good and increase supply as they reduce production costs)
• changes in technology (over a period of time, more new technology becomes available that businesses can use in their production process. They are more efficient and so reduce costs of production allowing them to offer more for sale => shift to the right)
• natural factors (production of goods may be influenced by the weather, natural disasters, pests and diseases)

Question 63

Indirect taxes

Answer 63

texes levied on spending, such as VAT

Question 64

Productivity

Answer 64

rate at which goods are produced, and the amount produced in relation to work, time and money needed to produce them

Question 65

Consumption

Answer 65

amount of goods, services, energy or natural materials used in particular period of time

Question 66

Subsidy

Answer 66

money that is paid by a government or organisation to make prices lower, reduce the cost of producing goods or providing a service, usually to encourage production of a certain good

Question 67

Government intervention

Answer 67

where the government becomes involved in a situation in order to help deal with a problem

Question 68

Equilibrium / disequilibrium price

Answer 68

equilibrium - price at which supply and demand are equal

disequilibrium - price at which supply and demand are unequal

Question 69

Market clearing price

Answer 69

price at which the amount supplied in a market matches exactly to the amount demanded

Question 70

Total revenue + equation

Answer 70

amount of money generated from the sale of goods calculated by:

TR = PRICE x QUANTITY

Question 71

Excess demand

Answer 71

where demand is greater than supply and there is a shortage in the market

Question 72

Excess supply

Answer 72

where supply is greater then demand and there are unsold goods in the market

Question 73

Price elasticity of demand + equation

Answer 73

the responsivess (reactive) of demand to a change in price

% change in quantity demanded / % change in price

🧲 if price falls put a negative infront of the fraction

Question 74

Inelastic demand

Answer 74

change in price results in proportionately smaller change in the quantity demanded (PRICE INELASTIC)

Question 75

Elastic demand

Answer 75

change in price results in a greater change in quantity demanded (PRICE ELASTIC)

Question 76

Perfectly elastic (demand)

Answer 76

demand where PED = infinity (an increase in price will result in 0 demand)

Question 77

Unitary elasticity (demand)

Answer 77

where PED = -1 (the responsiveness of demand is proportionally equal to the change in price)

Question 78

Perfectly inelastic (demand)

Answer 78

demand where PED = 0 (a change in price will result in no change in the quantity demanded)

Question 79

4 Factors affecting PED

Answer 79

• availability of substitutes (goods with lots of close substitutes have ELASTIC demand because consumers can easily switch from one product to another but if there none than demand is INELASTIC)
• degree of necessity (goods considered essential by consumers have INELASTIC demand because consumers cannot reduce the amounts of essentials they buy significantly. However, goods that are not essential has more of a ELASTIC demand. Also, if products are habit forming, some goods may become a necessity so will have INELASTIC demand)
• proportion of income spent on a product (if consumer spends most if their income => demand is ELASTIC. As a result, price changes in such high value items can result in significant change in the quantity demanded. In contrast, demand for products to which cost very little in relation to income are more price INELASTIC => these items are usually a necessity)
• time (in the short term, goods have INELASTIC demand because it takes time for consumers to find substitutes when prices rise. In the long term, demand is more ELASTIC because consumers can search for alternatives)

Question 80

Relationship between PED and total revenue

Answer 80

when there is a price change, there will be a change in quantity demanded and therefore a change in total revenue

Question 81

Fast-moving consumer good (FMCG)

Answer 81

goods, especially food, that sell very quickly and in large amounts

Question 82

Price elasticity of supply

Answer 82

responsiveness of supply to a change in price

% change in quantity supplied / % change in price

Question 83

Inelastic supply

Answer 83

change in price results in a proportionately smaller change in quantity supplied (PRICE INELASTIC)

Question 84

Elastic supply

Answer 84

change in price results in a proportionately greater change in quantity supplied (PRICE INELASTIC)

Question 85

Perfectly elastic (supply)

Answer 85

where PES = infinity (producers will supply an infinite amount at the given price)

Question 86

Perfectly inelastic (supply)

Answer 86

where PES = 0 (the quantity suplied is fixed and cannot be adjusted whatever the price)

Question 87

Unitary elasticity (supply)

Answer 87

where PES = 1 (a change in price will be matched by an identical change in the quantity supplied)

Question 88

Wholesalers

Answer 88

person or company that sells goods in large quantities to businesses, rather than the general public

