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economics > micro yr12 > Flashcards

micro yr12 Flashcards

1
Q

the purpose of economic activity

A

to produce goods and services to meet our needs and wants

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2
Q

need

A

something you must have to survive or to do something

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3
Q

want

A

something you desire but is not essential

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4
Q

the basic economic problem

A

there are infinite wants and finite resources - resources are scare in relation to wants

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5
Q

3 choices to make when allocating resources among competitors

A
  1. what to produce
  2. how to produce
  3. for who to produce
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6
Q

resources / factors of production

A

land - natural physical resources
labour - human input
capital - man made eg machinery
entrepreneurship - the ability to organise, coordinate and take risks in the production process

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7
Q

rewards to factors of production

A

land = rent
labour = wages
capital = interest
enterprise = profit

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8
Q

micro vs macro

A

micro is a branch of economics that studies the behaviour of individuals and firms in the market - macro considers the economy as a whole

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9
Q

what do rational economic agents aim to maximise?

A

consumers - total utility
workers - wages and benefits from work
producers - profit
government - social welfare

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10
Q

opportunity cost

A

the value of the next best alternative given up when a choice is made

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11
Q

positive statements

A

describe the world as it is, without making any value judgements - based on objective facts and can be proven true or false (eg rise in minimum wage decreases employment)

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12
Q

normative statements

A

express an opinion, and are subjective (eg the gov should increase spending on healthcare)

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13
Q

PPF (production possibility frontier)

A

shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed

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14
Q

what causes an outward shift in the PPF?

A
  • an increase in the quantity of the factors of production (eg discovery and extraction of new natural resources)
  • an increase in the quality of the factors of production (eg increase in labour productivity due to better management)
  • an advance in technology (eg a new innovation in resource use)
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14
Q

what causes an inward shift in the PPF?

A
  • a decrease in the quantity of the factors of production (eg war, conflict or natural disasters)
  • a decrease in the quality of the factors of production (eg loss of workers’ skills)
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14
Q

rational consumer behaviour

A

decision making process that is based on making choices that maximise utility, assuming that

  • consumers make all choices independently
  • consumers have fixed and consistent preferences
  • consumers have full information
  • consumers always make the optimal choice given their preferences
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15
Q

total utility

A

the total satisfaction the consumer gets from purchasing units of a good - rational consumers aim to maximise their total utility

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16
Q

marginal utility

A

the change in total utility from consuming an extra unit of a product

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17
Q

law of diminishing marginal utility

A

as a consumer buys and consumes more units of a good, the extra satisfaction gained diminishes, meaning at higher quantities consumers are less willing to pay a higher price which helps explain the downward sloping demand curve

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18
Q

how do rational consumers make decisions?

A

by calculating the marginal cost (change in total cost when one more unit is bought) and marginal benefit (change in total when one more unit is consumed)

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19
Q

information failure

A

occurs when people have inaccurate, incomplete, uncertain or misunderstood information and can possibly make ‘wrong’ choices

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20
Q

information gaps

A

when either the buyer or seller does not have access to the information needed for them to make a fully informed decision which can lead to a misallocation of scarce resources = market failure

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21
Q

symmetric information

A

for markets to work, buyers and sellers need to have the same perfect information

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22
Q

asymmetric information

A

buyers and sellers have different amounts of information (eg buyers often know less than sellers when buying second hand cars)

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23
Q

adverse selection

A

people taking our insurance are often those at highest risk (eg a person leading an unhealthy lifestyle is more likely to take out health insurance)

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24
Q

moral hazard

A

being insured can make you more careless (eg banks made risky decisions before the global financial crisis are that they would likely receive bail outs)

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25
Q

principle agent problem

A

goals of the principles, those who lose/gain from a decision, are different from the agents, those making the decisions (eg managers (agents) may have more information than shareholders (principles))

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26
Q

what can government policies do?

