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Econ > How Markets Work 1.2 + Market Failure 1.3 + Government Intervention 1.4 > Flashcards

How Markets Work 1.2 + Market Failure 1.3 + Government Intervention 1.4 Flashcards

1
Q

What does a supply curve show?

A

The quantity of a good/service that producers are able and willing to sell of a given price

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2
Q

Why is the supply curve modelled upwards

A

Law of decreasing marginal returns

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3
Q

What is producer surplus?

A

-The difference between the price that a producer receives for a good/service and the price they were able and willing to supply it at

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4
Q

What assumption do we make about producers objectives?

A

Maximising producer surplus

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5
Q

What is the law of diminishing marginal returns?

A

Diminishing marginal returns occur when there is a decrease in the additional output generated by adding additional units of a variable F.o.P to a fixed F.o.P

-> marginal cost of good increases while returns decrease

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6
Q

What are the factors that affect supply?

A

GTECC

-Government regulations (Taxes/Subsidies)
-Technology
-Expectations
-Cost of input
-COmpetition

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7
Q

What does a demand curve show?

A

The quantity of goods or services that consumers are willing and able to buy at a given price

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8
Q

Why do we model a demand curve down?

A

-Diminishing marginal utility

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9
Q

What is diminishing marginal utility?

A

-As consumers consume more of a good the utility they derive from an additional unit decreases

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10
Q

what is consumer surplus?

A

The difference between the price that a consumer is able/willing to pay and the price they acc pay

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11
Q

What assumption do we make about consumers objectives?

A

-They are motivated by maximising their consumer surplus and utility

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12
Q

What is marginal benefit?

A

The benefit of consuming an extra unit of a good

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13
Q

What are the factors that affect demand?

A

PIPED

-Preferences
-Income
-Price of related goods
-Expectations
-Demand

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14
Q

What does PES measure?

A

The ability of suppliers to respond to a change in price

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15
Q

What does PED measure?

A

The ability of suppliers to respond to a change in price

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16
Q

What is marginal revenue?

A

The increase in revenue if you sold one more unit
-change in TR/Change in Qs

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17
Q

What are the factors which affect PED?

A

NASBIT

1.Necessity
2.Addiction
3.Substitues
4.Brand loyalty
5.Proportion of INcome
6.Time period (short run = inelastic)

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18
Q

What factors effect PES

A

TEASS. 1.Time Period
-Short run: Period of time when at least 1 FoP is fixed (inelastic)
-Long run: All fops can be changed (elastic producers can respond)

2.State of Economy
-Bad state - more FoPs available = elastic

3.Availability of FOP

4.Stockpile & Perashability
-Easily stockpiled items are easier for producers to respond to a change in price

5.Spare capacity
-Lots of spare capacity - elastic (can increase quantity supplied by a larger %)

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19
Q

How does rationing in the price mechanism work?

A
  • due to scarcity, not everyone is able to buy everything they want; when demand is greater than supply, prices will rise so that the good/service is rationed out only to those who can afford to pay for the items.
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20
Q

How does incentive work in the price mechanism?

A

when the price of a product rises it creates an incentive for firms to shift production towards those products that help generate higher profits. Likewise falling prices may create an incentive for firms to move away from the production of a product

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21
Q

How does signalling work in the price mechanism?

A

when the price of a product rises it signals to producers that the demand for that product is probably high and firms should increase production. Prices are helping to determine where and how resources should be allocated

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22
Q

An indirect tax is a…

A

Indirect tax is a levy imposed by the government on the consumption or production of a good or service. It has the effect of increasing the cost of supply for producers. Although producers cannot pass on the legal burden, producers can pass on the economic burden of indirect tax by increasing the costs for consumers in order to account for taxes (P1 to P2.) Therefore this discourages consumption, decreasing demand ( Q1 to Q2 ) This also discourages production as producer total revenue decreases.

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23
Q

VAT is
-imposed on the ……..
-Taxation at point of …….

A

Producer
Sale

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24
Q

Excise Duties:
-Taxation at point of ………..

A

Production

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25
Q

Indirect Tax shifts the….

A

Supply curve

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26
Q

Indirect Tax is inflationary and …

A

Encourages saving

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27
Q

What is ad valorem tax?

A

-When government increases price of a product by a specific percentage

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28
Q

VAT is an example of?

A

Ad Valorem Tax

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29
Q

A direct tax is a

A

Levy imposed by the government on the income/wealth generated by an activity. It often discourages the activity
-DIscourages working/investment if too high

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30
Q

What are examples of Direct Tax?

A

-Income Tax
-Corporation Tax

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31
Q

Direct Tax always shifts…

A

Demand curve to the left

32
Q

Direct tax causes prices to go down and is…

A

Deflationary

33
Q

Income tax:

A

-leaves people with less money in their pockets
-t.f less likely to spend money on the product

34
Q

What is regressive tax?

A

-Hurts people with lower income more than higher
-Indirect tax
-2% or 20p of EVERYONES incomes

35
Q

Proportional tax is…

A

Corporation tax
Direct tax

36
Q

Progressive tax:

A

-Hurts people with higher income more than lower income
-Direct tax

37
Q

Incidence of tax depends on…

A

PED and PES

38
Q

IF PED is more elastic than PES burden of taxation is greater on…

A

Producer

39
Q

Welfare loss:

A

-occurs when a market fails to allocate resources efficiently
-only applicable is resources were allocated efficiently

40
Q

What are the 4 canons of taxation?

