economics theme 1 Flashcards

Question

3 determinants of elasticity of supply

Answer 1

1.availability of substitutes- more substitutes= easier to change pattern of production-high elasticity 2.time-less time=harder to switch production of good-inelastic because: item take time to make, no spare capacity, cheap or impossible to hold stock 3.long or short run- long=more elastic as all factors of production can be changed

Answer 2

market equalibrium-1 price where demand=supply therefore there is no excess

Answer 3

if there is excess demand producers will naturally want to maximise profit so increase price. similarly id there is excess supply it will be sold at a lower price to not build up stock-pressure toward equilibrium point

Answer 4

allocates resources between conflicting uses

Answer 5

1.rationing function-if many consumers demand a good but supply is scarce so price increases and limited supply is rationed to those prepared to pay the highest price, if demand is low and supply is high price will decrease to increase demand 2.signaling function-price reflects market conditions and changes decisions on buying and selling 3.incentive function-lower price encourages purchasing of goods as utility gained per £ increases but discourage production as can drive producer out market if not making profit

Answer 6

subsidy=grant given that lowers price of good -to encourage production or consumption of a particular good -so firms employ disadvantaged workers -to increase competition with imported goods

Answer 7

because it is levied on a percentage of the value-higher price=higher tax

Answer 8

incidence of tax= tax burden on tax payer depends on elasticity of supply and demand, if supply=perfectly elastic and demand=perfectly inelastic than incidence of tax= wholly on consumer vice versa

Answer 9

if demand=elastic and supply=inelastic than there will be little change in price and producers will absorb subsidy to increase profits

Answer 10

1.consideration of influence of other peoples behaviours-influenced by social norms to fit in 2.importance of habitual behaviour-habits=short cut in decision making(less time and effort) 3.consumer weakness at computation-consumers aren't willing/able to make comparisons between price and goods on offer-maths=too difficult-firms exploit this

Answer 11

market failure=when resources are inefficiently allocated due to imperfections in market mechanism 1.markets lead to over/under production -partial failure 2.markets don't exist-no production-complete failure

Answer 12

1.externalities-market price/profit don't reflect true cost and benefits 2.under provision of public goods-gain benifit from good without paying for it-no incentive to pay-underprovided 3.information gaps-imperfect information and asymmetric information-buyer/seller knows more than the other

Answer 13

1.negitive production externality- SC larger than PC in production e.g. dumping sewage water 2.positive production externality- SC lower than PC in production e.g. firm cleans up derelict site 3.negitive consumption externality- SB lower than PB in consumption e.g. second hand smoke 4.positive consumption externality- SB larger than PB in consumption e.g. child immune from chickenpox

Answer 14

equilibrium=maximised welfare(PC=PB) social optimum= SC=SB above equilibrium=cost of production larger than benefit of consumption vice versa

Answer 15

1.non rivalry-consumption by 1 doesn't reduce amount available for another 2.non excludability-once provided its impossible to prevent any person consuming the good 3.non reject ability-once provided its impossible for any person to not consume the good marginal cost of providing a unit=0

Answer 16

economic agent receiving benefits other have paid for without contributing-little incentive to pay for public good. solved through quasi public goods(not perfectly public)e.g. tolls on roads

Answer 17

imperfect info=buyer and or seller doesn't have info available to make decision asymmetric info=buyer and seller nave different amounts of info-1 group has more than other

Answer 18

1.education-principle agent problem, goals of principle(student) are different to goal of agent(parent) 2.pensions-young workers paying too little into pension so gov have to force them to save 3.drugs-unaware of long term cost of drug use leading to overconsumption 4.financial services-2008 crash-assumed state would bail out a failing bank 5.advertising-persuasive ads increase info failure to benefit seller e.g. smoking looks cool

Answer 19

1.indirect taxes-firms produce less which limits negative externalities 2.subsidies-upkeep positive externalities or correct info failure 3.maximum price-makes goods more affordable problems: 4.minimum price-used on good with negative externalities of consumption 5.regulation-closes info gaps, controls externalities, cheap to enforce 6.trade pollution permits-reduces externalities caused by pollution. Permit total=cap=target for emission 7.state provision of public goods-not provided by market mechanism so gov provided directly 8.provision of information-gov provide3d info themself and force parties to release info

Answer 20

1.indirect taxes-difficult to target, use tax to raise revenue, taxes=unpopular 2.subsidies-difficult to target, conflict with other policy objectives, difficult to remove 3.maximum price-create black markets 4.minimum price-create black markets who sell at lower price, no effect if below equilibrium 5.regulation-difficult to fix the right level, don't discriminate between different costs and reducing externalities e.g. cheaper if it happened by 1 firm 6.state provision of public goods-insufficient production, wrong mix of goods may be produced

Answer 21

when total social cost is greater than total social benefit caused by government intervention

Answer 22

1.distortion of price signals-impose tariffs on imports so domestic market isn't pushed out making domestic goods more expensive and space could be used more efficiently-larger than producer gain 2.unintended consequences-increasing food prices depressed world price as rich country price=undercut 3.excesive administrative costs-cost of correcting market failure outweighs welfare benefit 4.info gap-info available=misleading therefore make wrong policy 5.conflicting objectives-opportunity cost-choose option giving lower economic welfare 6.politicians maximise own welfare-policies benefit electors at expense of welfare for other citizens