A

can improve information to help producers and consumers value the actual costs and benefits more accurately, reducing or eliminating the market failure

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27
Q

government policies to improve information examples…

A
  • compulsory labelling on products
  • improved nutritional information on food/drinks
  • hard hitting anti speeding advertising
  • campaigns to raise awareness of risks of drink driving, vaping, drug abuse
  • campaigns on dangers of gambling addiction
  • performance league tables for schools/OFSTED
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28
Q

effective demand

A

demand supported by intention and ability to buy

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29
Q

latent demand

A

willingness to buy but not yet ability to buy

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30
Q

joint or complementary demand

A

demand for one good is closely linked to the demand for another (eg 2 goods that go well together like phone and charger)

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31
Q

competitive demand

A

two or more goods that are close substitutes for each other

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32
Q

derived demand

A

when demand for one product drives the demand for another

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33
Q

composite demand

A

good is demanded for more than one use

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34
Q

individual demand

A

a consumer’s demand for a good/service

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35
Q

market demand

A

all consumers’ demands in the market summed together

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36
Q

law of demand

A

as price falls, the quantity demanded increases and vise versa

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37
Q

extension in suppy or demand demand

A

a movement along the curve from A to B

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38
Q

contraction in supply or demand

A

a movement along the curve from B to A

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39
Q

ceteris paribus

A

all other influencing factors are held constant

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40
Q

factors causing a shift in demand

A
  • changes in tastes/preferences
  • change in incomes
  • change in the price of related goods
  • change in size of population
  • changes in interest rates
  • changes in the law
  • changes in expectations
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41
Q

why does the demand curve slope downwards

A
  1. substitution effect - consumers substitute in favour of the good that become cheaper, if price of good X falls then consumers will buy more of it
  2. real income effect - if the price of good X falls, the consumer buying good X will gain purchasing power and this extra ‘income’ available for spending can be used to buy more X
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42
Q

consumers may be irrational when using demand because…

A
  • bounded rationality and bounded self control
  • biases in decision making (rule of thumb, anchoring, availability, social norms)
  • altruism
  • choice architecture and framing
  • nudges
  • restricted choice
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43
Q

price elasticity of demand (PED) means…

A

the responsiveness of quantity demanded of a good to change in its price

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44
Q

PED formula

A

PED = %change in quantity demanded / %change in price

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45
Q

why is PED negative

A

the quantity demanded is inversely related to price - the values of PED range from 0 to -infinity

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46
Q

inelastic demand

A

quantity demanded is not responsive to price changes - the %change in QD is < the %change in P (value between 0 and 1)

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47
Q

elastic demand

A

quantity demanded is very responsive to price changes - the %change in QD is more than the %change in P (value between -1 and -infinity)

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48
Q

unitary demand

A

PED = -1

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49
Q

perfectly elastic demand

A

PED = -infinity

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50
Q

perfectly inelastic demand

A

PED = 0

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51
Q

PED is elastic when…

A
  • a rise in P leads to a more than proportionate fall in QD so TR falls
  • a fall in P leads to a more than proportionate rise in QD so TR rises
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52
Q

PED is inelastic when…

A
  • a rise in P leads to a less than proportionate fall in QD so TR rises
  • a fall in P leads to a less than proportionate rise in QD so TR falls
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53
Q

PED is unitary when…

A

TR will not change when price changes

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54
Q

factors influencing PED

A
  • availability of close substitutes
  • cost of switching suppliers
  • breadth of product definition
  • degree of necessity
  • time frame when making choice
  • brand loyalty
  • %of income spent on product
  • habitual demand
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55
Q

uses of PED

A
  • determination of pricing policy/impact on revenue
  • indication of competition faced
  • price setting in price discrimination
  • government decision on which goods to tax indirectly
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56
Q

income elasticity of demand (YED) means…

A

the responsiveness of demand for a good to a change in income

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57
Q

YED formula

A

YED = %change in demand / %change in income

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58
Q

what is YED positive for?

A

normal goods

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59
Q

what is YED negative for?

