Microeconomics Theme 1

Question 1

Types of fiscal policies

Answer 1

Taxes
Subsidies
Tradeable pollution permits
Minimum and maximum prices
Regulation
Information provision

Question 2

Government failure

Answer 2

When the government intervenes to correct a market failure but makes the allocation of resources even worse than before

Question 3

The Law of Unintended Consequences

Answer 3

Government intervention can have negative unintended consequences

Question 4

Information gaps

Answer 4

When the government lacks the information needed to intervene most efficiently

Question 5

Administration costs

Answer 5

The miscellaneous costs of government intervention e.g paperwork, legal fees, managers

Question 6

What is another name for excess demand

Answer 6

A shortage

Question 7

What is another name for excess supply

Answer 7

A surplus

Question 8

Total revenue formula

Answer 8

Price X Quantity

Question 9

Average revenue formula

Answer 9

Total revenue / Quantity OR it equals Price

Question 10

What is Average revenue

Answer 10

What a business receives on average from each sale

Question 11

What is Total revenue

Question 12

What is Marginal revenue

Answer 12

Any additional revenue a firms makes from selling one extra unit

Question 13

What is Price mechanism

Answer 13

The interaction of supply and demand to determine prices

Question 14

What are the functions of the Price mechanism when there is excess supply

Answer 14

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

Question 15

What are the functions of the Price mechanism when there is excess demand

Answer 15

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

Question 16

If the PED is between -1 and -∞, demand for our good is

Answer 16

Elastic - so consumers are responsive to change so the %△QD is bigger

Question 17

If the PED is between -1 and 0, demand for our good is

Answer 17

Inelastic - so consumers aren’t that responsive to change so the %△QD is smaller

Question 18

If the PED is -1, demand for our good is

Answer 18

Unitary elastic - where the %△QD is equal to the %△P

Question 19

What is Distortion of the price mechanism

Answer 19

Government intervention can distort the price mechanism

Question 20

What is Market failure

Answer 20

When the Price mechanism leads to a misallocation of resources

Question 21

Types of Market failure

Answer 21

Negative externalities
Positive externalities
Public goods
Information gaps

Question 22

What are Negative externalities

Answer 22

Costs which affect third parties outside the price mechanism due to the consumption of something

Question 23

What are Negative production externalities

Question 24

What are Negative production externalities known as

Answer 24

External costs

Question 25

Outside the price mechanism, there are

Answer 25

External costs & External benefits

Question 26

Within the price mechanism, there are

Answer 26

Private costs & Private benefits

Question 27

What is the formula for Social cost

Answer 27

Private costs + External costs = Social cost

Question 28

What is the formula for Social benefit

Answer 28

Private benefits + External benefits = Social benefit

Question 29

What is the formula for Net benefit (welfare)

Answer 29

Social benefit - Social cost = Net benefit

Question 30

The supply curve is equal to

Answer 30

Marginal private cost (MPC)

Question 31

The demand curve is equal to

Answer 31

Marginal private benefit (MPB)

Question 32

When MSB and MSC are equal it is

Answer 32

Socially efficient equilibrium

Question 33

Taxes are used for

Answer 33

Discourage harmful goods Raise tax revenue

Question 34

What does a subsidy mean for the produces

Answer 34

It means they are able to lower the price due to the government giving them money to produce it

Question 35

Benefits of the subsidy

Answer 35

Total cost = Size of subsidy x Quantity sold

Question 36

What is the Consumer benefit

Answer 36

How much a consumer benefits from the subsidy (the lower half of the area)

Question 37

What is the Producer benefit

Answer 37

How much a consumer benefits from the subsidy (the upper half of the area)

Question 38

What is a positive statement

Answer 38

A statement which can be tested using evidence. It can be true or false

Question 39

What is a normative statement

Answer 39

A statement which involves a value judgement. It is opinionated

Question 40

What does Ceteris Paribus mean?

Answer 40

All other things held constant

Question 41

What happens to quantity supplied when price increases

Answer 41

The quantity supplied goes up

Question 42

What do all supply curves have in common?

Answer 42

They all slope upwards, as price goes up so does the quantity supplied

Question 43

What is a contraction in supply

Answer 43

When a decrease in price leads to a decrease in quantity supplied

Question 44

What is an extension in supply

Answer 44

When an increase in price leads to an increase in quantity supplied

Question 45

What is an opportunity cost

Answer 45

The benefit given up of the next best alternative

Question 46

What is the economic problem

Answer 46

Humans have infinite wants but scarce resources

Question 47

What are the 4 factors of production

Answer 47

Land Labour Capital Enterprise

Question 48

What is an economy

Answer 48

Any system that tries to solve the economic problem

Question 49

What is Capital

Answer 49

The technology or machinery we use to make goods

Question 50

What is Enterprise

Answer 50

An entrepreneur combines and organises land, labour and capital to produce a good

Question 51

What is Land

Answer 51

All the earth's natural resources i.e. physical land but also raw materials

Question 52

What is Labour

Answer 52

Human workers used to produce a good

Question 53

Constant opportunity cost

Answer 53

All straight line PPF's have a constant opportunity cost

Question 54

What is a PPF

Answer 54

Shows all possible combinations of two goods that can be produced, using all resources efficiently

Question 55

What does the division of labour enable

Answer 55

Specialisation, when a firm splits up its production process into smaller separate tasks, and assigns different workers to each of these tasks

Question 56

Pros of specialisation

Answer 56

Increases output Increases quality Reduce unit costs Save on training

Question 57

Cons of specialisation

Answer 57

Demotivation Boredom Employee turnover Unemployment

Question 58

The 4 functions of money

Answer 58

Deferred payment Unit of account Store of value Means of value

Question 59

Deferred payment

Answer 59

You can borrow money to buy goods now, and then pay the money back in the future

Question 60

Unit of account

Answer 60

Money helps us compare prices of different products

Question 61

Store of value

Answer 61

You can store your money and save it for later

Question 62

Means of value

Answer 62

We can use money to trade goods and services.

Question 63

Pros of specialisation of trade

Answer 63

More variety More output More trade

Question 64

Cons of specialisation of trade

Answer 64

Over-specialisation Natural resource depletion Vulnerable