Revision Flashcards
consumer surplus
The difference from what consumers are willing to pay and the actual price they pay
Producer surplus
The difference between the price producers produce at and the price they sell at
What is the gradient of an inelastic demand curve
steep
What is the gradient of an elastic demand curve
shallow/flatter
What is state provision
When the government intervenes in the market to supply a good or service
Why does the government use tax revenues to supply state provisioned goods
To make sure they are free or largely free at the point of use
What are the benefits of state provision
Increased consumption of merit and public goods
Reduce inequalities
Redistribute incomes
What are the disadvantages of state provision
Productive inefficiency as there is no incentive to cut costs
Potentially wrong mix of goods being produced
Opportunity costs
Dynamic efficiency
When firms improve technology and production methods over time
Static efficiency
When all resources are being used at the most efficient manner at a single point in time
Regulation
When the government aims to provide effective competition within markets
What should regulation achieve
Greater choice
lower prices
protect interest of consumers
examples of regulation
Legal aim for smoking - 18
Prohibiting certain classes of drugs
Cant drink and drink over certain limit
Banning diesel cars in city centres
Benefits of regulation
Cheap to enforce
easy to understand
Drawbacks of regulation
Difficult to find right level of regulation
Regulatory capture
When regulators start acting in the interests of the company due to impartial information
Deregulation
The removal of regulations
Why might deregulation occur
To increase competition by removing barriers to entry in a market
What are the drawbacks of deregulation
Difficult to deregulate natural monopolies e.g. utilities
Cant fix some market failures such as neg externalities
What are public goods
Ones that their consumption does not stop others from using them and does not reduce the amount available to others
What are the characteristics of public goods
non rival and non excludeable
What is non rival
ones where their consumption does not reduce the amount available to others
what is non excludeable
ones where there consumption does not stop others from using it
What are private goods
ones where there consumption stops others from consuming it and reduces the amount available to others
What is a subsidy
Government support often financial given to producers and occasionaly consumers
What are the reasons for a subsidy
Provide support to poorer families
Reduce training and employment costs
Keep people in jobs
Make health care treatments affordable
What is a direct tax
Tax that affects households
e.g. Income tax
What is an indirect tax
A tax that only affects households if they buy a good or service e.g. VAT
What is a specific tax
Where £ or pence are added on e.g. fuel tax
Ad valorem tax
% tax added on
Progressive tax
The more you earn the more you pay e.g. income tax
Regressive
The less you earn the higher the proportion of income being spent on the tax e.g. VAT
Proportional tax
Pay the same amount of tax e.g. council tax
Price controls
When the government sets a maximum or minimum price for a goods or service
Price floor
A price limit where goods cant be sold below the price - above the free market price
Benefits of price floors
Guaranteed income (minimum wage)
Encourage production essential goods
Drawbacks of price floors
Increase prices, encouraging people to seek cheaper goods
Reduce international competitiveness
Price ceilings
Maximum price limits where prices can not go above - below market price
Advantages of price ceilings
Reduce monopoly power
Allow more consumers to access g/s
Price ceiling issues
Creates black markets
Excess demand - shortages and queues
Some consumers may not be able to obtain g/s
Marginal cost
The cost incurred from from an additional good or service
Normal profit
When TR=TC, where profit is £0, the minimum profit to keep resources in current use in the long run
Super normal/abnormal profit
When TR>TC, acting as an incentive for other firms to enter the market
Other objectives other than profit
Revenue maximisation
Market share
Reduce unit costs/costs
Labour productivity
Quality
Profit maximisation
MC=MR
Allocative efficiency
MC=AR
Productive efficiency
MC=AC, when average total costs are at their lowest
Normal profit
AR=AC
Revenue maximisation
MR=0
Monopoly
When a firm is the main producer of g/s in a market
Oligopoly
When a few firms have majority market share in an economy
Monopolistic competition
When many firms in a market produce similar g/s but not exact
Perfect competition
A hypothetical market where competition is at its greatest, which according to neoclassical theorists leads to the best outcomes for society
Concentration ratio
refers to % market share which is held by the top firms in the industry
Monopoly power
When a firm has the ability to control the price it charges by varying the quantity supplied - note doesn’t have to be a monopoly e.g. apple is not a monopoly due to the large competition it faces
Dominant monopoly
40% or more market share
Pure monopoly
Market is controlled by one supplier - e.g. national grid - high barriers to entry
Legal monopoly
Running under a government mandate
Natural monopoly
When it is most efficient to have one firm in the market e.g. water
Monopoly market share
25%
Market failure
Resources aren’t allocated efficiently to meet society’s needs
Negative externalities
Costs to the third party that aren’t included in the price
Positive externalities
Benefits to the third party that aren’t included in the price
Pure public goods
goods where it is impossible to exclude someone from consuming e.g. air we breathe
Free-rider problem
someone who benefits from a g/s despite not paying for it
Quasi public goods
takes characteristics from both a private and public good
Long run
When all FOP are variable
Short run
When at least one factor of production is fixed
Law of diminishing returns
In the short run, the productivity of the variable factor will eventually decrease
Internal economies of scale
Occurs due to increase in the scale of production of the firm
External economies of scale
Occurs due to an increase in the scale of production of the industry in which a firm operates in
Price mechanisms
Allocates resources by the interactions between buyers and sellers
Incentive
Higher prices act as an incentive for firms to increase there supply. Allowing greater revenue and profits to be achieved, achieving utility for firms
Signalling
Higher prices incentive firms to increase their supply, also signalling consumers to reduce demand
Allocative
Society is producing g/s that meets the needs of the consumers
Rationing
Excess demand causing firms to increase the price, this reduced demand as less consumers are willing to meet the new price, hence the supply is rationed for the g/s
Benefits of price mechanism
Consumers decided what g/s are being produced
Doesn’t costs anyone to operate
prices are kept to minimum
resources are allocated efficiently
Drawbacks of price mechanism
Inequality in wealth and income likely
Over-provision of demerit goods, under-provision of merit goods - supply won’t be at socially optimal level
Public goods aren’t produced
