Economics and Pricing (I)

Question 1

The circular flow model of Income and output

Answer 1

How money and resources circulate between households and firms within the economy

Question 2

Households (Definition)

Answer 2

Provide factors of products ( such as labor, land, capital and entrepreneurship) to firms through the factor Market.

In return, they receive income in the fomr os wages, rent, interest and profits.

Question 3

Firms (definition)

Answer 3

Use the factors of products they acquire to create goods and services

Question 4

Product Market

Answer 4

Housholds spen money to purchase goods and serviuces from firms, resulting in spending that contributes to the economy’s Gross Domestic Product (GDP).

This spending flows back to froms as revenue.

Question 5

Fcator Markets (Definiot)

Answer 5

Firms pay households for the factors of products they provide. This payment inlcudss wages (for labor), rent (for land), interest (for capital), and profits (for enterperniship).

These payments from the househol’s income, which they can then use to purchase goods ans services from firms

Question 6

Competitive market and humans welfare

Answer 6

In competitive market, consumers choose what is made and producers must be economically efficient (getting most from productive inputs).

Question 7

Competitive market and human welfare (exceptions)

Answer 7

Consumer choice restricted my government
Monopoly or oligopoly in production
Government subsidy to production or consumption
Market failure

Question 8

Market failure (Definition )

Answer 8

Cases where market will not maximize welfare without government intervention

Question 9

Subsidy (Definition)

Answer 9

Is a financial benefit provided by the goverment or a regulator body to reduce the cost of producing or consuming fossil fuels like cial, oil and natural gas.

Question 10

Using the atmosphere as a free dump for C02 waste ?
(Is it a subsidy?)

Answer 10

Yes, but that is not what people mean by fossil fuel subsidies.

Question 11

Goverment grants to producers abd consumers ( to lower the cost of production or consuption ) ?

(Is this a subsidy ? )

Answer 11

People agree that is a subsidy

Question 12

Goverment not collecting high enough resources royalties ?

(Is this a subsidy ? )

Answer 12

People agree in pricing , but not the correct amount

Question 13

Goverment allowing accelerated depreciation for taxtation purposes ?

(Is this a subsidy ? )

Answer 13

People do not agree. Lost of other industries get this to reflect risk

Question 14

Government financial support for R&D?

(Is this a subsidy ? )

Answer 14

People agree. But renewables get this too.

Question 15

Economic rent (Definition)

Answer 15

Return above the level necessary to invest.

Three types: differential, scarcity and monopoly rent.

Question 16

Differential rent (Definition)

Answer 16

Is the extra income earned by producers with lower production cost compared to the marginal producer, as they benefit from selling at the same market price

Question 17

Scracity rent (Definition)

Answer 17

Is the extra income earned by producers whe resources supply is limited, dividing market prices higher that production cost

Question 18

Monopoly rent (Definition)

Answer 18

Monopoly rent refers to the extra income or profit that a monopolist earns due to their exclusive control over a market or resource.
(Market control and lack of competition)

Question 19

Market price and differential / scarcity rents

Answer 19

Question 20

Natural Monopoly (Definition)

Answer 20

cost of production in an industry is lowest woth only one form, so it is in society’s interest to estabich a monopoly

Question 21

Policy Solution to market failures (Natural Monopoly)(Definition)

Answer 21

Create either a private monopoly and regulate it or create a publicly-owned monopoly

Question 22

Time-of-use pricing (Definition)

Answer 22

Setting different prices at different times of day amd season to reflect time-specific cost of providing energy and capacity.

Question 23

Block pricing (Definition)

Answer 23

Is a pricing strategy where the cost per unit energy chnages based on on the quantity consumed.

Question 24

Load Duration Curve LDC (Definiotn)

Answer 24

Graphival representation that shows the distributino of electrical load over ac specifc perod . It order the power demand from highest to lowest

Question 25

Natural monopoly Examples

Answer 25

Networks are usually natural monopolies. Exp. Railways, telephone lines, sewer systems, water supply systems, pipelines, transmission and distribution lines.

Question 26

Policy makers

Answer 26

Need to decide if a regulated natural monopoly or competition is the best market structure.

Question 27

Electricity sector reform

Answer 27

Question 28

Negative Environmental extrnality (Definition, Example, Policy Solution)

Answer 28

Definition :A harm or risk from production or consumption of a good that is not included in its price.

Example: usually occurs where property rights are not well - defined, as with common property resources like air, ocean, atmosphere

Policy Solution: charge producers the monetary value of the harm (taxes, tradable permits), whic will increase the market price.

Question 29

Social Cost of Crabon (SCC) Modeling Mechanism
(Definition, Importance)

Answer 29

Definition : is a tool used to estimate the economic cost associated with each additional ton of carbon dioxide (CO2) emission relesed into the atmosphere at a partocualr point of time.

Importance : Integrating the hidden cost of carbon emissions into economiv decision -making, by providing providig a more comprehensive viwe of the true cost of carvon-intensive activities

Question 30

Social Cost of Carbon (SCC) (Definition)

Answer 30

Monetary estimate of incremental damages of an extra unit of carbon pollution in each time period.

Question 31

Impact of Technical changes to Natural Monopoly

Answer 31

Technology advancements can disrupt or “undermine” the conditions that create or justofy natural monopoly.

Exp. Cost reduction, alternative solutions

Question 32

Difference between scarcity rent and differential rent

Answer 32

Scarcity rent:
- Arise due limited supply of a resource relative to demand.
-All producers, including the marginal producer, earn scarcity rent when the market price increases

Differential Rent” Arise from difference in production cost between producers.
-Only inframarginal producers earn differential rent because they sell at the market price but produce at lower cost

Question 33

Reasons for Market failure

Answer 33

Externalities
Monopolies
Public goods
Free riders