Microeconomics Theme 1 Flashcards
Types of fiscal policies
Taxes
Subsidies
Tradeable pollution permits
Minimum and maximum prices
Regulation
Information provision
Government failure
When the government intervenes to correct a market failure but makes the allocation of resources even worse than before
The Law of Unintended Consequences
Information gaps
Administration costs
The miscellaneous costs of government intervention e.g paperwork, legal fees, managers
What is another name for excess demand
A shortage
What is another name for excess supply
A surplus
Total revenue formula
Price X Quantity
Average revenue formula
Total revenue / Quantity OR it equals Price
What is Average revenue
What a business receives on average from each sale
What is Total revenue
What is Marginal revenue
Any additional revenue a firms makes from selling one extra unit
What is Price mechanism
The interaction of supply and demand to determine prices
What are the functions of the Price mechanism when there is excess supply
Signalling - The falling price signals to producers that consumers want fewer goods, so they reduce quantity supplied
Incentivising - The falling prices reduce incentive to supply as less profit can be made, so they reduce quantity supplied
What are the functions of the Price mechanism when there is excess demand
Signalling - The rising price signals to producers that consumers want more goods, so they increase quantity supplied
Incentivising - The rising prices increases incentive to supply as more profit can be made, so they increase quantity supplied
Rationing - The rising price means fewer consumers are willing and able to demand at higher prices, so they decrease the quantity demanded
If the PED is between -1 and -∞, demand for our good is
Elastic - so consumers are responsive to change so the %△QD is bigger
If the PED is between -1 and 0, demand for our good is
Inelastic - so consumers aren’t that responsive to change so the %△QD is smaller
If the PED is -1, demand for our good is
Unitary elastic - where the %△QD is equal to the %△P
What is Market failure
When the Price mechanism leads to a misallocation of resources
Types of Market failure
Negative externalities
Positive externalities
Public goods
Information gaps
What are Negative externalities
Costs which affect third parties outside the price mechanism due to the consumption of something
What are Negative production externalities
What are Negative production externalities known as
External costs
Outside the price mechanism, there are
External costs & External benefits
Within the price mechanism, there are
Private costs & Private benefits
What is the formula for Social cost
Private costs + External costs = Social cost
What is the formula for Social benefit
Private benefits + External benefits = Social benefit
What is the formula for Net benefit (welfare)
Social benefit - Social cost = Net benefit
The supply curve is equal to
Marginal private cost (MPC)
The demand curve is equal to
Marginal private benefit (MPB)
When MSB and MSC are equal it is
Socially efficient equilibrium
Taxes are used for
Discourage harmful goods
Raise tax revenue
What does a subsidy mean for the produces
It means they are able to lower the price due to the government giving them money to produce it
Benefits of the subsidy
Total cost = Size of subsidy x Quantity sold
What is the Consumer benefit
How much a consumer benefits from the subsidy (the lower half of the area)
What is the Producer benefit
How much a consumer benefits from the subsidy (the upper half of the area)
