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New: A level Econ > Theme 1 Content > Flashcards

Theme 1 Content Flashcards

1
Q

1.1 - Nature of economics

What is the definition of PPF? (production possibility frontier)

1.1.4 - Production possibility frontiers

A

The maximum possible combination of goods that can be produced with current technology and resources.

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2
Q

1.1 Nature of Economics

What does a PPF curve show and why is it curved?

1.1.4 - Production possibility frontiers

A

It shows the maximum possible combination of goods that can be produced with current technology and resources. It is curved as both products depend on the same finite resource for their manufacture. Law of diminishing returns

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3
Q

1.1 Nature of Economics

Why is a PPF graph curved?

1.1.4 - Production possibility frontiers

A

Law of diminishing returns - there comes a point where an added production factor has less of an impact.

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4
Q

1.1 Nature of Economics

Sketch a PPF showing:
unobtainable, efficient, inefficient, firm specialising in one product:

1.1.4 - Production possibility frontiers

A
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5
Q

1.1 Nature of Economics

Define specialisation

1.1.5 - Specialisation and the division of labour

A

The production of a limited range of goods by an individual organisation.

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6
Q

1.1 Nature of Economics

Name an example of Division of Labour + EXPLAIN WHY USEFUL

1.1.5 - Specialisation and the division of labour

A

Production of cars. Different people produce different parts: Wheels, doors, engines.
Increasing productivity due to less time taken and reduces cost of production

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7
Q

1.1 Nature of Economics

4 functions of money

1.1.5 - Specialisation and the division of labour

A
  • Medium of exchange
  • Measure of value
  • Store of value
  • Method of deferred payment
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8
Q

1.1 Nature of Economics

Adam Smith (18th C)

1.1.5 - Specialisation and the division of labour

A

Father of modern economic theory. Described specialisation and the division of labour in a pin factory.

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9
Q

1.1 Nature of Economics

What are the advantages of specialisation

1.1.5 - Specialisation and the division of labour

A
  • Increased Productivity: Specialization allows workers to become more skilled in specific tasks, leading to higher efficiency. –> leads to higher profits for businesses
  • Economies of Scale: Larger quantities of identical goods can be produced more efficiently.
  • Lower Costs: Reduced training time and waste contribute to cost savings –> higher real incomes and GDP growth. When successful key cause of economic growth
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10
Q

1.1 Nature of Economics

Disadvantages of Specilisation

1.1.5 - Specialisation and the division of labour

A
  • Monotony: Workers may find repetitive tasks monotonous, leading to job dissatisfaction.
  • Dependency: An economy heavily dependent on a single industry or export can be vulnerable to economic shocks.
  • Lack of flexibility - for example, if the companies eventually move elsewhere, the workforce left behind can struggle to adapt
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11
Q

1.1 Nature of Economics

Advantages of Specializing for Trade

1.1.5 - Specialisation and the division of labour

A
  • Comparative Advantage: Nations can focus on producing goods and services where they have a comparative advantage, leading to higher efficiency.
  • Increased Standard of Living: Trade allows access to a wider variety of goods and services, enhancing overall living standards
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12
Q

1.1 Nature of Economics

Disadvantages of Specializing for Trade

1.1.5 - Specialisation and the division of labour

A
  • Vulnerability to External Shocks: Reliance on trade exposes nations to risks, such as changes in global demand or supply disruptions.
  • Income Inequality: Specialization may benefit certain industries or regions more than others, leading to income inequality.
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13
Q

1.1 Nature of Economics

Free Market Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Markets allocate scarce resources
  • Suppliers are driven by the profit motive
  • Private sector is dominant
  • Consumer tastes and preferences are really important
  • Key figures: Adam Smith, who advocated for the “invisible hand” of the market to allocate resources efficiently.
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14
Q

1.1 Nature of Economics

Mixed Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Mix of state and private ownership of businesses
  • Government intervention in most markets
  • The mix of state and market forces will vary from country to country
  • Example: Most modern economies, including the United States, have mixed economic systems.
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15
Q

1.1 Nature of Economics

Command Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Most resources are state owned (nationalised)
  • Government planning allocates most scarce resources
  • Little role for market prices and the profit motive
  • In a command economy, the government or central authority makes all economic decisions.
  • Key figures: Karl Marx, who envisioned a classless society with centralized planning, and Friedrich Hayek, a critic of central planning who believed in free markets.
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16
Q