A

inferior goods

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60
Q

positive YED between 0 and 1 explaination

A

as income rises, there is only a small increase in demand (vice versa) which indicates the good is a necessity

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61
Q

positive YED between 1 and infinity explaination

A

as income rises, there is a relatively large increase (vice versa) which indicates the good is a luxury

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62
Q

negative YED explaination

A

as income rises, there’s a fall in the quantity demanded (vice versa) and indicates the good is an inferior good

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63
Q

normal goods

A

products or services where demand increases as consumer income rises - when peoples income goes up they tend to buy more of these goods (eg holidays)

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64
Q

inferior goods

A

products or services where demand decreases as consumer income rises - when peoples income increases they tend to buy less of these goods and may shift to higher quality alternatives (eg used or older cars)

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65
Q

cross elasticity of demand (XED) means…

A

the responsiveness of demand for a good to a change in the price of a related good

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66
Q

XED formula

A

XED = %change in demand for good A / %change in price of good B

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67
Q

XED is positive for?

A

substitute goods - when price of good B rises, the demand for good A increases and vice versa

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68
Q

YED is negative for?

A

complementary goods - when the price of good B rises, the demand for good A decreases and vice versa

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69
Q

positive XED between 0 and 1 explaination

A

goods are weak substitutes

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70
Q

positive XED between 1 and infinity explanation

A

goods are strong substitutes

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71
Q

negative XED between 0 and -1 explaination

A

goods are weak complements

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72
Q

negative XED between -1 and -infinity explaination

A

goods are strong complements

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73
Q

substitutes meaning

A

goods that can be used in place of each other to satisfy a similar need or desire (eg tea or coffee)

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74
Q

complements meaning

A

goods that are typically consumed or used together because they enhance each other’s value (eg tennis racket and tennis balls)

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75
Q

uses of YED (income elasticity)

A
  • effect of recession/growth on demand
  • business planning for product range
  • helps firms anticipate future demand
76
Q

uses of XED (cross elasticity)

A
  • marketing strategies (eg selling complements together or in bundles)
  • if a competitor changes its price, forms can work out the effect on their demand
77
Q

joint supply

A

two or more goods that derive from a single production process - a change in the supply of one good leads to a change in the supply of a by product

78
Q

individual supply

A

a producer’s supply of a good/service

79
Q

market supply

A

all producers’ supplies to the market summed together

80
Q

law of supply

A

as price falls, the quantity supplied decreases and vice versa - supply curve slopes upwards to the right

81
Q

why does the supply curve slope upwards

A
  • higher market prices motivate firms to supply more as they expect more profit
  • producing more increases the marginal cost of production so firms need higher prices to cover these costs (assumes law of diminishing returns)
82
Q

factors causing a shift in supply

A
  • change in the costs of production (eg raw materials, wages)
  • change in production technology
  • change in weather/climate
  • events like strikes or pandemic
  • changes in indirect taxes
  • changes in producer subsides
  • changes in the price of substitutes in production
  • changes in the number of firms supplying to the market
83
Q

price elasticity of supply (PES) means…

A

the responsiveness of quantity supplied of a good to a change in its price

84
Q

PES formula

A

PES = %change in quantity supplied / %change in price

85
Q

why is PES positive

A

the quantity supplied is positively related to price

86
Q

inelastic supply

A

quantity supplied is not responsive to price changes - value is between 0 and 1

87
Q

elastic supply

A

quantity supplied is very responsive to price changes - value is between 1 and infinity

88
Q

unitary supply

A

PED = 1

89
Q

perfectly elastic supply

A

PED = infinity

90
Q

perfectly inelastic supply

A

PES = 0

91
Q

factors influencing PES

A
  • time period
  • bottlenecks in supply
  • breakdowns in supply chains
  • spare capacity
  • stock levels
  • availability of producer substitutes
  • ease of entry into the market
92
Q

functions of prices

A

prices in markets help allocate the scarce resources between their competing uses via their signalling, incentivising and rationing functions

92
Q

signal meaning

A

prices provide key information to buyers and sellers; if the price changes because of a shift in demand, this signals to producers to adjust their output levels - if the price changes because of a shift in supply, this indicates to consumers to rethink how much they will purchase

93
Q

incentivise meaning

A

higher prices can incentivise producers to extend supply as they anticipate more profit - lower prices can incentivise consumers to extend demand as they pay less for a good yielding the same utility (vice versa)

94
Q

ration meaning

A

if supply is limited, the price rises, which rations the good to those who are most willing and able to pay

95
Q

when may the functions of prices not work effectively?

