The role of markets

Question 1

What is specialisation

Answer 1

The process of concentrating on a task or activity in order to become an expert on it

Question 2

What is division of labour

Answer 2

A process whereby production is broken down into a sequence of stages

Question 3

What is a market

Answer 3

A place where buyers and sellers meet in order to trade

Question 4

What is a barter system

Answer 4

An economy without money

Question 5

What is labour productivity

Answer 5

Output per worker per unit of input

Question 6

What is the equation for productivity

Answer 6

Units of output / Units of input

Question 7

Give some drawbacks of specialisation

Answer 7

Dull for workers
Inflexible
Creates reliance on certain conditions

Question 8

Why is specialisation often used

Answer 8

Increases the amount of output
Helps tackle scarcity
Allows for trade

Question 9

What is Tax

Answer 9

Theft

Question 10

What is an indirect Tax

Answer 10

A tax levied on expenditure of goods and services

Question 11

What is a Specific Tax

Answer 11

A Tax of a fixed amount imposed on purchases of a commodity

Question 12

What is a direct Tax

Answer 12

A Tax charged directly on an individual based on income

Question 13

What is an Ad Valorem tax

Answer 13

a Tax levied on a commodity set as a percentage of the selling price

Question 14

What is the excess burden of a sales tax

Answer 14

the loss to society following the imposition of a sales tax

Question 15

What is the polluter pays principle

Answer 15

An argument that a firm causing pollution should be forced to pay for the external cost on society

Question 16

Why do governments tax income

Answer 16

To raise revenue

Question 17

Why do governments tax demerit goods

Answer 17

To raise revenue and to decease demand
AKA internalizing the negative externality

Question 18

What is hypothecation

Answer 18

Spending tax revenue in the area it was generated

Question 19

What is the incidence of Tax

Answer 19

How tax is split between producers and consumers

Question 20

What 2 factors affect the effectiveness of a sales tax

Answer 20

Size of the tax
PED

Question 21

Why is taxation a better alternative than prohibition

Answer 21

Taxation is a market based solution that raises government revenue

Question 22

Why is taxation limited

Answer 22

Hard to measure negative externalities
Indirect taxes are regressive
Some taxes may be expensive or difficult to collect

Question 23

What is a subsidy

Answer 23

A grant given by government to producers to encourage them to produce at a lower price

Question 24

Why are subsidies used

Answer 24

To increases consumption of a good

Question 25

Why are subsidies good

Answer 25

They are a market based solution

Question 26

What factors could affect the effectiveness of a subsidy

Answer 26

Price elasticity of demand (If PED is high subsidy is more effective) Level of competition

Question 27

Give some limitations of using a subsidy

Answer 27

Expensive for government

Question 28

How could government negate the expense of a subsidy

Answer 28

By funding it using tax revenue generated in the same area

Question 29

What is government expenditure

Answer 29

The government deciding which goods and services to spend money

Question 30

What is government expenditure also known as

Answer 30

State provision

Question 31

In what way is government expenditure different from subsidy

Answer 31

State provision is paid before consumption

Question 32

What is the purpose of state provision

Answer 32

Ensures that goods are provided which has effects on supply

Question 33

Why is state provision used by government

Answer 33

To reduce inequality

Question 34

Why is state provision limited

Answer 34

Expensive for government Producers may charge more because government is paying Consumers may start to rely on the state Reduces innovation

Question 35

Give an example of a good that is provided by the state

Answer 35

NHS Education

Question 36

Why is government expenditure better than using a subsidy

Answer 36

Subsidy cannot be used to provide public goods State provision creates more equality

Question 37

In what ways is a state provision worse than subsidy

Answer 37

More expensive Not a market based solution Moral hazard (Some firms may become too large to fail e.g. Visa/Amazon/Bank of America)

Question 38

What is price control

Answer 38

A legal min or max price

Question 39

What is a price floor

Answer 39

A legal minimum price

Question 40

What is a price ceiling

Answer 40

A legal maximum price

Question 41

What would setting a max price increase

Answer 41

Consumption

Question 42

When will a max price have no effect

Answer 42

When it is set above the equilibrium price

Question 43

What is caused by setting a minimum price above the market rate

Answer 43

Excess supply and a surplus

Question 44

What is a merger

Answer 44

2 or more firms joining to form a new firm

Question 45

What is a cartel

Answer 45

An agreement between firms on price or output that allows them to maximise profits

Question 46

Why are cartels bad

Answer 46

They are anti-consumer

Question 47

What is competition policy

Answer 47

A form of regulation used to protect consumers and firms from being exploited by firms with market power

Question 48

What is the threshold for market power according to the CMA

Answer 48

Above £70m revenue and 25% UK market share

Question 49

What is the role of the CMA

Answer 49

Investigate mergers Protect customers Bring prosecution against cartels

Question 50

What does CMA stand for

Answer 50

Competition and Markets Authority

Question 51

Why is the CMA effective

Answer 51

Fines levied could cover cost of operation The threat of enforcement is often enough to prevent exploitation

Question 52

In what ways is competition policy limited

Answer 52

The correct size of a fine may be unclear The CMA may start to represent firms instead of regulating them

Question 53

What is Buffer stock

Answer 53

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

Question 54

Why is buffer stock effective

Answer 54

Can be self-funding Ensures that there is competition when prices fluctuate

Question 55

When may a buffer stock compare unfavourably to subsidy

Answer 55

If the surplus is too large Buying buffer stock increases the price of a commodity

Question 56

What is the marginal principle of economics

Answer 56

The idea that economic agents make decisions based on small changes from the current state

Question 57

What is rational decision making

Answer 57

A decision that allows an economic agent to maximize their own objective

Question 58

What is marginal utility

Answer 58

The additional utility gained from consuming another good or service

Question 59

What is the law of diminishing marginal utility

Answer 59

The more of a good is consumed, the lower the marginal utility from consuming said goods