1.1 Nature of Economics

Advantages of a Free Market Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Efficiency: Competition incentivizes firms to produce efficiently and innovate. Competition also helps keep prices low
  • Consumer Choice: Consumers have a wide range of choices in products and services.
  • Economic Growth: Free markets can lead to rapid economic growth and higher living standards.
  • Example: The United States’ free-market system has led to significant technological advancements and economic growth.
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17
Q

1.1 Nature of Economics

Disadvantages of a Free Market Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Inequality: Income and wealth disparities can be significant.
  • Lack of Public Goods: Some essential services may be underprovided without government intervention (e.g., public healthcare).
  • Boom-Bust Cycles: Free markets can be prone to economic cycles of booms and busts.
  • Example: The 2008 financial crisis exposed some of the shortcomings of unregulated financial markets.
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18
Q

1.1 Nature of Economics

Advantages of a Command Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Equality: Command economies aim to reduce income inequality through central planning.
  • Stability: Central control can provide stability during crises.
  • Prioritizing Social Goals: Resources can be directed toward public services and social welfare.
  • Example: North Korea’s command economy focuses on central planning and state control
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19
Q

1.1 Nature of Economics

Disadvantages of a Command Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Problems in fixing prices of goods and services - planners are unlikely to be as good as the market in determining suitable prices
  • Lack of Incentives: Central planning may discourage innovation and individual initiative. Also leading to low productivity
  • Resource Misallocation: Inefficient allocation of resources can lead to shortages or surpluses.
  • Bureaucracy: Command economies often involve complex bureaucracies.
  • Example: The collapse of the Soviet Union highlighted the challenges of central planning.
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20
Q

1.1 Nature of Economics

Roles of the State in a Mixed Economy

1.1.6 - Free Market Economies, Mixed Economy and Command Economy

A
  • Regulation of Markets - e.g. employment protection for poeple in work and regulation of monopoly firms
  • Public goods - e.g. national defencce and public service broadcast
  • Welfare Services - e.g. Universal Credit, Child Benefit and State Pension
  • Merit Goods - e.g. State education, NHS and social housing
  • State-Owned Industries - e.g. - Network Rail and the BBC
  • Stabilisation and Economic Planning - Governments may use fiscal and monetary policies to manage economic cycles and prevent economic crises.
    Example: Central banks adjust interest rates to control inflation and promote economic growth.
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21
Q

1.2 - How Markets Work

What are the Underlying Assumption of Rational Economic Decision Making

1.2.1 - Rational Decision Making

A
  1. Consumers Aim to Maximize Utility
  2. Firms Aim to Maximize Profits
  3. Consumer Decision-Making - Consumers make choices based on their preferences and budget constraints. Utility-maximizing consumers allocate their budgets to maximize satisfaction.
  4. Firm Decision-Making - Firms produce goods and services to meet consumer demand.
    Profit-maximizing firms adjust production levels and pricing to achieve the highest profit

Critiques of the Assumptions - Critics argue that in reality, consumers and firms may not always behave rationally due to bounded rationality, cognitive biases, and imperfect information
Importance of the Assumptions - Despite the critiques, the assumptions of utility maximization for consumers and profit maximization for firms serve as foundational concepts in economics.
They provide a framework for understanding and analyzing economic decision-making in various contexts.

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22
Q

1.2 - How Markets Work

What is the different between a Movement and a Shift of the Demand Curve

1.2.2 - Demand

A
  1. Movements Along a Demand Curve - Movements along a demand curve occur when the quantity demanded changes due to a change in the price of the good or service, while other factors remain constant. The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.
  2. Shifts of a Demand Curve - Shifts of a demand curve occur when factors other than price cause a change in the quantity demanded at every price level. A shift indicates a change in overall demand, not just a response to price changes.
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23
Q

1.2 - How Markets Work

Factors that may cause a shift in the demand curve

1.2.2 - Demand

A
  • Income
  • Consumer Preferences and Tastes
  • Prices of Related Goods
  • Population and Demographics
  • Expectations
  • Advertising
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24
Q

1.2 - How Markets Work

How does Diminishing Marginal Utility Influence the Demand Curve

1.2.2 - Demand

A

The law of diminishing marginal utility contributes to the downward-sloping shape of the demand curve. As price decreases, consumers are willing to buy more because the marginal utility of each additional unit exceeds the price. Example: If a consumer enjoys ice cream, the first scoop provides high utility, but by the fifth scoop, the satisfaction gained from each additional scoop decreases.