A

signalling - can fail if there are externalities, if the government imposes a maximum or minimum price, if the price set by producers is not at the equilibrium or if there’s imperfect information

incentivising - may be missing for public goods

rationing - may not work if the government sets the price

96
Q

customer surplus

A

the difference between the total amount that consumers are willing and able to pay for a good or service (indicated through the demand curve) and the total they pay (market price) - measure of consumer welfare

97
Q

producer surplus

A

the difference between what producers are willing and able to supply a good for (indicated by supply curve) and the price they actually receive (market price) - measure of producer welfare

98
Q

production converts what into output

A

inputs (factors of production)

99
Q

factors of production

A

the resources used as inputs - land, labour, capital and enterprise

100
Q

short run meaning

A

the time period where at least one factor of production is fixed

101
Q

long run meaning

A

the time period when all factors of production are variable

102
Q

what does productivity measure

A

efficiency of a factor input

103
Q

higher productivity can lead to…

A
  • higher profit
  • higher wages
  • lower unit costs
  • greater international competitiveness
  • better trade performance
  • faster economic growth
104
Q

specialisation meaning

A

the concentration of individuals, firms, or nations on producing a limited range of goods or services - can occur at home, in a firm or country level

105
Q

what is the division of labour

A

a form a specialisation where the tasks needed to produce an item are divided among workers

106
Q

advantages of specialisation and the division of labour

A

increased productivity - greater output from same resources, allows workers to become more skilled and experienced in specific tasks, leading to higher efficiency develop specialist machinery
lower costs - reduced training time and waste
economies of scale - mass production possible including assembly lines, larger quantities of identical goods can be produced more efficiently

107
Q

disadvantages of specialisation and the division of labour

A

higher staff turnover - workers may find repetitive tasks monotonous and unrewarding, leading to job dissatisfaction
dependency - over reliance on one work/task makes unit vulnerable to staff illness or economic shocks
structural unemployment - workers trained in fewer skills, machines can replace some labour tasks
lack of variety - mass produced goods can reduce consumer choice

108
Q

medium of exchange

A

money facilitates transactions between buyer and seller - specialisation and the division of labour requires a means of exchanging goods and services (money promotes this)

109
Q

characteristics of a free market economy

A
  • private ownership of resources
  • owners of resources and producers are free to buy/sell
  • economic agents are motivated by self interest
  • consumers have sovereignty (determine what is produced by being willing and able to buy goods/services)
  • income depends on the market value of an individual’s work
110
Q

advantages of free market economy

A
  • resources can be bought and sold
  • consumer sovereignty
  • freedom of choice
  • profit motive and self interest incentivises
  • incentive to worker harder for higher wages
  • firms face competitive forces driving down prices
  • incentive to innovate and invest in new ideas (dynamic efficiency)
111
Q

disadvantages of a free market economy

A
  • income/wealth inequality and poverty
  • market failure can reduce social welfare
  • lack of provision of public goods
  • over provision of goods with negative externalities
  • under provision of goods with positive externalities
  • information gaps may cause market failure
  • unemployment/worker exploitation/low pay for some
  • resources may be wasted on advertising and marketing
  • firms may develop monopoly power and push up prices
112
Q

characteristics of a command economy

A
  • government owns and allocates resources deciding what, how and for who to produce
  • government sets productions targets and growth rates according to its view of people’s wants
  • goods are allocated through rationing
  • workers are given job by the government
  • market prices do not inform resource allocation
113
Q

advantages of a command economy

A
  • resources are allocated by the government to maximise social welfare
  • relatively even distribution of income/wealth
  • workers are given jobs by the state/no unemployment
  • adequate provision of public goods
  • government should take externalities into account in decision making
  • welfare safety net
114
Q

disadvantages of a command economy

A
  • danger of government failure
  • difficult for the government to set and correct output planning targets and fix prices appropriately
  • lack of choices for consumers
  • lack of incentives to be innovative and entrepreneurial
  • corruption is likely to develop
115
Q

social welfare means…

A

the consumer surplus + producer surplus

116
Q

where does allocative efficiency occur?

