The allocation of resources: how the market works; market failure

Question 1

what is an economic system?

Answer 1

economic system describes the way in which the economy is organised and run including alternative views of how resources are best allocated

Question 2

what are the three kinds of economic systems and the crux of each?

Answer 2

Market : resources are allocated based on market forces
planned : relies on government allocating resources
mixed : combination of both market and planned

Question 3

5 advantages of planned economic system

Answer 3

economies of scale
prevent wastage
social equality
social protection
employment of resources

Question 4

3 disadvantages of planned system

Answer 4

lack of economic freedom
lack of incentives
bureaucracy

Question 5

3 advantages of market system

Answer 5

efficiency
freedom of choice
incentives

Question 6

2 disadvantages of market system

Answer 6

environmental issues

income and wealth inequalities

Question 7

define demand

Answer 7

ability and willingness of customers to pay a certain price to buy a good or service

Question 8

what does the market demand curve refer to ?

Answer 8

the sum of all individual demand for a product. it is found by adding up all individual demand at each price level.

Question 9

determinants of demand are ?

Answer 9

marketing
income
substitutes
complements

Question 10

when is a movement caused and when is a shift caused

Answer 10

movement is caused when there is a change in the price

shift is caused when there is a change in one of the factors of demand or supply

Question 11

define supply

Answer 11

it is the ability and willingness of firms to provide goods and services at given price levels

Question 12

market supply curve refers to ?

Answer 12

the sum of all supply at each price level

Question 13

determinants of supply are ?

Answer 13

weather
ict
taxes
subsidies

Question 14

what is equilibrium price?

Answer 14

the demand for a product= the supply of product at equilibrium price

Question 15

what will happen if the price is set too high?

Answer 15

excess supply leading to a fall in price

Question 16

what will happen if the price is set too low ?

Answer 16

excess demand leading to a rise in price

Question 17

what is ped?

Answer 17

ped measures the degree of responsiveness of quantity demanded for a product following a change in its price.

Question 18

what are four used of ped?

Answer 18

pricing strategy
impact following a change in exchange rate
price discrimination
sales tax determination

Question 19

when is a good said to be price inelastic

Answer 19

if ped/pes is less than one ( ignoring the minus sign)

Question 20

when is a good said to be price elastic

Answer 20

if ped/pes is greater than one (ignoring the minus sign)

Question 21

determinants of ped

Answer 21

time
habits
income
substitutes

Question 22

define pes

Answer 22

pes measures the degree of responsiveness of quantity supplied of a product following a change in its price

Question 23

determinants of pes

Answer 23

degree of spare productive capacity
level of stocks 
number of producers
time period 
ease and cost of factor substitution

Question 24

why is it preferable for firms to have a relatively high pes

Answer 24

can help make the firm more competitive and therefore generate more sales revenue and profit

Question 25

unitary price elasticity is when?

Answer 25

price elasticity = 1

Question 26

when does market failure occur

Answer 26

market failure is said to occur when the forces of demand and supply fail to allocate resources efficiently

Question 27

define demerit good

Answer 27

has negative spillover effects on a third party

Question 28

define merit good

Answer 28

has positive spillover effects on a third party

Question 29

define private costs

Answer 29

the actual cost of a firm individual or government eg road tax, petrol and cost of purchasing the car

Question 30

define external cost

Answer 30

negative side effects of production or consumption incurred by third parties for which no compensation is paid eg congestion and air pollution

Question 31

social cost

Answer 31

true cost ie private cost + external cost

Question 32

how can the government solve market failure

Answer 32

imposition of taxes or imposing rules and regulations

Question 33

advantages and disadvantages of government intervention to solve market failure

Answer 33

Advantages Disadvantages increases the price and certain goods are price hence should reduce demand inelastic creates tax revenue regressive taxation awareness is spread formation of underground markets which could be far more severe

Question 34

private benefit

Answer 34

benefits of production and consumption incurred by a firm, individual or government

Question 35

external benefit

Answer 35

positive side effects of production or consumption incurred by third parties for which no money is paid by the beneficiary

Question 36

social benefit

Answer 36

the true benefit ie private benefit+ social benefit