merit and demerit goods

Question 1

7 factors effecting the demand( shifting the demand curve)

Answer 1

population

Advertising

Substitutes

Incomes

Fashion

Interest

Complements

Question 2

what is moral hazard

Answer 2

Occurs when one party gets involved in a risky event knowing that they’re protected against the risk as another party may incur the cost

Question 3

what are demerit goods

Answer 3

Products which are more harmful to a consumer than they realise (or choose to realise) at the time of consumption e.g alcohol consumption

Question 4

reasons for demerit goods (7)

Answer 4

Reasons for demerit goods

Information failure

Limited information

Asymmetric information

Too much information

Moral hazard

Persuasive advertising

Question 5

why may information failure be the case with demerit goods (7)

Answer 5

Not being aware of the full harm- info failure

Packaging containing inaccurate, misleading, confusing or limited info

Info given may take time to transmit

Persuasive advertising may convince over- consumption of products which are not in the consumers best interest

Consumers may choose to ignore or re not bothered by the warnings anf info- negative effetcts may occur a long time into the futire (moral hazard may be a factor)

Moral hazard- individuals can make bad decisions if the costs are borne by others (e.g the nhs)

asymmetric info- producers may not share full info with consumers

Question 6

what is the minimum price

Answer 6

the lowest legal price that can be charged for a good or service.
It can refer to any price that is set below which transactions cannot occur. It can be applied to various contexts, like wages (minimum wage) or commodity pricing.

Question 7

what is the price floor

Answer 7

minimum legal price a seller can sell a product. Goal: keep price from falling to Eq snd reduce the consumption of the demerit goods

Question 8

why does gov intervention not always work in terms of price floor (3)

Answer 8

Price inelastic demand (the quantity of a good or service remains relatively unchanged when its price changes) e.g cigarettes

Black market

Price at right level as firms might struggle and they might shut down or leave the market

Question 9

what is the impact of a minimum price on producers

Answer 9

Producers will produce less when there is an intervention as they know this increase in price it is to decrease consumption. An issue is that when the pl is too high they’re selling less in the short run they’re not making as much revenue and in the long run they may have to leave the market

Question 10

what is the impact of a minimum price on consumers

Answer 10

For consumers it depends on the price elasticity of the product. High income suffer less, lower suffer more.
Equal but equity treatment due to regressive policy.

Question 11

what is the impact of a minimum price on the government

Answer 11

Government will be better off as they can use the money from their intervention elsewhere to help society and it helps society anyways as they won’t be buying as much as that demerit good. Although, the government will have to control the black market so they’d to use more funds to help stop the issue of the black market

Question 12

4 assumptions of rational behavior of economic agents

Answer 12

They have all the information

They will make independent choices

Flavors/ trends

They make optimum consumption to get maximum satisfaction

Question 13

what is a merit good

Answer 13

Merit goods are goods and services that society deems desirable and that are likely to be under-produced and under-consumed due to the market system resulting in market failure

Question 14

why does this happen (under produced/consumed)

Answer 14

information failure- misleading info

Question 15

what is asymmetric information

Answer 15

when one party has more information about a g or s than another

Question 16

Explain why a pension is a merit good

Answer 16

A pension is a merit good because it gives older people enough disposable income without having to work and still have a good quality of life in the long run. People don’t understand the actual benefit at the time of paying towards their pensions. People have a lack of information, budget constraint, asymmetric information

Question 17

what is a price ceiling

Answer 17

This is a maximum price, set below the equilibrium price, meant to help consumers of a product by keeping the price low.
used to protect consumers from excessively high prices in markets where essential goods and services might become unaffordable.

Question 18

effects of price ceilings on consumers

Answer 18

Quantity demanded increases
The lower price leads to an increase in consumer surplus
The lower quantity means some consumers who want to will not be able to buy the good