Question 89

4 Factors influencing PES

Answer 89

• factors of production (if producers have easy access to FofP such as labour, raw materials, energy, tools and machinery, they will be able to boost production if necessary so supply is ELASTIC. Also, if production factors are mobile, supply is ELASTIC as resources can be switched easily. However, if specialized resources are needed for production, they are less mobile and so supply is more INELASTIC)
• availability of stocks (producers that can hold stocks of goods can respond quickly to price changes so supply will be ELASTIC. But if holding stocks was expensive or impossible, then supply will be INELASTIC. Also, the supply of some perishable goods, such as fruit, will be INELASTIC as they cannot be stored for a long time)
• spare capacity (supply will be more ELASTIC if producers have spare capacity as producers will have the ability to produce more with their resources. However, if firms are running at full capacity supply will be INELASTIC because output cannot be increased at short notice. But, with time, even firms running at full capacity can also increase supply as they can build a bigger factory or buy more machinery)
• time (the speed at which producers react to price changes in the market affect PES. Generally, all producers can adjust output if they are given time and so the more time producers have to react to price changes, the more ELASTIC supply will be. But where it is not possible to increase supply quickly, due to production limitations, supply will be INELASTIC)

Question 90

Raw materials

Answer 90

substances used to make a product

Question 91

PES for manufactured and primary products

Answer 91

modern manufacturers can be quite flexible and so can adjust to production levels at short notice. This allows them to produce goods quickly so are likely to have ELASTIC supply

whereas primary products, such as agricultural goods, are unable to react quickly to price changes so supply is INELASTIC. Another example is diamonds or gold as they also are INELASTIC. This is because there are a few resources around the world and so production can be expensive and time consuming, so supply is unresponsive to price changes

Question 92

Income elasticity of demand

Answer 92

responsiveness of demand to a change in income

% change in quantity demanded / % change in income

Question 93

Interpreting the value of income elasticity of demand

Answer 93

NECESSITIES
- are the basic goods that a consumer needs to buy. e.g. electricity, water and petrol=> demand is income INELASTIC
- if the value of income elasticity of demand is between +1 and -1, demand is said to be income INELASTIC

LUXURY GOODS
- are goods that consumers like to buy if they can afford them. Spending on these types of goods is called discretionary expenditure which means that it is optional. e.g. air travel, satellite TV or designer items => demand is income ELASTIC
- if value of income elasticity of demand is greater than 1 or less than -1, demand is said to be income ELASTIC

NORMAL GOODS
- the value of income elasticity can also show whether goods are normal or inferior
- for normal goods, as income increases, the quantity demanded also increases so the value of income elasticity will be positive

INFERIOR GOODS
- for normal goods, as income increases, the quantity demanded decreases so the value of income elasticity will be negative
- this shows how quantity demanded, and income have an inverse relationship

Question 94

Discretionary expenditure

Answer 94

non-essential spending or spending that is not automatic

Question 95

Price elasticity and businesses

Answer 95

price elasticity provides businesses with useful information such as predicting the effect of a price change on total revenue. So, when a firm changes it price, there will be a change in quantity demanded and therefore a change in total revenue => firms can use this to know what effect a particular price change may have on total revenue

e.g. if demand for their product is ELASTIC, a price reduction will increase total revenue

Question 96

Income elasticity and businesses

Answer 96

many firms will be interested in income elasticity of demand because changes in income in the economy may affect demand for their products, so they can respond to predicted changes in incomes.

some firms have flexible resources and so are able to switch from the production of one good to another. So if there were to be a predicted rise in income, it may encourage firms to produce more if demand for them was income ELASTIC. Some firms predict rise in income in the future, they may plan ahead by making sure they had enough capacity

Question 97

Price elasticity and the government

Answer 97

INDIRECT TAXES
- governments often raise revenue by imposing indirect taxes, such as VAT and excise duty on products
- it is important for governments to select products that have INELASTIC demand because consumers will avoid heavily from buying taxed products if demand for them is ELASTIC => so they target goods that are necessities or have few substitutes but not goods that are essential for survival such as water. The most popular targets for governments is taxing cigarettes, alcohol and petrol to which demand is very price INELASTIC

SUBSIDIES
- governments may also consider PED when granting subsidy to producers. The subsidy shifts the supply curve to the right, to increase supply

e.g. if a good was designed to help the poor, they would make it cheaper, so demand is price INELASTIC. If price is not price INELASTIC, an increase in supply will only reduce price slightly