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25
Q

1.2 - How Markets Work

What is PED

1.2.3 - Price, income and cross elasticities of demand

A

Price Elasticity of Demand
Measures the responiveness of the quantity demand to changes in the price of a good
Formula: PED = (% Change in Quantity Demanded) / (% Change in Price)

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26
Q

1.2 - How Markets Work

What is YED

1.2.3 - Price, income and cross elasticities of demand

A

Incomne Elasticity of Demand
YED measures the responsiveness of the quantity demanded to changes in consumer income
Formula: YED = (% Change in Quantity Demanded) / (% Change in Income)

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27
Q

1.2 - How Markets Work

What is XED

1.2.3 - Price, income and cross elasticities of demand

A

Cross Elasticity of Demand
XED measures the responsiveness of the quantity demanded of one good to changes in the price of another.
Formula: XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)

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28
Q

1.2 - How Markets Work

Values for PED

1.2.3 - Price, income and cross elasticities of demand

A

Perfectly Elastic (PED = ∞): Quantity demanded is extremely responsive to price changes, demand is perfectly elastic.
Relatively Elastic (PED > 1): Demand is responsive to price changes.
Unitary Elastic (PED = 1): Percentage change in quantity demanded is exactly proportional to the percentage change in price.
Relatively Inelastic (0 < PED < 1): Demand is less responsive to price changes
Perfectly Inelastic (PED = 0): Quantity demanded does not respond to price changes, demand is perfectly inelastic.

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29
Q

1.2 - How Markets Work

Values for YED

1.2.3 - Price, income and cross elasticities of demand

A

Inferior Goods (YED < 0): Demand decreases as income increases (e.g., low-quality goods).
Normal Goods (0 < YED < 1): Demand increases with income but at a decreasing rate.
Luxury Goods (YED > 1): Demand increases significantly with income (e.g., luxury cars).

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30
Q

1.2 - How Markets Work

Values for XED

1.2.3 - Price, income and cross elasticities of demand

A

Substitutes (XED > 0): An increase in the price of one good leads to an increase in the quantity demanded of the other (e.g., Coke and Pepsi).
Complementary Goods (XED < 0): An increase in the price of one good leads to a decrease in the quantity demanded of the other (e.g., cars and gasoline).
Unrelated Goods (XED = 0): The price change of one good has no effect on the other.

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31
Q

1.2 - How Markets Work

Factors Influencing Elasticites of Demand

1.2.3 - Price, income and cross elasticities of demand

A

Degree ofNecessity
Addictiveness
Availability Substitutes
Time - become more elastic over time
Income (% of)
Brand Loyalty

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32
Q

1.2 - How Markets Work

Why is Elasticities of Demand Important to Firms

1.2.3 - Price, income and cross elasticities of demand

A
  • Firms use elasticities to set prices and predict revenue changes.
  • Elastic demand means price increases reduce total revenue, while inelastic demand means price increases raise total revenue.
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33
Q

1.2 - How Markets Work

Why are Elasticities of Demand Important to the Government

1.2.3 - Price, income and cross elasticities of demand

A
  • Government uses elasticities to make taxation and subsidy decisions.
  • Inelastic goods can bear higher taxes, while elastic goods may see reduced consumption due to taxes.
  • Subsidies can encourage the consumption of essential goods.
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34
Q

1.2 - How Markets Work

What is the difference between a movement along the supply curve and a shift of the supply curve

1.2.4 - Supply

A
  1. Movements Along a Supply Curve - Movements along a supply curve occur when the quantity supplied changes in response to a change in the price of the good or service, while other factors remain constant. The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied also increases, and vice versa.
  2. Shifts of a Supply Curve - Shifts of a supply curve occur when factors other than price cause a change in the quantity supplied at every price level. A shift indicates a change in overall supply, not just a response to price changes.
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35
Q

1.2 - How Markets Work

Conditions of Supply

1.2.4 - Supply

A
  • Productivity
  • Indirect taxes
  • Number of firms
  • Technology - level of technology or technological advancements
  • Subsidies
  • Weather
  • Costs
  • Government policies and regulation
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36
Q

