Introduction to Markets and Market Failure

Question 1

Ceteris Parabis

Answer 1

All other things remain the same

Question 2

Positive Statement

Answer 2

Objective statement. Can be proved in the future and expressed in the form of a hypothesis

Question 3

Normative Statement

Answer 3

Subjective statement. Based on opinion so can’t be proved. Includes ought, might, should,

Question 4

Scarcity

Answer 4

Wants are unlimited but resources are finite. Resources aren’t scarce but the demands placed upon them make them scarce

Question 5

How to solve basic economic problem

Answer 5

What, how, for whom

Question 6

Renewable Resources

Answer 6

The rate of consumption is less or equal to the rate of replenishment (solar power, wind power)

Question 7

Non Renewable Resources

Answer 7

The rate of consumption is more than the rate of replenishment (coal, oil)

Question 8

Opportunity Cost

Answer 8

The cost of one thing in terms of the next best option which has been given up. This is here in econ as the unlimited wants and finite resources together means choices have to be made. NO OPPORTUNITY COST FOR FREE RESOURCES

Question 9

Rational Decision Making

Answer 9

1. Consumers make choices on how to use their limited income based on what gives them the most satisfaction
2. Producers will make choices on how to use their limited income based on what gives them profit
3. Gov will make choices on how to use their limited tax revenues based on what gives them max social welfare

Question 10

Factors of Production

Answer 10

Land, Labour, Capital, Enterprise

Question 11

Land

Answer 11

All natural resources used in production (raw materials). Owners receive rent from land

Question 12

Labour

Answer 12

Productive human effort: paid, unpaid, physical and mental. The value of worker is their human capital. Labourers receive wages

Question 13

Capital

Answer 13

Refers to man made resources that are used to make goods in the future. Owners of capital receive interest from land.

Question 14

Enterprise

Answer 14

Willingness and ability to take the risk of combining the other 3 in order to make a product. Earn profit

Question 15

PPF

Answer 15

Max possible combinations of capital and consumer good that economy can produce with its current resources

Question 16

Max Productive Potential

Answer 16

Any point on curve represents max productive potential, of economy, the most the country can produce.

Question 17

Economic Growth

Answer 17

Growth as the economy can produce more of both goods. Caused by increasing quality or quantity of resources

Question 18

Economic Decline

Answer 18

Decline as they can only produce less goods than original. Caused by natural disasters, war, decrease in labour

Question 19

Efficient/Inefficient Allocation

Answer 19

Point on graph: resources are allocated efficiently
Point below: Possible to produce but inefficient as they are producing within the curve but not max output
Point above: unobtainable production. Beyond PPF therefore not enough resources

Question 20

Consumer Goods

Answer 20

Goods that are demanded and bought by households and individuals. Satisfy our wants and needs directly

Question 21

Capital Goods

Answer 21

Goods that are made to aid the consumer goods production in the future. Man made goods that are used to supply other goods.

Question 22

Specialisation

Answer 22

Production of the limited range of goods by a company which means trade is essential as they get access to all the things they need

Question 23

Division of Labour

Answer 23

When labour becomes specialised in a particular part of the production process

Question 24

How to maximise the amount of goods

Answer 24

Ensure that all factors of production undertake the tasks that they are best at

Question 25

Adam Smith

Answer 25

Concept of specialisation and division of labour showed it can increase labour productivity, allowing firms to increase efficiency and lower cost of production (pin)

Question 26

Advantages of specialisation and the division of labour in organising production

Answer 26

1. Concentrating on one thing so can develop skills and become more efficient. 2. High quality and quantity of goods as they are more skilled 3. Don't waste time and money as workers are skilled to do one job

Question 27

Disadvantages of specialisation...

Answer 27

1. Gets very boring as the person is doing only one task leading to poor quality of work 2. If one process is delayed then the whole process has to be stopped

Question 28

Advantages of specialising in production of goods and services to trade

Answer 28

1. Countries should specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing. This will help them boost their economy. On the whole, there is greater output globally

Question 29

Disadvantages of specialising in production...

