Micro 1.2

Question 1

Define: Free Market Mechanism

Answer 1

The system bu which the market forces of supply and demand determine and the decisions made by consumers and firms

Question 2

Define: Allocative efficiency

Answer 2

When society is producing an appropriate bundle of goods relative to consumer preferences

Question 3

Define: Productive efficiency

Answer 3

Using resources ‘fully’ such that the average cost of production is at its lowest point

Question 4

Define: Economic efficiency

Answer 4

Occurs when both allocative and productive efficiency are achieved

Question 5

Where on the diagram is allocative efficiency

Answer 5

Where marginal cost = Marginal benefit

Question 6

Define: Private costs

Answer 6

The costs incurred by those taking a particular action

Question 7

Define: Third party

Answer 7

Those not directly involved in a decision

Question 8

Define: External costs

Answer 8

The costs imposed upon third parties as a consequence of decisions made by producers or consumers. The external cost is therefore not reflected in the market price

Question 9

Social costs =

Answer 9

Social costs = Private costs + external costs

Question 10

Allocatively efficient level of output is described as _____

Answer 10

SOLO

Question 11

Evaluation for externalities

Answer 11

1. Magnitude
2. Measurement difficulty
3. Potential benefits
4. Time lag
5. Impact on different groups

Question 12

Define: Positive externality

Answer 12

A benefit that would be enjoyed by a third-party but is under-consumed

Question 13

Causes of information failure

Answer 13

1. Asymmetric information
2. Complex information
3. Addiction
4. Inaccurate information

Question 14

Public goods are both

Answer 14

Non-rival and non-excludable

Question 15

What does non-rival mean

Answer 15

Consumption by one person does not reduce availability for a good to others

Question 16

What does non-excludable mean

Answer 16

Consumers cannot be excluded from consuming that good or service

Question 17

What is a merit good

Answer 17

A good that is underconsumed. Education

Question 18

What is a demerit good

Answer 18

A good which can have a negative impact on the consumer - Overconsumed. Alcohol

Question 19

Define: Subsidy

Answer 19

A payment, usually from the govt., to encourage production or consumption

Question 20

Subsidy evaluation

Answer 20

1. How much to subsidise
2. Firms become dependent
3. Expensive for tax payers
4. Firms don’t pass on the subsidy

Question 21

Subsidies are more effective for _______ goods

Answer 21

Elastic

Question 22

Subsidies are less effective for ________ goods

Answer 22

Inelastic

Question 23

Top part of subsidy area benefits

Answer 23

Producer

Question 24

Bottom part of subsidy area benefits

Answer 24

Consumer

Question 25

Define minimum price

Answer 25

Where the government sets a price above the equilibrium price level. Price cannot go below the floor. Makes goods more expensive

Question 26

What does a minimum price diagram look like

Answer 26

Line drawn above the equilibrium

Question 27

Evaluation of minimum price

Answer 27

Ineffective if PED is inelastic Increase in inequality High price encourages black market Encourages inefficient producers

Question 28

Define maximum price

Answer 28

The government sets a price below the equilibrium price level. Price cannot go above the ceiling. Makes goods cheaper

Question 29

Advantages of maximum price

Answer 29

May reduce exploitation of consumers May reduce inequality Makes necessities affordable

Question 30

Advantages of minimum price

Answer 30

Reduces qd Limits negative externalities Helps producers

Question 31

Evaluation of maximum price

Answer 31

Excess demand = Some consumers get no good | Shortage encourages black market

Question 32

Information provision advantages

Answer 32

Reduces market failure Consumers maximise welfare Decrease in demand for demerit goods

Question 33

Evaluation of information provision

Answer 33

Consumers may not understand information Expensive to provide Time lag

Question 34

Types of govt. regulation

Answer 34

Ban Cap Health and safety regulations increasing costs

Question 35

Types of government failure

Answer 35

Distortion of price signals Unintended consequences Excessive administration costs Information gaps