Theme 1: Introduction to Markets and Market Failure

Question 1

Difference between a model and a theory

Answer 1

A model uses an equation while theories will be expressed in words

Question 2

Theory / Model

Answer 2

Theoretical concept that looks at how different variables interact

Question 3

Ceteris Paribus

Answer 3

All other factors remain the same

Question 4

Positive Statement

Answer 4

A statement which is objective, factually based comments that can be tested and accepted or rejected by referring to the evidence.
(Unemployment is 8%)

Question 5

Normative Statement

Answer 5

Subjective statements which are based on opinion and can not be scientifically proven.
(The government should increase spending on the military)

Question 6

What are the 3 questions of the economic problem?

Answer 6

1) How to produce
2) What to produce
3) Who to produce for

Question 7

Basic Economic Problem

Answer 7

Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce.

Question 8

Opportunity Cost

Answer 8

The cost of the next best thing that you lost out on due to a decision

Question 9

Trade-off

Answer 9

All alternatives you miss out on because if a decision you made.

Question 10

Consumer Goods

Answer 10

Goods that are used by people to satisfy their needs and wants

Question 11

Capital Goods

Answer 11

Goods which are used to make consumer goods.

Roads etc.

Question 12

What happens as you move towards the origin on a PPF?

Answer 12

The opportunity cost continuously increases.

Diminishing returns

Question 13

Specialisation

Answer 13

Production of a limited range of goods by individuals or firms or countries in co-operation with others so that together a complete range is produced.

Question 14

Division of Labour

Answer 14

It increases productivity in both labour productively (output per worker) and capital productivity (profits)

Question 15

Public Sector

Answer 15

Government sector of the economy (NHS)

Question 16

Private Sector

Answer 16

Sector owned by individuals or firms (Private Clinic)

Question 17

Market

Answer 17

Any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

Question 18

Why is money more efficient than barter?

Answer 18

1) Medium of Exchange
2) A store of value
3) A unit of account
4) A standard of deferred payments

Question 19

Consumer Surplus

Answer 19

The difference between how much buyers are prepared to pay for a good and what they actually pay.

Question 20

Contraction of Demand

Answer 20

When quantity demanded for a good fall because it’s price rises

Question 21

Utility

Answer 21

Satisfaction they get out of an item

Question 22

Role of the State in a Mixed Economy

Answer 22

• Provide public goods (parks etc.)
• Control macroeconomic variables (inflation etc.)
• Reduce negative externalities
• Provide a legal framework
• Encourage free trade (restrict monopolies from forming)

Question 23

Negative Exteranality

Answer 23

Cost / negative impact for a third party (environment etc.)

Question 24

Public Good

Answer 24

A good by the government’s production

Question 25

Merit Good

Answer 25

A good which their consumption has a positive impact (healthcare)

Question 26

Demerit Good

Answer 26

A good which has a negative impact on users

Question 27

Key Assumptions for Economic Agents

Answer 27

Consumers: Assumed to maximize their economic welfare
Workers: Want to maximize their own welfare at work
Firms: Firms want to maximize their profit and will make decisions for it
Governments: Governments are wanting to maximize the welfare of citizens