Micro LS(11-15)

Question 1

Direct tax

Answer 1

A tax levied directly on an individual / organisation

Question 2

Indirect tax

Answer 2

A tax levied on a good or service
- increases the supply costs faced by producers
- The amount of this tax is shown by the vertical distance between the two supply curves
- This tax reduces the quantity demanded which increases the price, but the demand curve does not shift.

Question 3

Define Ad Valorem tax

Answer 3

Causes a nonparallel/pivotal shift in the supply curve. The tax increases as the amount sold rises. Examples would be VAT

Question 4

Define specific tax?

Answer 4

A taxwhich causes a parallel shift in the supply curve. The tax is the same amount of oil prices, for example, fuel duty. 

Question 5

Why do governments impose taxes and give subsidies

Answer 5

Your government imposes taxes to discourage certain economic activities and to raisegovernment revenue
The government gives subsidies to encourage certain economic activities

Question 6

Define price, elasticity of demand and explain it

Answer 6

Price elasticities of demand measures the responsiveness of demand, given a change in price
Demand is price elastic when a change in price causes a proportionally larger change in demand
If the change in price causes a proportionally, smaller change in demand demand is said to be price inelastic

Question 7

What are the determinants of price elasticity of demand?

Answer 7

• Number of substitutes: the most substitutes of product as the greater, the degree of consumer switching will be when there is a price change. A large number of substitutes equals high price elasticity.
  – Necessities/luxury: if a product is considered a necessity, demand is likely to be price inelastic as people require the product, no matter what the prices is
  – Addictiveness: the more addictive product is the more inelastic
  – Time: time gives consumers opportunity to switch, therefore, great of the time period the more price elastic demand will be
• Proportion of income spent on the product: if there is a greater proportion of income spent, it will be more elastic because they won’t be able to afford any price increases.

Question 8

Define:
- derived demand
- effective demand
- joint demand
- composite demand

Answer 8

• Derived demand: demand for a good/service (factor of production) resulting from the demand for a related goods/service, for example, the demand for builders is derived from the demand for houses
• Effective demand: when a consumer is willing AND ABLE to buy a good/service
• Joint demand: the combined demand of two or more interlinked goods. This is also known as, interdependent demand.
• Composite demand: when going to have more than one used to increase in demand for one leads to a fall in the supply of the other, for example milk produces yoghurt, and cheese

Question 9

How do you calculate the price elasticity of demand?

Answer 9

% change in quantity demanded DIVIDED BY % change in price

Question 10

What is the PED value for:
- Elastic
- Inelastic
- Unitary
- Perfectly elastic

Answer 10

• elastic: { x >1 }
• inelastic: { 0 < x < 1 }
• unitary: { x = 1 }
• perfectly elastic: { x = 0 }

Question 11

Define price, elasticity of supply

Answer 11

The responsiveness of supply given a change in price

Question 12

When is supply price elastic/price inelastic?

Answer 12

• when supply is price elastic a change in price causes a proportionately larger change in supply
• When supply is price inelastic a change in price causes a proportionally smaller change in supply

Question 13

What are the determinants of price elasticity of supply?

Answer 13

• Time required to produce the product: the greater the time needed to produce the product. The more price inelastic supply will be because it cannot respond to changes in price quickly.
• Level of spare capacity: the greater the spare capacity in an industry, the more price elastic supply will be this is because there will be extra factors of production available to be used. (Spare capacity is the ability to produce more of a product than is being produced, with given factors of production,)
• Number of stocks/finished goods available: the more finished goods that are available to sell them or price. Elastic supply will be because firms will be able to respond straight away.
• Time: time gives firms the opportunity to expand or reduce production therefore, the greater the time the more price elastic supply will be
• Perishability of the product: the more perishable product is the more inelastic, the supply will be because it’s hard to build up stocks of it

Question 14

Define consumer surplus

Answer 14

The extra amount of money consumers are prepared to pay for a good/service above what they actually pay. It is the utility/satisfaction gained from a good or service in excess of the amount paid for it.

Question 15

Define producer, surplus

Answer 15

The extra amount of money paid to produces above what they are willing to accept to supply a good or service. It is the extra earning obtained via produce above the minimum required for them to supply the good or service.