Question 98

Excise duty

Answer 98

government tax on certain goods, such as cigarettes, alcoholic drinks and petrol that are sold in the country

Question 99

Value-added tax (VAT)

Answer 99

tax on some goods and services - businesses pay VAT on most goods and services they buy and if they are VAT registered, charge VAT on the goods and services they sell

Question 100

Economy

Answer 100

system that attempts to solve the basic economic problem

Question 101

Private sector

Answer 101

provision of goods and services by businesses that are owned by individuals or group of individuals

Question 102

Public sector

Answer 102

government organisations that provide goods and services in the economy

Question 103

Private sector organisations - OWNERSHIP AND CONTROL

Answer 103

• sole traders (one person)
• partnerships (2 or more people working together which are often found in professions)
• companies (shareholders own the business. They elect a board of directors to run the business on their behalf, these can vary in size and can be found in different business sectors)

Question 104

Durables

Answer 104

products that are intended to have a life of more that 3 years from when they were made or bought

Question 105

Professions

Answer 105

careers that need a high level of education and training in order to work in them, traditionally including medicine, law and teaching

Question 106

Shareholders

Answer 106

people or organisations that own shares in a company

Question 107

Provision

Answer 107

the act of providing something that someone needs

Question 108

AIMS - private sector organisation

Answer 108

• survival (when a firm first starts out, many owners will not expect to make profit immediately as it takes time to establish a business and may also encounter some difficulties)
• profit maximisation (owners of most firms are in the business to make profit and this is assumed by the economic theory where firms will aim to maximise profits. Companies pay their shareholders a share of their profit through a dividend to which they want it to be as high as possible and so is an aim)
• growth (many firms aim to grow because bigger businesses enjoy a number of advantages. This also means they will earn more in the long term and will benefit other stakeholders, such as workers or managers as they may feel more secure with their job. But often the profit is used to finance their growth to which shareholders may not like as their dividends will be lower)
• social responsibility (an increasing number of firms aim to be good corporate citizens which means they aim to please a wider range of stakeholders)

Question 109

Dividend

Answer 109

part of a company’s profit that is divided among the people with shares in the economy

Question 110

Public sector organisations - OWNERSHIP AND CONTROL

Answer 110

• central government departments (usually controlled by teams or boards led by a government minister)
• public corporations or state-owned enterprises (owned by the government so they selects the people who run the organisation and is responsible for its key policies. These corporations are state-funded so they fund their capital using money from taxation. All their assets and liabilities also belong to the state)
• local authority services (councillors who are elected by residents in the local communities to run local authories such as libraries, sport halls, swimming pools, etc.)
• other public sector organisations (led by an experienced expert selected by a government body following government advice)

Question 111

Assets

Answer 111

things or resources belonging to an indivisual or a business that has value or the power to earn money

Question 112

Liabillities

Answer 112

amount of debt that is owed or must be paid

Question 113

Sue

Answer 113

to make a legal claim against someone, especially for money, because you have been harmed in some way

Question 114

AIMS - public sector organisation

Answer 114

• improving quality of services
• minimising costs (government resources are scarce so waste needs to be minimised)
• allow for social costs and benefits (since their aim is to not make a profit, they take into account the needs of a wider range of stakeholders so they need to also take into account the externalities)
• profit: in some countries, the government owns a number of large businesses that aim to make a profit

Question 115

Stakeholders

Answer 115

indivisuals or groups who are considered to be an important part of an organisation or of society because they have responsibility within it and recieve advantages from it

Question 116

3 Types of economy

Answer 116

• a market or free enterprise economy
• a command or planned economy
• a mixed economy

Question 117

Monetary

Answer 117

system of money in a particular country or the world as a whole, and the way that is controlled by government and central banks

Question 118

Market failure

Answer 118

where markets lead to inefficiency

Question 119

Mixed economy

Answer 119

economy where goods and services are provided by both the private and public sectors

Question 120

Mixed economy in terms of solving the basic economic problem

Answer 120

WHAT TO PRODUCE?
- consumer goods, such as entertainment/leisure or clothes, are best provided by the private sector
- public sector more likely to produce streetlighting or loads as the private sector tends to provide goods that might fail to provide in sufficient quantities => caused by market failure