A

CEEC

-Efficient
-Equitable (asking tax payers to pay something they can afford)
-Convenient (easy to transfer to gov)
-Certain

41
Q

What is a subsidy?

A

A subsidy is a grant given by the govt to producers (sometimes consumers). It has the effect of lowering costs for producers which in turn reduces the price of the good and encourages the consumption of it. It also has the effect of increasing revenues for producers encouraging the production of it.

42
Q

What are the benefits of unit tax?

A

-Money collected can be used for advertisements and projects that will discourage harmful behaviour even before

43
Q

What is consumer surplus?

A
  • The difference between the amount consumers are willing to pay and the price they actually pay
44
Q

What is producer surplus?

A
  • the difference between the amount producers are willing to sell a good for and the price they actually receive
45
Q

What is market failure?

A
  • when too much or too little of a good is being produced and/or consumed compared with the socially optimal level of output
  • or when the price mechanism leads to an inefficient allocation of resources
46
Q

What is an externality?

A
  • an external cost/benefit of an economic transaction is the cost/benefit experienced by a third party not involved in the transaction
47
Q

When is an externality negative?

A

Social costs > private costs

  • social costs = private costs + external costs

(Taking a flight)

48
Q

When is an externality positve?

A
  • when social benefits of an economic action are greater than the private benefits

Social benefits > private benefits

(Planting a tree)

49
Q

What are public goods?

A
  • non-rival and non-excludable goods
50
Q

What are non-rivalrous goods

A
  • when one person consumes a good there is no less of the good left for another person to consume
51
Q

What are non-excludable goods?

A
  • for practical purposes, producers cannot stop consumers who don’t want to pay from consuming the good

(Flood defences)

52
Q

What problems occur with public goods?

A

Free rider problem

  • occurs when firms are unable to stop consumers who dont want to pay from consumer goods/services
  • leads to the missing market
  • (street lighting, flood defences)
53
Q

How can free rider problems be solved?

A
  • government intervention as society will be better off if defences were put in place
  • government builds it itself
  • government pays the private sector on behalf of the public
54
Q

What are information gaps?

A
  • when information is asymettric and producers know more than consumers or the information is incomplete or imperfect
55
Q

Give an example of an information gap

A
  • people who are over-consuming alcohol don’t realise they are over consuming and therefore harming their health
56
Q

How can information gaps be closed?

A
  • government intervention
  • packaging laws to reduce information gaps (smoking)
  • these policies only work for new consumers entering the market. Long time consumers have different issues
57
Q

Give an example of a cognitive gap

A

Time asymmetry (behaviour bias):
- rational agents
- value the present over future
- (smoking)
- (not saving enough money)

58
Q

What is regulatory capture?

A
  • occurs when the regulator acts in the interest of the industry they are regulating instead of public interest
59
Q

What is principle agent problem?

A
  • agent acting in self interest rather in the interest of the principal
60
Q

What is the revolving doors problem?

A
  • government uses specialists to make laws
  • specialists go back into industry and find loopholes in these laws
61
Q

How does the government affect the market when setting as minimum price?

A
  • discourage consumption of a particular good
  • set above the market price
  • Scotlands minimum price for alcohol
62
Q

How would the government setting a maximum price affect markets?

A
  • encourage consumption of a particular good
  • set below the market price
  • contraction of supply but extension of demand
  • Cyprus introducing a maximum price of milk
63
Q

What is government failure?

A
  • when the government intervenes to correct a market failure but the result is more inefficient allocation of resources and there is a net welfare loss.
64
Q

What are some causes of government failure?

A
  • distortion of price signals:
    leading to unintended consequences such as smuggling and illicit production,
  • excessive administrative costs and information gaps
65
Q

Example markets include:

A
  • agricultural sector (Cyprus milk maximum price)
  • transport policies (Mexico City and car emissions)
  • housing policies (rent controls)
  • tobacco and alcohol policies (taxing tobacco and alcohol, leading to smuggling)
66
Q

What is YED?

A
  • Income elasticity of Demand
  • YED = % change in Q / % change in Y
  • Luxury good > 1
  • 1 > Normal Good > 0
  • Inferior good < 0
67
Q

What is a normal good?

A
  • as income goes up you want to buy more of it
68
Q

What is an inferior good?

A
  • as income increases you want to buy less of it
69
Q

What is a positional good?

A
  • goods valued by how they are distributed amongst society (Ferrari)
70
Q

What is XED?

A
  • cross elasticity of demand
  • % change in quantity demanded of A / % change in price demanded of B
  • if XED is positive the two goods are substituted
  • if XED is 0=0 they are unrelated
  • if XED is negative they are complements
71
Q

What is competitive supply?

A
  • multiple goods come from the same supply ( milk and yoghurt)
  • alternative products a firm could make with its resources
72
Q

What is joint supply?

A
  • come from the same process
73
Q

XED for substitutes is…

A

Positives

74
Q

XED for complements is…

A

Negative
- demand for one good increases alonng with another

75
Q

What is competitive supply?

A
  • multiple goods come from the same supply
  • alternative products of a firm could make with its resources
76
Q

What is joint supply?

A
  • come from the same process (beef + leather)
77
Q

What does XED measure?

A
  • how much quantity demanded of good A will respond to a change in price of good B

Econ (8 decks)

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