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Econ2 > The role of markets > Flashcards

The role of markets Flashcards

1
Q

What is specialisation

A

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

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2
Q

What is division of labour

A

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

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3
Q

What is a market

A

A place where buyers and sellers meet in order to trade

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4
Q

What is a barter system

A

An economy without money

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5
Q

What is labour productivity

A

Output per worker per unit of input

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6
Q

What is the equation for productivity

A

Units of output / Units of input

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7
Q

Give some drawbacks of specialisation

A

Dull for workers
Inflexible
Creates reliance on certain conditions

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8
Q

Why is specialisation often used

A

Increases the amount of output
Helps tackle scarcity
Allows for trade

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9
Q

What is Tax

A

Theft

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10
Q

What is an indirect Tax

A

A tax levied on expenditure of goods and services

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11
Q

What is a Specific Tax

A

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

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12
Q

What is a direct Tax

A

A Tax charged directly on an individual based on income

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13
Q

What is an Ad Valorem tax

A

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

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14
Q

What is the excess burden of a sales tax

A

the loss to society following the imposition of a sales tax

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15
Q

What is the polluter pays principle

A

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

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16
Q

Why do governments tax income

A

To raise revenue

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17
Q

Why do governments tax demerit goods

A

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

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18
Q

What is hypothecation

A

Spending tax revenue in the area it was generated

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19
Q

What is the incidence of Tax

A

How tax is split between producers and consumers

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20
Q

What 2 factors affect the effectiveness of a sales tax

A

Size of the tax
PED

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21
Q

Why is taxation a better alternative than prohibition

A

Taxation is a market based solution that raises government revenue

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22
Q

Why is taxation limited

A

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

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23
Q

What is a subsidy

A

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

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24
Q

Why are subsidies used

A

To increases consumption of a good

25
Q

Why are subsidies good

A

They are a market based solution

26
Q

What factors could affect the effectiveness of a subsidy

A

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

27
Q

Give some limitations of using a subsidy

A

Expensive for government

28
Q

How could government negate the expense of a subsidy

A

By funding it using tax revenue generated in the same area

29
Q

What is government expenditure

A

The government deciding which goods and services to spend money

30
Q

What is government expenditure also known as

A

State provision

31
Q

In what way is government expenditure different from subsidy

A

State provision is paid before consumption

32
Q

What is the purpose of state provision

A

Ensures that goods are provided which has effects on supply

33
Q

Why is state provision used by government

A

To reduce inequality

34
Q

Why is state provision limited

A

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

35
Q

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

A

NHS
Education

36
Q

Why is government expenditure better than using a subsidy

A

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

37
Q

In what ways is a state provision worse than subsidy

A

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

38
Q

What is price control

A

A legal min or max price

39
Q

What is a price floor

A

A legal minimum price

40
Q

What is a price ceiling

A

A legal maximum price

41
Q

What would setting a max price increase

A

Consumption

42
Q

When will a max price have no effect

A

When it is set above the equilibrium price

43
Q

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

A

Excess supply and a surplus

44
Q

What is a merger

A

2 or more firms joining to form a new firm

45
Q

What is a cartel

A

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

46
Q

Why are cartels bad

A

They are anti-consumer

47
Q

What is competition policy

A

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

48
Q

What is the threshold for market power according to the CMA

A

Above £70m revenue and 25% UK market share

49
Q

What is the role of the CMA

A

Investigate mergers
Protect customers
Bring prosecution against cartels

50
Q

What does CMA stand for

A

Competition and Markets Authority

51
Q

Why is the CMA effective

A

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

52
Q

In what ways is competition policy limited

A

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

53
Q

What is Buffer stock

A

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

54
Q

Why is buffer stock effective

A

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

55
Q

When may a buffer stock compare unfavourably to subsidy

A

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

56
Q

What is the marginal principle of economics

A

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

57
Q

What is rational decision making

A

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

58
Q

What is marginal utility

A

The additional utility gained from consuming another good or service

59
Q

What is the law of diminishing marginal utility

A

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

Econ2 (5 decks)

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