HOW TO PRODUCE?
- private sector aims to make a profit by providing goods so competition exists between firms allowing consumers to make more choice. To meet consumer needs, firms will use production methods that help them maximise quality and minimise costs
- public sector services is provided by the government and so they will decide how services should be provided efficiently
- however some public sector goods are produced in the private sector e.g. to make roads they need construction equiptment

FOR WHOM TO PRODUCE?
- goods sold in private sector is sold to anyone who can afford them
- most public sector goods are free to everyone and paid from taxes

Question 121

5 Reasons why market failure needs government intervention

Answer 121

• externalities (sometimes firms do not take into account the costs of production and so may impose a cost onto society, such as poor air quality. Any damage done to people or things outside the business, such as ill health, as a result of this activity is called an external cost)
• lack of competition (a market may fail if there is no competition and it becomes dominated by 1 or more firms. If this happens, the dominant firms may exploit their customers, by charging high prices or limiting choice)
• missing markets (some goods and services, called public goods, are not provided by the private sector. Other goods, called merit goods, such as education and health care are underprovided by the public sector as they are so expensive that many people may not be able to afford them)
• lack of information (markets will only be efficient if there is a freeflow of information to both buyers and sellers. Consumers need to know everything about nature, price and quality of products. Businesses need information about resources and production techniques needed to make a product but is not always possible. This lack of information may result in the wrong goods to being purchased or produced or the wrong prices being paid)
• factor immobility (for markets to work efficiently, factors of production need to be mobile. This means that factors, such as labour or capital, must be able to move freely from one use to another)

Question 122

Merit goods

Answer 122

goods that are underprovided by the private sector

Question 123

Public goods

Answer 123

goods that are not likely to be provided by the private sector

Question 124

5 ways to the government can intervene to help with market failure

Answer 124

• externalities => if they impose negative externalities, they may be heavily regulated or fined for polluting the atmosphere
• lack of competition => they can use legalisations to prevent businesses from dominating markets
• missing markets => state can give money to provide public and merit goods as these goods and services are important for the well-being of everyone
• lack of information => pass legalisation to help provide information about products with the help of the internet
• factor immobility => e.g. can retraining workers

Question 125

2 Roles of private and public sectors in the production of goods and services

Answer 125

• non-excludability (this means once a public good is provided in the market, any indivisual consumer cannot be prevented or excluded from its consumption. Also, they cannot refuse consumption of the good even if they wanted to. e.g. police service is a public good and no one can refuse the benefit from that protection)
• non-rivalry (this means that consumption of a public good by one indivisual cannot reduce the amount available to others. e.g. someone benefitting by the police does not prevent others from benefitting from the same protection)

Question 126

Legalisation

Answer 126

law or set of laws

Question 127

Merger

Answer 127

occasion when 2 or more companies or organisations join together to form a larger company

Question 128

Regulated

Answer 128

industry that is closely controlled by the government

Question 129

Why do governments have to provide public goods?

Answer 129

because of market failure => if the private sector provides public sector goods there would be a free-rider problem. Since it is impossible to exclude consumption of a public good by an indivisual consumer, there is little reason for them to pay for it. Public goods such as defence, policing, streetlighting, etc. will significantly increase the standard of living in a country. Consequently, the government takes responsiblity for them - assuming there is enough money to pay for their service

Question 130

Free rider

Answer 130

indivisual who enjoys the benefit of a good but allows others to pay for it

Question 131

Privatisation

Answer 131

act of selling a company or activity controlled by the government to private investors

Question 132

Monopolies

Answer 132

situation where a business activity is controlled by only one company or by the government, and other companies do not compete with it

Question 133

Bankrupt

Answer 133

not having enough money to repay your debts

Question 134

Nationalised industries

Answer 134

public corporations previously part of the private sector that were taken into state ownership

Question 135

Natural monopolies

Answer 135

situation that occurs when one firm in an industry can serve the entire market at a lower cost than would be possible if the industry were composed of many smaller firms

Question 136

3 Reasons why privatisation takes place

Answer 136

• to generate income
• public sector organisations were inefficient (some nationalised industries lacked the incentive to make a profit and often made losses. It was argued that the private sector would have to cut costs, improve services and return profits for shareholders. They would also be more accountable)
• reduce political interference (governments cannot use these organisations for political aims. They would be free to decide their own investment, prices, product ranges and growth)

Question 137

Accountable

Answer 137

being responsible for the effects of your actions and will to explain or be criticised by them