A

when price = marginal cost

117
Q

when price is more then marginal cost…

A

it’s efficient to allocate scarce resources to the production of that good

118
Q

when price is less than marginal cost…

A

it’s efficient to allocate scarce resources to the production of that good

119
Q

market failure exists when…

A

the competitive outcome of markets is not efficient from the point of view of the economy as whole (eg resources are not allocated as efficiently as they could be)

120
Q

complete market failure occurs when…

A

the market does not supply products at all - there is a missing market

121
Q

partial market failure occurs when…

A

the market functions/exists but it supplies the wrong quantity of a product

122
Q

examples of partial market failure

A
  • negative and positive externalities from production and consumption
  • some information gaps
  • irrationality (linked to behavioural economics)
  • merit and demerit goods
123
Q

what does market failure provide?

A

a rationale for the government to intervene to correct the market failure (or reduce it)

124
Q

examples of policies for the government to use to correct market failure

A
  • indirect taxes
  • subsides
  • regulations
  • bans
  • price controls (max/min prices)
  • competition policy
125
Q

government failure meaning

A

if the government fails to improve the allocation of resources or makes it worse

126
Q

what are private goods

A

goods and services supplies and sold through markets by private sector businesses

127
Q

characteristics of private goods

A
  1. excludable (buyers can be excluded from benefiting from the good if they’re not will or able to pay for it)
  2. rival (one person’s consumption of a product reduces the amount left for others to consume and benefit from)
  3. rejectable (can be rejected by the consumer if their needs and preferences or their budget changes)
128
Q

characteristics of public goods

A
  1. non excludable (once a good is provided it’s impossible to prevent people from using and benefitting from it; non payers can enjoy the benefits for free making a ‘free rider’ problem)
  2. non rival (consumption of a good by one person doesn’t prevent or reduce the benefits to another person consuming the good)
  3. non rejectable (the collective supply of a pure public goods means it can’t be rejected by people)
129
Q

pure public good

A

non excludable and non rival all of the time (eg national defence or mass vaccinations)

130
Q

quasi public good

A

technological advances can change a pure public good into a quasi public good or a quasi public good into a private good - eg TV and radio

131
Q

public bads

A

non excludable and non rival, but provide dissatisfaction to people who consumer (eg air pollution)

132
Q

free rider problem

A

someone who consumes a good without paying for it - because public goods are non excludable its hard to charge consumers once a good has been provided

133
Q

free rider problem characteristics

A
  • consumers don’t reveal their preferences if they think they can free ride
  • no demand curve in market
  • no incentive for producers to supply the good because it will not be profitable
  • market is missing so resources are not allocated to produce public goods even though consumers may actually want them
134
Q

possible solutions to market failure of public goods

A
  1. government provision - collective provision through taxation
  2. government funding - the government could fund private provision financed through taxation or charges (eg TV license)
  3. donations - eg RNLI
  4. altruism - communities pay collectively (eg private road)
135
Q

advantages and disadvantages of government provision

A
  1. equity - all people, regardless of income, have access to public goods
  2. efficiency - collective provision allows economies of scale
  3. overcomes the free rider problem/missing market
  4. public sector investment is higher
  5. government may lack the information needed to provide best amount of public goods
  6. possible diseconomies of scale
  7. government funding of private sector provision if often costly and wasteful
136
Q

negative production externality

A

a third party or spillover external costs arising from the production of a good for which no compensation is paid (eg pollution)

137
Q

negative consumption externality

A

a third party or spillover external cost arising from the consumption of a good for which no compensation is paid (eg tobacco consumption causing passive smoking)

138
Q

social benefit

A

private benefit + external benefit

139
Q

social cost

A

private cost + external cost

140
Q

MPC = marginal private cost

A

all the costs of producing one more unit of the good to the producer

141
Q

MSC = marginal social cost

A

all the costs of producing one more unit of the good to the society

142
Q

MPB = marginal private benefit

A

all the benefits of consuming one more unit of the good to the consumer

143
Q

MSB = marginal social benefit

A

all the benefits of consuming one more unit to society

144
Q

government policies can help reduce negative externalities so…

A

the externalities are internalised (eg the polluter pays principle) which reduces or eliminates the market failure

