Micro YR 1 - Interrelated markets and market failure

Question 1

Joint demand?

Answer 1

Demand for Complimentry goods.

Question 2

Composite demand?

Answer 2

A good is demanded for multiple separate uses

E.g. milk for cheese and cream

Outward shift in demand of of one = inward shift of supply of others

Question 3

Derived demand?

Answer 3

Demand for a factor of production used to produce a good

Question 4

Joint supply?

Answer 4

Supply of one good increases the supply of a by-product e.g. Cow and leather, Chicken and eggs

Question 5

Competitive demand?

Answer 5

Demand for substitute goods

You can derive equal satisfaction from either product

Question 6

Market failure?

Answer 6

When the price mechanism leads to a misallocation of resources and inefficiency

Question 7

Causes of market failure?

Answer 7

Externalities (POS / NEG)
Public goods
Information gaps

Question 8

Positive externality?

Answer 8

When a benefits affecting third parties outside the price mechanism

Question 9

Negative externality?

Answer 9

When a cost affecting third parties outside the price mechanism

Question 10

Social costs?

Answer 10

Private costs + external costs

Question 11

Social Benefits?

Answer 11

Private Benefits + external Benefits

Question 12

How do we further classify externalities?

Answer 12

Production or consumption

Question 13

How to counter negative externalities?

Answer 13

Set up a minimum price for goods
Increase indirect tax
Tradeable pollution permits
Regulation

Question 14

Define regulation

Answer 14

When the govt makes changes to the law to counter market failure

Question 15

How to fix Positive positive consumption externality?

Answer 15

Set a max price below equilibrium

Question 16

How to fix Positive positive production externality?

Answer 16

Subsidies

Question 17

Subsidy?

Answer 17

A grant from the govt to a firm to increase supply and extend Qd

Question 18

Value of per unit subsidy from a graph?

Answer 18

The vertical distance between the supply curves shows the value of the subsidy per unit.

Question 19

Total cost of subsidy from graph?

Answer 19

Rectangle with a height equal to the per-unit subsidy and a width equal to the equilibrium quantity

Question 20

How does a subsidy counter a PPE

Answer 20

Increases and shifts supply