1.2 - How Markets Work

What is PES

1.2.5 - Elasticity of Supply

A

Price Elasticity of Supply
Measures the responsiveness of the quantity supplied of a good to changes in its prices
Formula: PES = (% Change in Quantity Supplied) / (% Change in Price

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37
Q

1.2 - How Markets Work

Value for PES

1.2.5 - Elasticity of Supply

A
  • Perfectly Inelastic (PES = 0) - Quantity supplied doesn’t respond to price changes. Price are unable or unwilling to change supply
  • Relatively Inelastic (0 < PES < 1) - a percentage change in price results in a smaller percentage change in quantity supplied. Producers have limited flexibility to adjust supply quickl
  • Relatively Elastic (PES > 1) - a percentage change in price results in a larger percentage change in quantity supplied. Producers can respond to price changes by adjusting production.
  • Perfectly Elastic (PES = ∞) - even a slight price change results in an infinite change in quantity supplied. This is rare and usually occurs in markets where producers can instantly and costlessly adjust production.
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38
Q

1.2 - How Markets Work

Factors Influencing PES

1.2.5 - Elasticity of Supply

A
  • Availability of substitutes
  • Stocks - shelf life
  • Production time
  • Availability of factors of production
  • Capacity
  • Ease of entry into the market

ASPACE

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39
Q

1.2 - How Markets Work

What are the Functions of the Price Mechanism to Allocate Resources

1.2.7 - Price Mechanism

A
  1. Rationing Function - Prices allocate scarce resources among competing uses. When demand is higher than supply then price rises, so only people willing to oay get the goods
  2. Incentive Function - Provides incentive for producers to allocate resources. Higher prices motivate proders to produce more and vice versa
  3. Signaling Function - Convey information about market conditions allowing consumers and producers to make informed decisions
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40
Q

1.2 - How Markets Work

The Price Mechanism in Local Markets

1.2.7 - Price Mechanism

A

In local markets, prices are determined by supply and demand conditions within a specific geographic area. Local factors, such as weather or local preferences, can influence prices. Example: The price of fresh produce at a local farmers’ market may vary based on seasonal factors and local supply.

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41
Q

1.2 - How Markets Work

Price Mechanism in National Markets

1.2.7 - Price Mechanism

A

National markets cover an entire country and consider supply and demand at a broader scale. National policies and regulations, such as taxes and trade policies, can impact prices. Example: The national housing market may be influenced by government policies related to interest rates and mortgage regulations.

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42
Q

1.2 - How Markets Work

Price Mechanism in Global Markets

1.2.7 - Price Mechanism

A

Global markets involve international trade and can be influenced by factors like currency exchange rates, global supply chains, and geopolitical events. Prices in global markets are interconnected and can impact local and national markets. Example: The price of oil in global markets affects fuel prices around the world, impacting consumers and industries in various countries

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43
Q

1.2 - How Markets Work

What is Consumer Surplus

1.2.8 - Consumer and Producer Surplus

A

Consumer surplus is the additional benefit or utility that consumers receive when they are able to purchase a good or service at a price lower than what they are willing to pay. It represents the difference between what consumers are willing to pay (their maximum price) and what they actually pay in the market.

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44
Q

1.2 - How Markets Work

What is Producers Surplus

1.2.8 - Consumer and Producer Surplus

A

Producer surplus is the additional profit that producers earn when they sell a good or service at a price higher than their minimum acceptable price. It represents the difference between the market price and the producer’s marginal cost of production.

45
Q

1.2 - How Markets Work

What is a Subsidy

1.2.9 - Indirect Taxes and Subsidies

A

Money grant given to producers by the government to lower costs of production and encourage an increase in output

46
Q

1.2 - How Markets Work

What are Indirect Taxes

1.2.9 - Indirect Taxes and Subsidies

A

A tax that increases a firms cost of production but can be transferred onto the consumer via higher price
Or a tax on spending

47
Q

1.2 - How Markets Work

When are Subsidies used

1.2.9 - Indirect Taxes and Subsidies

A

PE in consumption – Used when there is an underconsumption of a good, so by lowering the cost of the production via a subsidiary there is a socially optimum quantity of the good and also a lower price level. E.g buses and rail
PE -

48
Q

1.2 - How Markets Work

What is the impact of indirect taxes on consumers

1.2.9 - Indirect Taxes and Subsidies

A
  • Increased prices
  • Possible behavioural changes
  • Possible regressive impact
49
Q

1.2 - How Markets Work

Who gains more from a subsidy if demand is price inelastic?

