Theme 1- Introduction to markets and market failure

Question 1

What is the basic economic problem?

Answer 1

Scarcity-unlimited wants vs Limited resources

Question 2

What are the 3 Economic agents?

Answer 2

Consumers, Producers and the government

Question 3

What are the 3 types of economies?

Answer 3

Free market, Mixed economy and Command economy.

Question 4

Define opportunity cost

Answer 4

The next best alternative foregone when making a decision

Question 5

What is the production possibility frontier?

Answer 5

A curve showing the maximum possible output combinations of two good given resources and technology

Question 6

What causes a outward shift in the PPF?

Answer 6

Increase in resources, better technology, Improved education.

Question 7

What causes an inward shift in the PPF?

Answer 7

Natural disasters, war, depletion of resources

Question 8

What specialisation?

Answer 8

When individuals, firms, or countries focus on producing certain good/services to increase efficiency

Question 9

What is division of labour?

Answer 9

When a production process is split into different tasks, improving efficiency

Question 10

What are the advantages of specialisation?

Answer 10

Higher productivity, lower costs, better quality.

Question 11

What are the disadvantages of specialisation?

Answer 11

Boredom, Over-reliance on one industry, structural unemployment.

Question 12

What are the functions of money?

Answer 12

Medium of exchange, store value, unit of account, standard of deferred payment (value debt)
.

Question 13

What is demand?

Answer 13

The quantity of a good/service consumers are willing and able to buy at a given price.

Question 14

What are the 6 factors affecting demand?

Answer 14

1. Income
2. Consumer Preferences
3. Prices of Related Goods
4. Tastes and Preferences
5. Population and Demographics
6. Expectations

Question 15

What causes a shift in the demand curve?

Answer 15

Changes in income, price of substitutes/complements, tastes, population.

Question 16

What is supply?

Answer 16

The quantity of a good/service producers are willing and able to sell at a given price.

Question 17

What are the factors affecting supply?

Answer 17

Production costs, technology, government taxes/ subsidies, weather.

Question 18

What is equilibrium price?

Answer 18

The price where quantity demanded=quantity supplied

Question 19

What happens when price is above equilibrium?

Answer 19

surplus(excess supply), leading to price falls.

Question 20

What happens when price is below equilibrium?

Answer 20

Shortages(excess demand), leading to price rises.

Question 21

What is price elasticity of demand(PED)?

Answer 21

A measure of how responsive demand is to a change in price.

Question 22

What is the formula for PED?

Answer 22

% change in quantity demanded / % change in price.

Question 23

What values of PED indicate elasticity?

Answer 23

PED >1: Elastic
PED <1: Inelastic
PED =1: unitary

Question 24

What factors affect PED?

Answer 24

Substitutes, necessity vs luxury, proportion of income, time period.

Question 25

What is income elasticity of demand (YED)?

Answer 25

A measure of how demand changes with income

Question 26

What is the formula for YED?

Answer 26

% change in quantity demanded / %Change in income.

Question 27

What values of YED indicate different types of goods?

Answer 27

YED >1: Luxury good YED <1:Necessity YED <0:inferior good

Question 28

What is cross elasticity of demand (XED)?

Answer 28

A measure of how demand for one good response to a change in price of another good

Question 29

What is the formula for XED?

Answer 29

% Change in Quantity Demanded of Good A / % Change in price of good B

Question 30

What values of XED indicate different relationships?

Answer 30

XED >0: Substitutes XED <0: Complements XED =0: No relationship

Question 31

What is market failure?

Answer 31

When the free market leads to an inefficient allocation of resources

Question 32

What are the 3 main types of market failure?

Answer 32

1. Externalities 2. Public goods 3. Imperfect information

Question 33

What is an externality?

Answer 33

A cost or benefit to a third party not involved in a transaction

Question 34

What is a negative externality?

Answer 34

A cost to a third parties e.g air pollution from factories

Question 35

What is a positive externality?

Answer 35

A benefit to third parties e,g vaccines reducing disease spread

Question 36

What are public goods?

Answer 36

Goods that are non-rivalrous and non-excludable

Question 37

Why do public good cause market failure?

Answer 37

The free rider problem-firm have no incentive to provide them since people can benefit without paying

Question 38

What is asymmetric information?

Answer 38

When one party in a transaction has more information than the other

Question 39

How can government correct market failure?

Answer 39

-Taxes (on negative externalities) -subsidies (for positive externalities) -regulation and laws -state provision of public goods

Question 40

What are the main types of government intervention?

Answer 40

Indirect taxes, subsidies, regulations, price control and state provision

Question 41

What is an indirect tax?

Answer 41

A tax on goods/service that increases production costs

Question 42

How do indirect taxes correct negative externalities?

Answer 42

They increase production costs, shifting supply left, reducing overconsumption.

Question 43

What is a subsidy?

Answer 43

A government payment to firms to encourage production of a good.

Question 44

How do subsidies correct positive externalities?

Answer 44

They reduce costs for firms, shifting supply right, increasing output.

Question 45

What is a price ceiling?

Answer 45

A maximum price set below equilibrium to make goods affordable.

Question 46

What is a price floor?

Answer 46

A minimum price set above equilibrium to support producers e.g minimum wage

Question 47

What is government failure?

Answer 47

When government intervention causes a misallocation of resources and worsens the situation

Question 48

What are examples of government failure?

Answer 48

-Unintended consequences(e.g black market from price controls) -Administrative costs(e.g expensive subsidy schemes) -regulatory capture(e.g firms influencing regulators in their favor)