145
Q

policies to address negative externalities could be…

A
  • trade-able pollution permits
  • indirect taxes
  • banning/restricting output
  • legislation/regulations
  • ‘nudge’ policies
146
Q

negative production externalities examples

A
  • air
  • noise and water pollution
  • environmental damage
147
Q

negative consumption externalities example

A
  • tobacco
  • alcohol
  • gambling
  • obesity
148
Q

positive consumption externality means…

A

a third party or spillover external benefit arising from the consumption of a good for which no compensation is paid (eg healthcare or public transport)

149
Q

positive production externality means

A

a third party or spillover external benefit arising from the production of a good for which no compensation is paid (eg training or education)

150
Q

policies to address positive externalities could be…

A
  • subsidies
  • government provision free at the point of use
  • legislation/regulations
  • ‘nudge’ policies
151
Q

positive production externalities example

A

fish industry benefitting from a dam built to store water (reservoir)

152
Q

positive consumption externalities examples

A
  • healthcare
  • education
  • dental care
  • parks/green spaces
153
Q

success of government policies to reduce/eliminate externalities depends on…

A
  • size of externality
  • the extent to which the externality can be measured
  • whether there are unintended consequences from the policy
  • opportunity cost of policy (some interventions are expensive)

government needs to judge whether the benefits of intervening are sufficiently high relative to the costs to make it worthwhile for social welfare

154
Q

merit goods

A

goods/services the government judges people will under-consume, and which ought to be subsided for provided free at the point of use

  • people don’t fully understand the private benefits of their consumption
  • consumption of merit goods also often generates positive externalities - where the social benefit exceeds the private benefit
155
Q

behavioural economics can help explain why…

A

consumers face information gaps; consumers do not always act on full information even when they have it

156
Q

information gaps exist when…

A

either the buyer or seller doesn’t have access to the information needed for them to make a fully informed decision, leading to a misallocation of scarce resources = market failure

157
Q

examples of information failure

A
  • risks from using sunbeds
  • addiction to painkillers and other drugs
  • complexity of pension schemes
  • uncertain quality of second hand goods
  • knowledge of the nutritional content of food
  • tourist bazaars or buying and selling antiques
158
Q

factor mobility

A

occurs when factors of production can easily be moved from one use to another

159
Q

geographical immobility of labour

A

in practise, labour may not be fully mobile because of regional house price variation, family and social ties, children in school etc

160
Q

occupational immobility of labour

A

can occur because of insufficient education and training, lack of transferrable skills, inability to afford training etc

land - not geographically mobile but can be occupationally mobile
capital - can be both occupationally and geographically mobile

161
Q

factor immobility can cause…

A

structural unemployment and regional inequality which leads to market failure

162
Q

producer subsidies

A

payments to producers by the government to reduce the costs of production (eg subsidies for renewable energy)

163
Q

consumer subsides

A

payments to consumers to allow them to purchase more of a good/service (eg childcare vouchers)

164
Q

advantages of producer subsidies

A
  • corrects market failures
  • encourages consumption of goods that are good for us (eg fruit)
  • encourages firms to invest and innovate
  • helps protect producer incomes and jobs
  • supports those on lower incomes
  • can help tackle climate change
  • can help make exports more competitive
165
Q

disadvantages of producer subsidies

A
  • cost to government (opportunity cost)
  • firms may become over reliant on subsidy
  • firms have less incentive to be efficient and productive
  • firms may distribute extra profit to shareholders rather than reinvest
  • government failure/unintended consequences
  • may cause fraud
166
Q

reasons for maximum price

A
  • to make necessities more affordable, especially for those on low incomes, also reduces poverty
  • to encourage consumption of goods that are good for social welfare, have positive externalities or where consumers may lack all information
  • to prevent businesses profitting at the expense of consumers
166
Q

maximum price

A

the government or an industry regulator can set a maximum price to prevent the market price rising above a certain level (price cap)

