Theme 1 - Introduction To Markets And Market Failure

Question 1

What does Certeris Paribus mean?

Answer 1

Latin for ‘All other things being equal’ or “all other things remaining the same’. DONE

Question 2

Why is Economics a social science?

Answer 2

It provided a unique and special way of examining many areas of human behaviour, as individuals or as organisations.
DONE

Question 3

What is a positive statement?

Answer 3

They’re objective statements that can be tested. They’re based on facts that can be proved or disproved using evidence.
DONE

Question 4

What is a normative statement?

Answer 4

They’re subjective statements. They’re based on value judgements and cannot be proved or disproved.
DONE

Question 5

What is the basic economic problem?

Answer 5

Wants are infinite but resources are scarce/limited.

DONE

Question 6

What is an economic system?

Answer 6

A complex network of individuals, organisations and institutions which allocate resources.
DONE

Question 7

Who are the ‘actors’ within an economic system and what do they do?

Answer 7

Individuals - Consumers/ workers. May own a factor of production which they supply for production purposes.
Groups- Firms, trade unions, political parties, families and charities.
Government- Range from a local parish council, to a local police authority to a national parliament or supranational body. They exercise power. It establishes or influences the relationships between individuals and groups (e.g. laws).
DONE

Question 8

What is the definition of scarcity?

Answer 8

The shortage of resources in relation to the quantity of human wants (unlimited wants but limited resources).
DONE

Question 9

What does opportunity cost mean?

Answer 9

The value of the next best alternative forgone.

DONE

Question 10

What are the four factors of production?

Answer 10

Land - Natural resources and raw materials. Land included non-renewable and renewable resources. Nearly all things in this factor are scarce (air is an exception). Owners receive rent from land/money from sales of land.
Labour - The work done by people (contribute to production process). The population who are available to work = labour force (of age and capable to work). Different people have different levels of education/experience/training (makes them more valuable).
Capital - Equipment used in production goods and services like factories, schools and machinery. Capital has to be made before land. Much of an economies capital is paid by the government. Owners of capital receive interest on their land.
Enterprise - Willingness to take risk to make a profit. Entrepreneurs who combine the other 3 factors to take risks. If it fails they can lose money but if it succeeds they make a profit.
DONE

Question 11

What are economic goods?

Answer 11

They are created from resources that are limited in supply and so are scarce. Consequently, they command a price.
DONE

Question 12

What are free goods?

Answer 12

Free goods are unlimited in supply such as sunlight or sand on a beach. Consumption by one person Ford not limit consumption by others. Therefore, opportunity cost of consuming a free food is zero.
DONE

Question 13

What is does a production possibilities frontier show?

Answer 13

Illustrates the maximum potential output of an economy when all resources are fully employed/used.
DONE

Question 14

What are capital goods?

Answer 14

Those required to produce other goods (e.g. machinery, factory buildings)
DONE

Question 15

What are consumer goods?

Answer 15

They give satisfaction/utility to consumers (e.g. smartphones and cars).
DONE

Question 16

What does it mean if a point is on the PPF?

Answer 16

Indicates the maximum productive potential of an economy and that resources are being used efficiently.
DONE

Question 17

What does it mean if a point is inside the PPF?

Answer 17

Resources are not being allocated efficiently and not all resources are being used (e.g. workers may be unemployed or machinery may be unused).
DONE

Question 18

What is marginal analysis?

Answer 18

Involves consideration of the impact of small changes on the current situation. The rational decision-maker will only decide on an option if the marginal benefit exceeds the marginal cost.
DONE

Question 19

What is economic growth?

Answer 19

Refers to an increase in the productive capacity of an economy indicating an increase in real output.
DONE

Question 20

What is economic decline?

Answer 20

Refers to a decrease in the productive capacity of the economy indicating a decrease in real output.
DONE

Question 21

Would economic decline be associated with an inward or outward shift in the PPF?

Answer 21

Inward.

DONE

Question 22

Would economic growth be associated with an inward or outward shift of the PPF?

Answer 22

Outward.

DONE

Question 23

What caused movements along a PPF and shifts in PPF?

Answer 23

• Reallocating scarce resources from one product to another (opportunity cost)
• If we increase our output of capital goods then fewer resources are available to produce consumer goods.
• Changes in the combination of the tow goods being produced (e.g. capital and consumer goods ~ more to capital, fewer to consumer).
DONE

Question 24

What factors would cause an outward shift in the PPF?

Answer 24

• Advances in technology
•Discovery of new natural resources (e.g. oil)
• Improvements in education and training ( increased productivity of workforce)
• Immigration
• Investment
• An increase in the detriment age
DONE

Question 25

What factors would cause an inward shift of the PPF?