1.2.9 - Indirect Taxes and Subsidies

A

The consumer
There is little change in output, but a large fall in price.

50
Q

1.2 - How Markets Work

Who gains more from a subsidy if demand is price elastic?

1.2.9 - Indirect Taxes and Subsidies

A

The producer

51
Q

1.2 - How Markets Work

What are some problems with subsidies for consumers

1.2.9 - Indirect Taxes and Subsidies

A
  • Tend to be poorly targeted if everyone can buy subsidised goods as even rich households can benefit
  • Economic theory would suggest that welfare would probably be higher if poor households were given cash payments instead of subsidies, as they could be targeted more effectively High opportunity cost.
    Difficult to target (exact size of externality = unknown).
    Can make firms inefficient.
    Difficult to remove.
52
Q

1.2 - How Markets Work

What are some disadvantages of subsidies for the government and producers

1.2.9 - Indirect Taxes and Subsidies

A
  • High opportunity cost.
  • Difficult to target (exact size of externality = unknown).
  • Can make firms inefficient.
  • Difficult to remove.
53
Q

1.2 - How Markets Work

What are some advantages of subsidies

1.2.9 - Indirect Taxes and Subsidies

A
  • Welfare maximisation (social optimum output is reached (if pigouvian subsidy is utilised).
  • Supports exports
  • Changes preferences to goods that are subsidiesed, as if passed on price goes down so increase in demand
  • Help an industry grow so it can become internationallly competitive
  • Positve externality remains
54
Q

1.2 - How Markets Work

What kind of government intervention occurs with a merit good?

1.2.9 - Indirect Taxes and Subsidies

A

Subsidies
(Tend to be underprovided by free market)

55
Q

1.2 - How Markets Work

What kind of government intervention occurs with a demerit good?

1.2.9 - Indirect Taxes and Subsidies

A

Indirect taxes

56
Q

1.2 - How Markets Work

What are the advantages of indirect taxation?

1.2.9 - Indirect Taxes and Subsidies

A
  • The market produces at the social equilibrium position and social welfare is maximised.
  • Raises tax revenue - which could be used to solve the externality through other ways - investment in carbon capture.
  • Polluter pays principles - polluter pays external costs, fairer to society.
57
Q

1.2 - How Markets Work

What are some disadvantages of Indirect Taxation

1.2.9 - Indirect Taxes and Subsidies

A
  • Imperfect information - Difficult to know where to set the tax. May be set too high/low.
  • Government might be too focused on raising revenues.
  • Might lead to the creation of a black market.
  • If demand for the good is inelastic, then taxes will be ineffective at reducing output.
  • Taxes are politcally unpopular, so governments may be reulcant to introduce them.
  • Regressive
58
Q

1.2 - How Markets Work

What are the advantages of max/min prices?

A
  • Increase social welfare (can be set where MSB = MSC / consider externalities).
  • Can make goods affordable or provide a fair price (Both reduce poverty + ↑ equality).
  • Can be used to prevent monopolies from exploiting customers
59
Q

1.2 - How Markets Work

What are the disadvantages of max / min prices?

A
  • Creates excess supply / demand (Caused by distortion of price signals).
  • Difficult to set a new price (don’t know size of externality [Hayek’s criticism of Pigou]).
  • Creates a shadow market.
60
Q

1.2 - How Markets Work

What are the advantages of pollution permits?

A
  • Guarantee that pollution will fall (Internalises externality pigou).
  • Increase Gov rev
  • Encourages green tech
  • Preserves business autonomy
61
Q

1.2 - How Markets Work

What are the disadvantages of pollution permits?

A
  • Expensive to monitor and police (fines imposed on firms, large enough to ensure they follow regulation).
  • Raises costs for businesses (could be passed on to consumers).
  • Difficult to know how many to create.
  • Imperfect info. means govt. don’t know optimum level of pollutions.
  • Need for internation cooperation (as climate change is a global issue, this = difficult).
62
Q

1.2 - How Markets Work

What are the advantages of state provision of good/ services?