Question 16

Discuss the incidence of an indirect tax in detail

Answer 16

This is the distribution of tax between consumers and producers. It depends on the elasticity of both demand and supply. When demand is price, elastic burden of the tax will fall, mostly on producers. When demand is price, inelastic, burden of the tax will fall, mostly on consumers.

Question 17

Discuss the incidence of a subsidy

Answer 17

This refers to how the gains of the subsidy are distributed between consumers and producers. It depends on the elasticity of both demand and supply. When demand is price elastic, most of the gains, go to producers. When demand is price, inelastic most of the gains, go to consumers.

Question 18

Define the income affect

Answer 18

Assuming a fixed level of income, the income affect means that as price falls the amount that consumers can afford increases, and so demand increases

Question 19

Define marginal utility

Answer 19

the utility or satisfaction obtained from consuming one extra unit of a good or service.

Question 20

Define diminishing marginal utility

Answer 20

As successive units of a good are consumed, the marginal utility gained from each extra unit will fall.

Question 21

When does diminishing marginal utility first occur?

Answer 21

2 to 3 units

Question 22

How do you calculate the cross price elasticitiy of demand?

Answer 22

(XED) = % change in the quantity, demanded of product A / % change in the price of product B

Question 23

What does the cross price elasticity of demand (XED) measure?

Answer 23

The responsiveness of demand for one good to changes in price of the other good

Question 24

What kind of XED, do you substitute and compliment good to have. what about unrelated goods?

Answer 24

Substitute goods have a positive XED
Compliment goods have a negative XED
Unrelated goods have an XED of 0

Question 25

What does a strong/weak substitute look like and what does a strong/week compliment look like?

Answer 25

• strong substitute = +0.6
• Weak substitute = +0.2
• Strong compliment = -0.6
• Weak compliment = -0.2

Question 26

How do you calculate the income elasticity of demand (YED)?

Answer 26

YED = % change in quantity demanded / % change in income

Question 27

What does the income elasticity of demand (YED) measure

Answer 27

The responsiveness of demand to changes in income

Question 28

Describe the types of YED of different goods
(income elasticity)

Answer 28

• inferior goods, have a negative YED
• Normal good to have a positive YED
• Normal goods that have a YED of 0-1 are income inelastic and tend to be necessities
• Normal goods that have a YED of >1 are classed as income elastic and considered luxuries

Question 29

Talk about the different effects of indirect tax on different kinds of elasticities
Perfectly Inelastic demand
Perfectly Elastic supply

Answer 29

An indirect tax on supplies will have no effect on market price if demand is perfectly elastic
An indirect tax on suppliers will be passed on to consumers, in full if demand is perfectly price inelastic
An indirect tax on suppliers will be passed on to consumers in full if supply is perfectly elastic

Question 30

What is a subsidy?

Answer 30

A subsidy is any form of government support—financial or otherwise—offered to producers and (occasionally) consumers. It does not have to be repaid. A subsidy paid to producers causes an outward shift of the supply curve leading to a lower equilibrium price and an increase in the quantity traded. This is because it is intended to lower production costs.

Question 31

Give a few examples of justifications for government subsidies

Answer 31

• Helping poorer families with food and child-care costs – to relieve persistent poverty and improve work incentives in the labour market.
• Encourage output and investment in fledgling sectors such as renewable energy.
• Protect jobs in loss-making industries hit by recession such as steel and farming. UK farmers receive around €4 billion per year under the EU’s Common Agricultural Policy (CAP).
• Make some key health care treatments more affordable to families on lower incomes.
• Reduce the cost of training & employing workers to help improve human capital.
• Achieve a more equitable distribution of income.
• Reduce some of the external costs of mass transport.
• Encourage the arts and other cultural services – many of which have positive externalities from consumption.

Question 32

What is the importance of a price elasticity?

Answer 32

Firms use price elasticities to help prices and predict revenue changes

Governments use price elasticities to make tax and subsidy decisions

Question 33

What factors impact:
1. Local markets.
2. National markets.
3. Global markets.

Answer 33

1. Local markets will be impacted by the interaction of supply and demand, as well as local weather or local preferences
2. National markets will be impacted by the interaction of aggregate supply and aggregate demand curves (the price mechanism) as well as national policies and regulations (on taxes, subsidies or trade)
3. The global market can be impacted by currency exchange rates, global supply chains, geopolitical events, and trade unions