Microeconomics Booklet Three - Y12

Question 1

Allocative/rationing function of prices

Answer 1

The role of prices in deciding who receives resources – when there is excess demand, price will rise and those with the greatest willingness and ability to pay will get the resources.

Question 2

Altruism

Answer 2

Acting entirely in the interests of others without regard to one’s own utility.

Question 3

Anchoring

Answer 3

When someone’s perceptions of something (e.g. the value of a good) are skewed by a single initial piece of information.

Question 4

Asymmetric information

Answer 4

When one party in a transaction knows more than the other.

Question 5

Availability bias

Answer 5

A tendency to give undue importance to the most recent or well-known example of something, even if that is not representative.

Question 6

Bounded rationality

Answer 6

Limitations to people’s ability to be rational based on their limited ability to process information, limited time and inaccurate or incomplete information.

Question 7

Bounded self-control

Answer 7

A limited ability to put into practice utility-maximising behaviour, even if someone knows what the best course of action would be.

Question 8

Ceiling price

Answer 8

A maximum price enforced by law or some other government interventio

Question 9

Choice architecture

Answer 9

Designing the choices that people take in order that they might make better decisions (without losing the ability to choose).

Question 10

Complete market failure

Answer 10

When the incentive function of prices breaks down and a market either disappears or fails to come into being, such as the market for public goods.

Question 11

Default choice

Answer 11

The option that will be taken if no conscious decision is taken to change it.

Question 12

Demerit good

Answer 12

A good which will be overconsumed in a free market because it is worse for consumers than is commonly understood

Question 13

Floor price

Answer 13

A minimum price enforced by law or some other means such as intervention buying

Question 14

Framing

Answer 14

The tendency for an individual to be influenced by the context in which information is presented (rather than the information itself)

Question 15

Free-rider problem

Answer 15

When the benefit of a good or service is not restricted to those who have paid, giving people an incentive to avoid paying in the hope/expectation that other people will, giving them a “free ride”

Question 16

Government failure

Answer 16

The cost of government intervention outweighs the benefit.

Question 17

Heuristics

Answer 17

Mental shortcuts or rules-of-thumb.

Question 18

Hypothecation

Answer 18

Ring-fencing the revenue from a tax for a particular (and often related) purpose.

Question 19

Incentive function of prices

Answer 19

The role of prices in changing the behaviour of buyers or sellers, for example in triggering an increase in production through higher prices due to an increased profit incentive.

Question 20

Indirect tax

Answer 20

A tax on goods and services, either a fixed amount per unit (unit tax) or a percentage added to the pre-tax price (ad valorem tax).

Question 21

Information failure

Answer 21

When the information available to a decision-maker is incomplete, inaccurate or otherwise unreliable leading to market failure.

Question 22

Law of unintended consequence

Answer 22

The idea that any action is likely to result in a reaction other than that which was intended (usually negative).

Question 23

Libertarian paternalism

Answer 23

A philosophy that is libertarian in that it promotes freedom to choose, but paternalistic in the sense that it seeks to encourage better choices.

Question 24

Mandated/required choice

Answer 24

A situation where the consumer must make a conscious decision one way or another before they are able to continue (i.e. there is no default choice).

Question 25

Marginal External Benefit (MEB

Answer 25

The benefit to third parties from the consumption of one additional unit.

Question 26

Marginal

Answer 26

Relating to a change (usually an increase) of one unit.

Question 27

Marginal External Cost (MEC

Answer 27

The cost to third parties from the production of one additional unit

Question 28

Marginal Private Benefit (MPB)

Answer 28

The benefit to consumers from the consumption of one additional unit.

Question 29

Marginal Private Cost (MPC)

Answer 29

The cost to producers from the production of one additional unit.

Question 30

Marginal Social Benefit (MSB)

Answer 30

The benefit to society as a whole from the consumption of one additional unit (MSB=MPB+MEB).

Question 31

Marginal Social Cost (MSC

Answer 31

The cost to society as a whole from the production of one additional unit (MSB=MPB+MEB

Question 32

Merit good

Answer 32

A good which will be underconsumed in a free market because it is better for consumers than is commonly understood.

Question 33

Missing market

Answer 33

A market that has either disappeared or failed to come into being because of a breakdown of the incentive function of prices.

Question 34

Negative externality

Answer 34

A negative spillover effect (i.e. cost) to a third party.

Question 35

Non-excludable

Answer 35

People cannot be prevented from receiving the benefit of a good or service (i.e. this cannot be restricted to those who have paid).

Question 36

Non-rejectable

Answer 36

Consumers cannot avoid the benefit of the consumption of a good.

Question 37

Non-rivalrous

Answer 37

One person’s use of a good does not reduce the utility available to others from the use of that good

Question 38

Nudges

Answer 38

Any aspect of choice architecture that alters behaviour in a predictable way without removing choice or significantly changing economic incentives. Nudges must be easy and cheap to avoid.

Question 39

Partial market failure

Answer 39

When a market exists but the quantity produced/consumed is allocatively inefficient, e.g. the markets for merit and demerit good

Question 40

Positive externality

Answer 40

A positive spillover effect (i.e. benefit) to a third party

Question 41

Private good

Answer 41

A good that is both excludable and rivalrous.

Question 42

Privately Optimal Level of Production/Consumption

Answer 42

The quantity produced and consumed when sellers and buyers only consider the private costs and benefits (where MPB=MPC). This is the quantity produced and consumed in a free market

Question 43

Property rights

Answer 43

Legal control or ownership of a good. In a market failure context, this includes the extension of property rights to include, for example, the right to clean air or water.

Question 44

Public good

Answer 44

A good that is both non-excludable and non-rivalrous.

Question 45

Quasi-public good (or impure or non-pure public good)

Answer 45

A good that has some of the characteristics of a public good or has some of those characteristics under certain conditions.

Question 46

Regulation

Answer 46

Rules enforced by the government (backed by the force of law).

Question 47

Restricted choice

Answer 47

A situation where a choice architect gives consumers a reduced list of options to choose from (i.e. a shortlist).

Question 48

Signalling function of prices

Answer 48

The role of prices in providing information to economic agents – e.g. a sudden rise in price might indicate a shortage of a good.

Question 49

State provision

Answer 49

Also known as direct provision, a situation in which the government supplies a good or service itself, often free at the point of consumption.

Question 50

Social norms

Answer 50

Accepted patterns of behaviour within a society.

Question 51

Socially Optimal Level of Production/Consumption

Answer 51

The quantity of a good or service produced and consumed that maximises social welfare (where MSB=MSC).

Question 52

(Production) Subsidy

Answer 52

A sum of money given to firms to encourage the production of a good or service. (Consumption subsidies are given to consumers)

Question 53

Third party

Answer 53

Someone who is affected by the production or consumption of a good, but not directly involved (i.e. not the buyer or the seller).

Question 54

Tradable permits

Answer 54

Permits that give the holder the right to emit a specific quantity of a pollutant that can be sold by firms who are able to reduce their pollution and bought by firms with higher abatement costs.

Question 55

Tragedy of the common

Answer 55

The depletion of common resources through people prioritising (often short-term) self-interest over the common good.

Question 56

Utility-satisficing

Answer 56

Settling for a level of utility deemed acceptable rather than seeking to utility-maximise.