The role of markets Flashcards
What is specialisation
The process of concentrating on a task or activity in order to become an expert on it
What is division of labour
A process whereby production is broken down into a sequence of stages
What is a market
A place where buyers and sellers meet in order to trade
What is a barter system
An economy without money
What is labour productivity
Output per worker per unit of input
What is the equation for productivity
Units of output / Units of input
Give some drawbacks of specialisation
Dull for workers
Inflexible
Creates reliance on certain conditions
Why is specialisation often used
Increases the amount of output
Helps tackle scarcity
Allows for trade
What is Tax
Theft
What is an indirect Tax
A tax levied on expenditure of goods and services
What is a Specific Tax
A Tax of a fixed amount imposed on purchases of a commodity
What is a direct Tax
A Tax charged directly on an individual based on income
What is an Ad Valorem tax
a Tax levied on a commodity set as a percentage of the selling price
What is the excess burden of a sales tax
the loss to society following the imposition of a sales tax
What is the polluter pays principle
An argument that a firm causing pollution should be forced to pay for the external cost on society
Why do governments tax income
To raise revenue
Why do governments tax demerit goods
To raise revenue and to decease demand
AKA internalizing the negative externality
What is hypothecation
Spending tax revenue in the area it was generated
What is the incidence of Tax
How tax is split between producers and consumers
What 2 factors affect the effectiveness of a sales tax
Size of the tax
PED
Why is taxation a better alternative than prohibition
Taxation is a market based solution that raises government revenue
Why is taxation limited
Hard to measure negative externalities
Indirect taxes are regressive
Some taxes may be expensive or difficult to collect
What is a subsidy
A grant given by government to producers to encourage them to produce at a lower price
Why are subsidies used
To increases consumption of a good
Why are subsidies good
They are a market based solution
What factors could affect the effectiveness of a subsidy
Price elasticity of demand
(If PED is high subsidy is more effective)
Level of competition
Give some limitations of using a subsidy
Expensive for government
How could government negate the expense of a subsidy
By funding it using tax revenue generated in the same area
What is government expenditure
The government deciding which goods and services to spend money
What is government expenditure also known as
State provision
In what way is government expenditure different from subsidy
State provision is paid before consumption
What is the purpose of state provision
Ensures that goods are provided which has effects on supply
Why is state provision used by government
To reduce inequality
Why is state provision limited
Expensive for government
Producers may charge more because government is paying
Consumers may start to rely on the state
Reduces innovation
Give an example of a good that is provided by the state
NHS
Education
Why is government expenditure better than using a subsidy
Subsidy cannot be used to provide public goods
State provision creates more equality
In what ways is a state provision worse than subsidy
More expensive
Not a market based solution
Moral hazard (Some firms may become too large to fail e.g. Visa/Amazon/Bank of America)
What is price control
A legal min or max price
What is a price floor
A legal minimum price
What is a price ceiling
A legal maximum price
What would setting a max price increase
Consumption
When will a max price have no effect
When it is set above the equilibrium price
What is caused by setting a minimum price above the market rate
Excess supply and a surplus
What is a merger
2 or more firms joining to form a new firm
What is a cartel
An agreement between firms on price or output that allows them to maximise profits
Why are cartels bad
They are anti-consumer
What is competition policy
A form of regulation used to protect consumers and firms from being exploited by firms with market power
What is the threshold for market power according to the CMA
Above £70m revenue and 25% UK market share
What is the role of the CMA
Investigate mergers
Protect customers
Bring prosecution against cartels
What does CMA stand for
Competition and Markets Authority
Why is the CMA effective
Fines levied could cover cost of operation
The threat of enforcement is often enough to prevent exploitation
In what ways is competition policy limited
The correct size of a fine may be unclear
The CMA may start to represent firms instead of regulating them
What is Buffer stock
A scheme intended to stabilize the price of a commodity by buying when price is high and selling when supply is high and selling when supply is low
Why is buffer stock effective
Can be self-funding
Ensures that there is competition when prices fluctuate
When may a buffer stock compare unfavourably to subsidy
If the surplus is too large
Buying buffer stock increases the price of a commodity
What is the marginal principle of economics
The idea that economic agents make decisions based on small changes from the current state
What is rational decision making
A decision that allows an economic agent to maximize their own objective
What is marginal utility
The additional utility gained from consuming another good or service
What is the law of diminishing marginal utility
The more of a good is consumed, the lower the marginal utility from consuming said goods
