Theme 1: Introduction to markets and market failure Flashcards
What is government failure and what does it entail? (1.4.2)
Intervention resulting in net welfare loss.
Causes:
- Distorted price signals
- Unintended consequences
- Excessive administrative costs (regulation enforcement)
- Information gaps (in government)
What are the different types of government intervention for market failure?
(1.4.1)
- Indirect tax
- Information provision
- Subsidies
- Maximum / minimum price
- Pollution permits
- Public good provision
- Regulation (age)
What are the disadvantages of indirect taxation as government intervention in
market failure? (1.4.1)
- Risk of incorrect level (information failure)
- Laffer curve (total revenue)
- PED potentially inelastic
- Unpopular
What are the characteristics of public goods and what is the free-rider problem?
(1.3.3)
Characteristics:
- Non-rivalry (not reducing else’s consumption)
- Non-excludability
Free-rider:
- Underprovided
- No incentive to pay
What reasons may there be to why consumers may not behave rationally? (1.2.10)
- Other people’s behaviour (influences, peer pressure)
- Habitual behaviour
- Consumer weakness at computation (cannot process info)
What are the functions of the price mechanism to allocate resources? (1.2.7)
- Rationing
- Incentivising (encourages buying / selling)
- Signalling (demonstrates where resources required)
What determines the elasticity of supply? (1.2.5)
- Nature of good (perishability)
- Capacity
- Stockpiling
- Time (SR 1 FoP fixed, LR all variable)
What factors cause shifts in the supply curve? (1.2.4)
- Productivity
- Indirect tax
- Number of firms
- Technology
- Subsidies
- Weather
- Costs (of production)
What is the formula for cross elasticity of demand? (1.2.3)
XED=%▲QDofX%▲PofYXED=\frac{\%▲QD\ of\ X}{\%▲P\ of\ Y}XED=%▲PofY%▲QDofX
What do the numerical measures of using the price elasticities formulae
represent? (1.2.3)
Ignore minus sign
Perfectly inelastic: 0
Inelastic: Between 0 and 1
Unitary elasitc: 1
Elastic: 1 to ∞
Perfectly elastic: ∞
What factors cause shifts in the demand curve? (1.2.2)
- Population
- Advertising
- Substitutes
- Interest rates
- Fashion tastes
- Income (normal / inferior goods)
- Complements
What are the assumptions of rational economic decision-making? (1.2.1)
Consumers: maximise utility (welfare / enjoyment)
Firms: maximise profits
Which economists are associated with free-market, mixed, and command economies
respectively? (1.1.6)
- Free-market: Friedrich Hayek
- Mixed: Adam Smith
- Command: Karl Marx
What are the functions of money? (1.1.5)
- Medium of exchange
- Measure of value
- Store of value
- Method of deferred payment (lending)
What are the advantages and disadvantages of specialisation, on a micro & macro
level? (1.1.5)
Advantages:
- Increases output
- Lower prod. costs
- Encourages trade / partnerships
- Meets consumer needs
Disadvantages:
- Repetitive work
- Over-reliance on certain industries
- Interdependence