Economics mock Flashcards
how can tradable pollution permits be used as a method of government intervention
- governments create a pollution permit market to issue permits to polluting firms
- this reduced the negative externalities of production
- more polluting firms have to buy permits from less polluting firms
- the price of the permits represent an extra cost of production
- if the price of the permit is more than investing in less pollutant technology firms will be incentivised to switch to cleaner technology
- firms can sell their permits and gain additional revenue reducing the cost of production
how can state provision of public goods be used as a method of government intervention
- public goods are beneficial for society but are not provided by private firms due to the free rider problem
- they are often free at the point of consumption and are paid for through general taxation
how can provision of information be used as a method of government intervention
- information gaps can cause market failure
- governments can set up information portals to reduce asymmetric information
how can regulation be used as a method of government intervention
- governments create rules to limit harm from negative externalities of production/consumption
- they create regulatory agencies to monitor that the rules are not broken
what are information gaps
- consumers do not have full knowledge before consumption
- this is known as asymmetric information
- asymmetric information distorts socially optimal prices and quantities in markets resulting in both over provision and under provision of goods/services
how do information gaps cause market failure
- they distort market outcomes
- goods with dangerous side effects would be sold in lower quantities if buyers were aware of its effects and fewer factors of production should be allocated towards producing these.
- goods with extra benefits would be sold in higher quantities if buyers were aware of them and factors of production should be allocated towards producing these
what is ad
the sum of all expenditure in the economy
AD = Consumption (C) + Investment (I) + Government spending (G) + Net Exports (X-M)
what is sras
Short-run aggregate supply (SRAS) is the total supply provided in the economy at a given average price level
how does exchange rates impact rising inflation
A weaker currency - imports more expensive - raises production costs for businesses reliant on imported inputs leading to cost-push inflation.
graph
1 ad line top down
2 sras lines down up - shifting left because higher production cost
a stronger currency - imports cheaper exports more expensive
means it more expensive to borrow and more rewarding to save which will slow down inflation
consumption decreases so ad decreases
ad shifts left and prices decrease
what is the economic problem
- resources are scarce
- there are finite resources however unlimited human wants and needs
- the resources are the factors of production and choices have to be made by producers on how to use these factors of production
- resources can either be renewable or non renewable
- opportunity cost is the loss of the next best alternative when making a decision
advantage of the division of labour
it leads to increased productivity and efficiency - and lowers the cost of production per unit for firms