A
  • Improves social welfare
  • Ensures access to basic goods / corrects market failure (some goods not provided by private sector producers).
  • Increases external benefits
63
Q

1.2 - How Markets Work

Disadvantages of state provision of good/ services

A
  • Expensive - high opportunity cost e.g. administrative costs.
  • Gov. may provide wrong level of provision
  • Inefficiencies and corruption
  • Govt. may have inefficient production. (no incentive to cut costs).
64
Q

1.2 - How Markets Work

Advantages of provision of information?

A
  • Allows consumers to act rationally.
  • Can be used alongside other policies. (e.g. can make demand more elastic - will increase effectiveness of indirect taxes at reducing output).
65
Q

1.2 - How Markets Work

What are the disadvantages of provision of information?

A
  • Expensive - high opportunity cost.
  • Gov. may not have correct info.
  • Consumers might not listen (due to irrational behaviour)
66
Q

1.2 - How Markets Work

What are the disadvantages of regulation?

A
  • Laws are expensive.
  • Regulatory capture.
  • Increased costs (may be passed on to consumer).
  • May reduce competition - firms below shut down point / π motive limited inc. barriers
67
Q

1.2 - How Markets Work

What are the advantages of regulations?

A
  • Can consider externalities, prevent exploitation.
  • (Overcoming market failure + max social welfare).
  • Non-market based approach, so doesn’t suffer from problems related to elasticity etc.
68
Q

1.2 - How Markets Work

What are the 4 main types of government failure?

A
  • Distortion of price signals
  • Unintended consequences - Black Markets
  • (Excessive) Admin costs
  • Information gaps
69
Q

1.2 - How Markets Work

Outline the assumption of consumer behaviour?

1.2.10 - Alternative views of consumer behaviour

A

Should be rational but…
* Peer pressure - e.g. fashion trends
* Habits - such as brand loyalty
* Poor compuatation - difficult to compare value of different products and calcualting price per unit so may lead to inefficent choices

70
Q

1.3 - Market Failure

What are the 3 main types of market failure?

1.3.2 - Externalities

A
  • Externalities (under or overproduction).
  • Under-provision of public goods (by the private sector, due to free-rider problem).
  • Information gaps (Resources not allocated to maximise social welfare)
71
Q

1.3 - Market Failure

Define externalities?

1.3.1 - Types of market failure

A

The cost or benefit a third party receives from an economic transaction.

72
Q

1.3 - Market Failure

What are External costs / benefits

1.3.2 - Externalities

A

The costs / benefits to those participating in the economic transaction.

73
Q

1.3 - Market Failure

What are External costs / benefits

1.3.2 - Externalities

A

Costs / benefits to the third party.

74
Q

1.3 - Market Failure

What are Social costs / benefits?

1.3.2 - Externalities

A

Costs / benefits of the activity to society as a whole

75
Q

1.3 - Market Failure

What is a merit / demerit good?

A

A good with external costs / benefits.

76
Q

1.3 - Market Failure

What 2 things are public goods? Give an example

A
  • Non-rivalrous
  • Non-excludable
    A fireworks display
77
Q

1.3 - Market Failure

What does non-rivalrous mean?

A

One person’s use does not stop another person. (Both still receive benefit).

78
Q

1.3 - Market Failure

What does non-excludable mean?

A

You cannot stop someone from accessing the good and someone cannot choose not to access the good.
(Person always receives benefit)

79
Q

1.3 - Market Failure

What is the free rider problem?

A

You cannot charge an individual for a non-excludable good. People will use without paying therefore it will not be profitable

80
Q

1.3 - Market Failure

Why are public goods not found in a free market economy?

A

Due to the free rider problem, public goods are not profitable - you cannot charge an individual for use of a non-excludable good

81
Q

1.3 - Market Failure

What are information gaps?

A

Asymmetric information where one party has superior knowledge. Can be caused by advertising and leads to misallocation of resources.

82
Q

1.3 - Market Failure

What is Symmetric information?

A

Consumers and producers have potential access to the same information.

83
Q

1.3 - Market Failure

What is asymmetric information?

A

Consumers and producers don’t have the same information.

