Government Interventation

Question 1

Why do governments intervene in markets

Answer 1

Earn revenue, to support firms, support low income earning households

Question 2

Price controls

Answer 2

Setting a minimum or maximum price by the government so that prices can’t adjust to their normal equilibrium level determined by supply and demand

Question 3

Market disequilibrium

Answer 3

Market is prevented from reaching clearing price and there are shortages of surpluses

Question 4

Price ceilings

Answer 4

When the government sets a legal maximum price for a particular good

Question 5

Consequences of price floors and explain each

Answer 5

Shortages, non-price rationing, underground markets, welfare loss

Question 6

Consequences of price ceilings on consumers (stakeholders)

Answer 6

Consumers gain and lose. Coz bought at less but the good is less in quantity

Question 7

Consequences of price ceilings on producer stakeholders

Answer 7

Worse off. Less quantity, less money

Question 8

Consequences of price ceilings on worker stakeholders

Answer 8

Unemployment

Question 9

Examples of price ceilings

Answer 9

Rent controls, food price controls

Question 10

Price floor

Answer 10

This is setting a legal minimum price below price equilibrium

Question 11

Why governments set price floors

Answer 11

Support firms, to protect low-skillled labour

Question 12

Consequences of price floors

Answer 12

Surplus, firm inefficiency, over allocation of resources, government has to dispose of surplus

Question 13

Consequences of price floors to consumers (stakeholders)

Answer 13

Pay higher price while getting less quantity

Question 14

Consequences of price floors to producers (stakeholders)

Answer 14

Get more money coz govt buys surplus, produces more but misallocation or waste of resources

Question 15

Consequences of price floors to workers (stakeholders)

Answer 15

Employment

Question 16

Consequences of price floors to governments (stakeholders)

Answer 16

They buy surplus and it’s a burden on the budget

Question 17

How to calculate consumer expenditure (PF)

Answer 17

Before PF; Pe x Qe
After PF; PF x Qd

Question 18

How to calculate producer revenue (PF)

Answer 18

Before PF; Pe x Oe
After PF; PF x Qs

Question 19

How to calculate government expenditure (PF)

Answer 19

PF x Consumer Surplus(Qs - Qd)

Question 20

How to calculate change in consumer surplus (PF)

Answer 20

B4 PF: Max - Pe x Qe divided by 2
After PF: Max - PF x Qd divided by 2

Question 21

How to calculate change in producer surplus (PF)

Answer 21

Before PF: Pe - lowest x Pe divided by 2
After Pf: PF - lowest x Qs divided 2

Question 22

How to calculate welfare loss (PF)

Answer 22

Rectangle minus f(triangle)

Question 23

Minimum wage

Answer 23

This is the legal minimum amount that can be paid to workers

Question 24

Consequences of minimum wage on the economy at large (explain each)

Answer 24

Labour surplus leading to unemployment
Illegal workers below minimum wage
Miss allocation of resources

Question 25

Consequences of minimum wage for stakeholders

Answer 25

Firms pay more Workers earn more but could loss jobs Consumers get less supply of goods at higher prices

Question 26

Indirect tax

Answer 26

These are taxes imposed on producers by the government but are pushed to another group usually consumers

Question 27

Two types of indirect tax

Answer 27

Excise tax (imposed on particular goods eg petrol Taxes on all goods and services

Question 28

Why do governments impose indirect tax

Answer 28

To reduce consumption of demerit goods Source of government revenue To redistribute income

Question 29

Consequences of indirect tax to stakeholders

Answer 29

Consumers pay more for less quantity Producers earn less and produce less Governments earn

Question 30

How to calculate consumer expenditure after indirect tax

Answer 30

Before tax; Pe x Qe After tax; Pc x Qt The subtract before - after

Question 31

How to calculate producer revenue after indirect tax

Answer 31

Before tax; Pe x Qe After tax; Pp x Qt Then subtract

Question 32

How to calculate government spending after indirect tax

Answer 32

First find the tax which is PC - PP = tax Then T x QT

Question 33

How to calculate welfare loss after indirect tax

Answer 33

Consumer surplus before tax plus producer surplus before tax minus consumer surplus after tax plus producer surplus after tax

Question 34

Subsidy

Answer 34

This is assistance by the government to individuals eg firms in form of direct cash or low interest rates

Question 35

Reasons why the government gives subsidies

Answer 35

To help start up businesses To make certain goods affordable for consumers esp food or meds To increase employment

Question 36

Consequences of subsidies to stakeholders

Answer 36

Consumers pay less for more quantity However it’s tax payers money that could be spent better so opportunity cost Producer produce more earn more Government it’s a burden on budget

Question 37

Convulsing effects of subsidies

Answer 37

It’s the same thing(think)

Question 38

Draw all graphs

Answer 38

🙂