Question 138

Incentive

Answer 138

something that is used to enourage people to do something, epecially to make them work harder, produce more or spend more

Question 139

Effects of privatisation to the CONSUMER

Answer 139

it is hoped that consumers benefit from privatisation as businesses are under pressure to meet customer needs and return profit to their owners. This should mean businesses will become efficient, try to provide good quality, charge a reasonable price and grow

Question 140

Effect of privatisation to the WORKER

Answer 140

large numbers of people are made redundant (no longer needed) to cut costs. This has a negative impact as mass redundancies often weaken businesses through the loss of experienced staff and will be difficult + expensive to scale up in the future. To the people still part of the company may be forced to increase their productivity and adopt more flexible working practices

Question 141

Effect of privatisation to the BUSINESS

Answer 141

firms start to experience competition which can affect them by:

• changing their objectives
• increased their investments
• more mergers and takeovers
• diversified into new areas

Question 142

Effect of privatisation to the GOVERNMENT

Answer 142

they benefit from the huge amount of revenue that is generated but privatisation is expensive. It has also been suggested that some state assets were sold off too cheaply => governments failed to maximise the revenue from sales

Question 143

Diversified

Answer 143

if a company or economy diversifies, it increases the range of goods and services it produces

Question 144

Hostile takeover

Answer 144

takeover that the company being taken over does not want or agree to

Question 145

takeovers

Answer 145

act of getting control of a company by buying over 50% of its shares

Question 146

Trade union

Answer 146

organisation representing people working in a particular industry or profession that protects their rights

Question 147

Spillover effect

Answer 147

effect that one situation or problem has on another situation

Question 148

Third parties

Answer 148

someone who is not one of the 2 main people or organisations involved in an agreement or legal case

Question 149

External costs

Answer 149

negative spillover effects of consumption or production - they affect 3rd parties in a negative way

Question 150

External benefits

Answer 150

positive spillover effect of consumption or production - they bring benefits to 3rd parties

Question 151

3 External benefits of production

Answer 151

• education (those who attend schools, universities and colleges are more likely to get better jobs, earn more money and enjoy a better quality of life. This can also benefit the wider society because if people are well-educated they may partake in highly skilled and socially useful jobs, such as doctors, teachers, pilots, etc. As a result, productivity increases and standard of living rises. Arguably, education may also decrease unemployment, improve household mobility and raise rates of political participation => benefitting society)
• health care (indivisuals will benefit if their own personal health improves and if they can return to work + enjoy life more. This can also benefit 3rd parties e.g. if more people are healthy, more people work and so contribute to economic output and paying taxes => benefit society)
• vaccinations (indivisuals who recieve injections to protect against infectious diseases will benefit but also to the 3rd parties as it prevents the likeliness of passing on their illness to another person)

Question 152

Social benefits

Answer 152

benefits of an economic activity to society as well as to the indivisual or firm

SB = private benefits + external benefits (positive externalities)

Question 153

Social costs

Answer 153

costs of an economic activity to society as well as the indivisual or firm

SC = private cost + external costs (negative externalities)

Question 153

Private costs

Answer 153

costs of an economic activity to indivisuals and firms

Question 154

Private benefits

Answer 154

rewards to 3rd parties of an economic activity, such as consumption or production

Question 155

5 Ways government policies deals with externalities

Answer 155

• taxation (can be used to reduce external costs of production and consumption as firms would need to raise their prices resulting in a fall in demand for their product. But if the consumer is addicted or in habit to buying this product, even if prices rise, demand may not shift dramatically)
• subsidies (governments can offer money to firms as an incentive to reduce external costs or to generate external benefits. One problem is the opportunity cost as this money could have been spent more effectively on other government projects)
• fines (they are used to reduce external costs. e.g. fines may be imposed on businesses who damage the environment)
• government regulation e.g. mostly on global warming (even though they may make laws, it is not easy for companies to obey them as governments may lack commitment to enforce laws or lack the resources for a enforcement)
• pollution permits (government could issue documents that give businesses the right to discharge a certain amount of polluting material. These are tradeable, so firms can sell them to each other if they found a way to reduce their own emissions. Therefore, businesses struggling to control levels of pollution cna buy a permit and discharge more polluting material legally. This further creates an incentive in the market for companies to use new technology that reduces pollution using the money recieved when they sold it. However, the government needs to control how much pollution goes into the atmosphere as pollution is difficult to measure of how much we emmit)