Theme 1: Introduction to markets and market failure

Question 1

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

Answer 1

Intervention resulting in net welfare loss.

Causes:

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

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

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

Answer 4

Characteristics:

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

Free-rider:

• Underprovided
• No incentive to pay

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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

Question 7

What determines the elasticity of supply? (1.2.5)

Answer 7

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

Question 8

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

Answer 8

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

Question 9

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

Answer 9

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

Question 10

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

Answer 10

Ignore minus sign

Perfectly inelastic: 0

Inelastic: Between 0 and 1

Unitary elasitc: 1

Elastic: 1 to ∞

Perfectly elastic: ∞

Question 11

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

Answer 11

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

Question 12

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

Answer 12

Consumers: maximise utility (welfare / enjoyment)

Firms: maximise profits

Question 13

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

Answer 13

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

Question 14

What are the functions of money? (1.1.5)

Answer 14

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

Question 15

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

Answer 15

Advantages:

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

Disadvantages:

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

Question 16

What are positive and normative statements? (1.1.2)

Answer 16

Positive: objective, proving / rejecting theories

Normative: opinion, subjective, difficulty proving

Question 17

What does ceteris paribus mean? (1.1.1)

Answer 17

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