167
Q

consequences of maximum price

A
  • the maximum price causes a shortage of the good
  • there is a disequilibrium at the maximum price
  • the price cannot rise to remove the excess demand (lost its rationing function)
  • the quantity supplied will need to be rationed in a different way (eg waiting lists)
  • potential for gov failure and unintended consequences
167
Q

examples of maximum prices in markets

A
  • rent controls
  • energy price cap
  • cap on tuition fees
  • cap on interest rates
  • ticket prices for events
168
Q

problems with maximum prices

A
  • excess demand needs addressing; alternative rationing methods may not work well
  • suppliers may leave the market if they cannot charge a price high enough to make profit (which would increase any shortage created by the max price)
  • there may be better alternative policies the government could use if it believe the market price is too high (eg subsidies)
169
Q

minimum price

A

the government can set a minimum price to prevent the market price from falling below a certain level (price floor)

170
Q

guaranteed minimum price

A

the government will buy up and excess supply to guaranteed the minimum price

171
Q

legal minimum price

A

the government sets the minimum by law; there’s a ban on sales below the price set; gov doesn’t buy up any surplus (eg minimum price of alcohol)

172
Q

reasons for minimum prices

A
  1. to support the incomes and jobs of producers and encourage investment and innovation
  2. to discourage consumption of goods that are bad for social welfare, have negative externalities or where consumers may lack all information
  3. to prevent consumers abusing any monopsony power they have at expense of suppliers
173
Q

consequences of minimum price

A
  • the minimum price causes a surplus of the good
  • there’s a disequilibrium at the minimum price
  • the price cannot fall to remove the excess supply (lost its signalling and incentivising functions)
  • for a legal minimum, firms cannot sell more than Qd so will reduce supply
174
Q

examples of minimum prices in markets

A
  • minimum price for alcohol
  • national minimum/living wage
  • minimum care worker price
  • agricultural support where price is guaranteed to farmers
175
Q

problems with minimum prices

A
  • excess supply needs addressing
  • for legal minimum price suppliers can’t sell any excess so will cut supply, output and jobs
  • for guaranteed minimum price intervening to buy up the surplus can be expensive (opportunity cost) so surplus will need storing, selling on or destroying
  • there may be better alternative policies the government could use if it thinks the market price is too low (eg indirect taxes, regulations)
176
Q

government failure

A

government intervention worsens the allocation of scarce resources

  • results in greater net welfare loss
  • the cost of the intervention outweighs the benefits gained
  • the policy fails to generate a change in behaviour by economic agents so the policy fails to achieve its aim
177
Q

causes of government failure

A
  • political self interest
  • poor value for money
  • conflicting objectives
  • regulatory capture
178
Q

outcomes of government failure

A
  • greater inequality (eg effects on lower income households)
  • high costs of compliance and implementation
  • possible unintended consequences
  • possible conflicts with other micro/macro objectives
  • poor policy choice/ outcomes
  • policy may be ineffective in changing behaviour
179
Q

arguments against government intervention in markets

A
  1. the price mechanism is very efficient and can promote innovation
  2. when resources are scarce, higher prices are potentially a good outcome
  3. profit motive incentivises businesses and entrepreneurs
180
Q

arguments for government intervention in markets

A
  • allocation of property rights and legal system
  • provision of public goods
  • macro economic stability
  • measures to reduce inequality
181
Q

economic agents are rational…

A
  • consumers aim to maximise their utility from consumption
  • workers aim to maximise their wages and other work benefits
  • firms aim to maximise social welfare
182
Q

rational consumer behaviour is a decision making process based on making choices that maximise utility, assuming that…

A
  • consumers make all choices independently
  • consumers have fixed and consistent preferences
  • consumers have full information
  • consumers always make the optimal choice given their preferences
183
Q

irrational consumer behaviour is when people make systematic and persistent deviations from rational choice, because of…

A
  • humans are emotional, impulsive and lack self control
  • humans are social and belong to many networks
  • humans can be altruistic, generous and forgiving
  • humans have limited time, energy and brain power
184
Q

bounded rationality

A

idea that the cognitive, decision making capacity of humans cannot be fully rational because of a number of limits that we face

185
Q

bounded self control

A

consumers have good intentions but may consume more than is rational because they value the present more than the future so want instant rewards

186
Q

consumers may be irrational because they are influenced by others…

A

peer pressure, social norms and herd behaviour

187
Q

nudges

A

subtle pushes to influence and guide people toward making better decisions without limiting their choices or using direct enforcement

economics (4 decks)

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