Answer 29

1. Countries may become over dependent on one particular export 2. Some countries have non renewable resources which would run out resulting in a huge loss in income and loss of resources 3. They could be mutually dependent on each other meaning that if trade is prevented then this could cause problems

Question 30

Functions of money

Answer 30

A medium of exchange, a measure of value, a store of value, a method of postponed payment

Question 31

Medium of Exchange

Answer 31

Used to buy and sell goods and is accepted everywhere. Everyone will accept money as they can use it to buy whatever they want. Problem: can only trade if both parties want the good the other party offers

Question 32

Measure of Value

Answer 32

Compare values of 2 goods

Question 33

Store of Value

Answer 33

Able to keep its value and can be kept for a long time. When trading, goods went out of date so couldn't keep their value

Question 34

Method of Postponed Payment

Answer 34

Allow debts to be created. Relies on money storing its value

Question 35

Price Mechanism

Answer 35

Consumers and businesses interact to determine the allocation of resources between competing uses

Question 36

Free Market Economy

Answer 36

Free to make their own choices and own factors of production without gov intervention. Resources are allocated through price mechanism. No free markets as gov does intervene by issuing money and protecting property rights. Without this market mechanism won't work

Question 37

Adam Smith

Answer 37

Believed in free market economy. Invisible hand in market which allocated resources to everyone's advantage. Competition in markets=lower prices as firms wanted to be competitive=consumers pay less. Argued state needed to provide goods which free markets wouldn't: laws, bridges, roads

Question 38

Friedrich Hayek

Answer 38

State control=loss of freedom. Believed that poor in free market countries lived better than in command economies as they had personal freedom.

Question 39

Advantages of Free Market Economy

Answer 39

1. Automatic system due to invisible hand 2. Freedom of choice for consumers 3. Political freedom 4. Competition= lower costs for goods= productive efficiency

Question 40

Disadvantages of Free Market Economy

Answer 40

1. Inequality as rich own more factors of production so get more richer 2. If competition disappears, chance of monopolies who charge high prices and low quality of service 3. Problem of externalities

Question 41

Command Economy

Answer 41

All apart from labour is owned by state. Labour is directed by the state. No private property and everyone working for a common good. Resource allocation is carried out by gov, not price mechanism. Some planning is complex meaning some decisions are left up to the consumers. All workers, no matter their job, tend to receive the same wage, products are standardised and prices are limited causing excess demand and queueing.

Question 42

Karl Marx

Answer 42

``` Believed in command economy. Capitalist’s profit came from exploiting labour as they underpaid workers for the value that they actually created. Wanted to remove the difference between the incomes of owners and workers and believed that capitalism would collapse, leading to communism. Marx saw businesses growing and workers getting poorer, creating a two class system with a few wealthy capitalists and many underpaid workers. He thought more firms would fail because of competition causing unemployment, lower wages and higher prices. This would lead to democracy where everything was owned by everyone ```

Question 43

Advantages of Command Economy

Answer 43

1. Minimum standard of living=less inequality 2. Less wastage of resources due to no competition 3. Long term planning

Question 44

Disadvantages of Command Economy

Answer 44

1. Impossible for state to make decisions correctly, leading to wastage of resources 2. Less motivation as people know that working harder wouldn't increase their standard of living 3. Consumers lose their freedom

Question 45

Mixed Economy

Answer 45

Compromise economy. Both the free market mechanism and gov planning process allocate a significant amount of the total resources in the country

Question 46

Gov Role in Mixed Economy

Answer 46

Creating framework of rules, supplements and modify price system, redistributing income, stabilise economy

Question 47

Creating Framework of Rules

Answer 47

Prevent abuse of monopolies. a company with more than 25% of market share can be considered as having monopoly power so can take advantage of their customers due to the lack of competition and charge higher prices/provide a poorer service. Gov can protect customers as they pass a large amount of consumer protection laws to protect the consumers from it. They protect property rights, ensuring whatever a person owns cannot be taken away by someone else. Also, they ensure safety standards, protecting employers and employees.

Question 48

Supplements and Modify Price System

Answer 48

They produce public goods, such as emergency services and transport, and limit the production of goods like child pornography. Government action ensures the consideration of externalities.

Question 49

Redistributing Income

Answer 49

They move income from the rich to the poor. They use tax to take money away from one group then give the money to the poor. This is in the form of benefits for those who are out of work or on low incomes, and in the provision of services for all, such as education and the NHS, allowing the poor to access these services when they might not have been able to afford to.

Question 50

Stabilising Economy

Answer 50

The government will attempt to manage the level of demand in the economy to prevent extremes of too much or too little demand. They do this through fiscal and monetary policy.