Theme 1: Introduction to markets and market failure Flashcards

1
Q

What is government failure and what does it entail? (1.4.2)

A

Intervention resulting in net welfare loss.

Causes:

  • Distorted price signals
  • Unintended consequences
  • Excessive administrative costs (regulation enforcement)
  • Information gaps (in government)
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2
Q

What are the different types of government intervention for market failure?
(1.4.1)

A
  • Indirect tax
  • Information provision
  • Subsidies
  • Maximum / minimum price
  • Pollution permits
  • Public good provision
  • Regulation (age)
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3
Q

What are the disadvantages of indirect taxation as government intervention in
market failure? (1.4.1)

A
  • Risk of incorrect level (information failure)
  • Laffer curve (total revenue)
  • PED potentially inelastic
  • Unpopular
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4
Q

What are the characteristics of public goods and what is the free-rider problem?
(1.3.3)

A

Characteristics:

  • Non-rivalry (not reducing else’s consumption)
  • Non-excludability

Free-rider:

  • Underprovided
  • No incentive to pay
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5
Q

What reasons may there be to why consumers may not behave rationally? (1.2.10)

A
  • Other people’s behaviour (influences, peer pressure)
  • Habitual behaviour
  • Consumer weakness at computation (cannot process info)
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6
Q

What are the functions of the price mechanism to allocate resources? (1.2.7)

A
  • Rationing
  • Incentivising (encourages buying / selling)
  • Signalling (demonstrates where resources required)
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7
Q

What determines the elasticity of supply? (1.2.5)

A
  • Nature of good (perishability)
  • Capacity
  • Stockpiling
  • Time (SR 1 FoP fixed, LR all variable)
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8
Q

What factors cause shifts in the supply curve? (1.2.4)

A
  • Productivity
  • Indirect tax
  • Number of firms
  • Technology
  • Subsidies
  • Weather
  • Costs (of production)
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9
Q

What is the formula for cross elasticity of demand? (1.2.3)

A

XED=%▲QDofX%▲PofYXED=\frac{\%▲QD\ of\ X}{\%▲P\ of\ Y}XED=%▲PofY%▲QDofX

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10
Q

What do the numerical measures of using the price elasticities formulae
represent? (1.2.3)

A

Ignore minus sign

Perfectly inelastic: 0

Inelastic: Between 0 and 1

Unitary elasitc: 1

Elastic: 1 to ∞

Perfectly elastic: ∞

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11
Q

What factors cause shifts in the demand curve? (1.2.2)

A
  • Population
  • Advertising
  • Substitutes
  • Interest rates
  • Fashion tastes
  • Income (normal / inferior goods)
  • Complements
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12
Q

What are the assumptions of rational economic decision-making? (1.2.1)

A

Consumers: maximise utility (welfare / enjoyment)

Firms: maximise profits

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13
Q

Which economists are associated with free-market, mixed, and command economies
respectively? (1.1.6)

A
  • Free-market: Friedrich Hayek
  • Mixed: Adam Smith
  • Command: Karl Marx
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14
Q

What are the functions of money? (1.1.5)

A
  • Medium of exchange
  • Measure of value
  • Store of value
  • Method of deferred payment (lending)
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15
Q

What are the advantages and disadvantages of specialisation, on a micro & macro
level? (1.1.5)

A

Advantages:

  • Increases output
  • Lower prod. costs
  • Encourages trade / partnerships
  • Meets consumer needs

Disadvantages:

  • Repetitive work
  • Over-reliance on certain industries
  • Interdependence
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16
Q

What are positive and normative statements? (1.1.2)

A

Positive: objective, proving / rejecting theories

Normative: opinion, subjective, difficulty proving

17
Q

What does ceteris paribus mean? (1.1.1)

A

‘Other things being equal’, effect of change in 1 independent variable.