84
Q

1.3 - Market Failure

What is an example of a merit good? (Where the social benefit > private)

A

Toothpaste

85
Q

1.3 - Market Failure

What is an example of a demerit good (Private benefit > social)

A

Cigarettes

86
Q

1.3 - Market Failure

What is the supply curve also known as

A

MPC (Marginal Private Cost)
The cost to firms to make the product

87
Q
A
88
Q

1.3 - Market Failure

What does the MSC represent?

A

Marginal Social Cost - the cost to society per unit.

89
Q

1.3 - Market Failure

What does Pso and Qso represent?

A

The socially optimum price and quantity.

90
Q

1.3 - Market Failure

Where should the economy produce?

A

Where MSB=MPC
The market produces where MPB=MPC

91
Q

1.3 - Market Failure

What could the gov. provide (provision of good / service)

A

Any g/s where social benefits are very high.
E.g. healthcare / education

92
Q

1.3 - Market Failure

What are two examples of information gaps

A
  • Adverse Selection: In the used car market, sellers may have more information about the car’s condition than buyers. Buyers may be cautious because they fear purchasing a lemon.
  • Moral Hazard: Insurance markets can suffer from moral hazard. When individuals have insurance coverage, they may take on riskier behaviors because they are protected from the full consequences of their actions.
93
Q

1.3 - Market Failure

When do Positive consumption externalities occur?

A

Social benefits are greater than social costs.

94
Q

1.3 - Market Failure

Give 2 evaluations for externalities:

A
  • It can be difficult to work out size of externality - placed on value judgements. (Difficult to monetise external costs (Hayek’s criticism of Pigou)).
  • Many externalities due to info. gaps - people unaware of implications.
95
Q

1.3 - Market Failure

How does govt. intervention such as ind. taxes + subsidies inc. social welfare?

A

Subsidies - merit goods
Ind. taxes - demerit goods
(Helps to internalise externality - POLLUTER PAYS - moving production closer to social optimum position through pigouvian tax).

96
Q

1.3 - Market Failure

What is a merit good?

A

A good with external benefits - greater benefit to society than the individual.

97
Q

1.3 - Market Failure

What is a demerit good?

A

A good with external costs - the cost to society is greater than to the individual.

98
Q

1.3 - Market Failure

Why can indirect taxes be bad for consumers?

A

The increases CoP can be transferred to them via higher prices (Consumer burden)

99
Q

1.3 - Market Failure

Why might the govt. provide information?

A

Externalities = associated with info. gaps.
Govt. provides info. so eco agents make informed decisions + acknowledge external costs.

100
Q

1.3 - Market Failure

Why is a street light a public good?

A

Has two characteristics: cannot stop person from using it, their use doesn’t prevent yours.

101
Q

1.3 - Market Failure

What are non-pure public goods also referred to as? Define them:

A

Quasi-public goods.
(Goods which aren’t perfectly non-rivalrous / excludable).

102
Q

1.3 - Market Failure

Why do public goods have to be provided by govt.?

A

Due to free-rider problem, PGs are non-excludable - cannot be sure of making a profit ∴ not provided by private sector producers.

103
Q

1.4 - Government Intervention

Give the extra disadvantage to indirect taxes

A

If demand for a good is inelastic, the tax will be ineffective at reducing output.
(Still increases govt. rev tho).

104
Q

2 Benefits of indirect taxes in essay writing:

A

1) Internalises externality (polluter pays [pigouvian tax]).
2) Generates govt. revenue, hypothecated tax. [Double dividend theory].
Eval: regressive, shadow markets, ineffective at reducing demand if PED is inelastic.

105
Q

If an indirect tax is imposed on a good, who has to pay the majority of the tax? Consumers or producers

A

The tax will mainly be passed onto the consumers since they are unresponsive to price changes.
This means that the tax will not be very effective at decreasing output, but will raise revenue for government.

106
Q

If an indirect tax is imposed on a good and demand is price elastic, who has to pay most of the tax burden?

A

The more elastic the demand curve, the lower the incidence of tax on the consumer.
When PED is elastic, a tax will only lead to a small increase in price and the supplier will have to cover the majority of the cost of the tax

107
Q

Why is distortion of price signals government failure?

A

Price mechanism aims to allocate resources to their best use.
Distortion can keep producers allocating resources to an inefficient product.

108
Q
A

New: A level Econ (18 decks)

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