2. The role of markets

Question 1

Specialisation Advantages

Answer 1

Higher output, higher quality
Greater opportunities for economies of scale
More competition, incentive to lower cost

Question 2

Specialisation disadvantages

Answer 2

Work becomes repetitive, lower motivation
Structural unemployment, skills not transferable
Higher worker turnover for firms

Question 3

Functions of money

Answer 3

Without money, used to be bartering
Measure of value
A store of value
Allows debt to be created, deferred payment

Question 4

Derived demand

Answer 4

Demand linked to the demand of another good, bricks and houses

Question 5

Consumer surplus

Answer 5

below demand above price
Difference in what the pay and what they are willing to pay, increases with a shift in supply

Question 6

Producer surplus

Answer 6

above supply, below price line
Difference the producer is willing to charge and what they actually charge

Question 7

compliment goods

Answer 7

negative XED, if one if more expensive, qd of both will fall, close compliments large number

Question 8

substitute goods

Answer 8

positive XED, price of one tv brand increases, demand for the other goes up
close substitutes, large number

Question 9

symmetric information

Answer 9

producers and consumers perfect information to make their decision

Question 10

asymmetric information

Answer 10

unequal knowledge, car dealer knowing a fault that the consumer is unaware of, misallocation of resources,

Question 11

principle agent problem

Answer 11

managers and shareholders may have different objectives, personal goals, this is asymmetric information

Question 12

moral hazard

Answer 12

individual takes on a risk when they don’t have full consequence, insurance companies will pay if they crash

Question 13

free rider

Answer 13

some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs

Question 14

private good

Answer 14

rival and excludable

Question 15

quasi public

Answer 15

roads or paths, hard to charge, but are somewhat exclusive

Question 16

ad valorem tax

Answer 16

percentage added on, inelastic demand, higher gov revenue

Question 17

specific tax

Answer 17

set tax per unit, more inelastic demand, higher tax burden passed onto customer

Question 18

subsidy

Answer 18

government pay producer, encourage production

Question 19

pollution permits

Answer 19

trade able , can sell and buy permits, but reduce incentive to pollute as they have to pay

Question 20

competition policy

Answer 20

government action to increase competition in markets

Question 21

information provision

Answer 21

when a government intervened to provide correct information to stop market failure

Question 22

regulation

Answer 22

laws to adress market failure, promote competition, ban a good, regulatory recycling schemes

Question 23

excise duty

Answer 23

type of indirect tax

Question 24

factors affecting elasticity of demand

Answer 24

necessity
substitutes
habit/ addiction
proportion of income spent on it

Question 25

factors affecting elasticity of supply

Answer 25

time scale
spare capacity
level of stock
barriers to entry

Question 26

XED

Answer 26

change in QD of X/
change in P of Y

Question 27

free good

Answer 27

no opportunity cost

Question 28

joint demand

Answer 28

demand for 2 goods that are bought together

Question 29

competitive demand

Answer 29

purchase of one means there is less demand for another

Question 30

composite demand

Answer 30

demand for one good goes up, supply falls for the other

Question 31

joint supply

Answer 31

2 goods produced from same origin, beef and leather

Question 32

competitive supply

Answer 32

alternative products that a business could make

Question 33

public good

Answer 33

non rival non excludable

Question 34

advantages of planned economy

Answer 34

government know all externalities
can prevent monopoly power
ensure full employment