Answer 25

• Natural disasters (e.g. earthquakes, floods)
• War
• Epidemic of disease
• Disinvestment
• Mass emigration 
• A deep recession
• Depletion of natural resources
DONE

Question 26

What is the meaning of the division of labour?

Answer 26

The breakdown of production into its components. Work is split up into smaller tasks. Workers specialise in very specific tasks.
DONE

Question 27

What is specialisation?

Answer 27

A method of production where a business or an area focuses on a limited range of products or services in order to gain greater degrees of productive efficiency.
DONE

Question 28

What did Adam Smith have to do with the division of labour?

Answer 28

In his book ‘The Wealth of Nation’ Adam Smith set out the view that economic growth could be achieved by increasing the division of labour. Breaking down jobs into smaller tasks would allow works with particular skills to specialise in a particular task without the need to change jobs throughout the day. This saved time and enabled each worker to become an expert in that task so increasing his or her productivity.
DONE

Question 29

What are the advantages of specialisation and the division of labour?

Answer 29

• Greater efficiency
• each worker specialises in tasks for which he or she is best suited (only trained in one task)
• Faster production, greater productivity
• Better quality of work
• Shorter learning periods
• Leads to innovation
• Less strain
• Reduced average costs of production
• Less time is water as a worker no longer has to live from one task to another
DONE

Question 30

What are the disadvantages of specialisation and the division on labour?

Answer 30

• Monotony and boredom for workers (could result in a decrease of productivity)
• Loss of skills as workers are only trained in one particular task (limited skills - problem if made redundant)
• A strike by one group of workers could bring the entire production facility to a standstill (too interdependent)
• There is a lack of variety because all goods produced on a production like are identical
• Jobs at risk - workers can be replaced by machinery
• Lower labour mobility
• Workers are not motivated
• Lack of responsibility
• Only possible with large scale production
DONE

Question 31

What are the advantages of specialisation to trade?

Answer 31

If a country specialises in the production of certain goods and species and then it trades these in exchange for goods and services that it does not produce, then it can benefit from increased output, greater choice and lower prices.
DONE

Question 32

What are the disadvantages of specialisation to trade?

Answer 32

Such specialisation might mean that a country becomes over-dependent on imported goods and services. If it’s goods and services are uncompetitive then unemployment could result, and the country’s value of imports may persistently exceed the value of its exports.
DONE

Question 33

What are the limits to the division of labour?

Answer 33

• The size of the market (if there is only a small market then it will be difficult to specialise)
• The type of product (e.g. designer products are likely to be unique and not suitable for the division of labour)
• Transport costs (if these are high then large-scale production and the division of labour may not be possible)
DONE

Question 34

What are the functions of money?

Answer 34

Money’s functions help to facilitate specialisation and the division of labour. The key function are :
• As a medium of exchange enabling people Tod socialise, exchanging the money earned from doing a specialist job for the goods and services they wish to buy
• A store of value enabling people to save in order to buy goods in the future
• A measure of value enabling people to asses the value of different goods and services
• A means of deferred payment enabling people to buy goods and pay for them on credit
DONE

Question 35

What are the characteristics of free market economies?

Answer 35

• Private ownership of resources
• Market forces (i.e. supply and demand determine prices)
• Producers aim to maximise profits
• Consumers sim to maximise satisfaction
• Resources are allocated by the price mechanism
DONE

Question 36

What are the characteristics of a command economy?

Answer 36

• Public (state) ownership of resources
• Price determination by the state
• Producers aim to meet production targets set by the state
• Resources are allocated by the state
• There is greater equality of income and wealth than in free market economy
DONE

Question 37

What are the sectors of production?

Answer 37

Primary - Growing, extracting from natural resources
Secondary - Manufacturing and construction
Tertiary - Services
DONE

Question 38

What is a private sector?

Answer 38

It’s owned and run by individuals, profit-making.

DONE

Question 39

What is a public sector?

Answer 39

It’s owned and run by the government, to provide a service for the population.
DONE

Question 40

What’s a market?

Answer 40

It’s where buyers and sellers come together to exchange goods and services.
DONE

Question 41

What are the advantages and disadvantages of bartering?

Answer 41

A:
• Allowed a greater variety of goods
• Allows them to specialise

D:
• Must find someone who has what you want and you just want want they’re willing to offer
• May only want a small quantity of what they’re offering
DONE

Question 42

What are the forms of money in a modern economy?

Answer 42

• Notes and coins (cash)
•Electronic money
• Near monies (e.g. money in a savings account)
DONE

Question 43

What is the governments role in a free market?

Answer 43

• Provide public goods like defends and street lighting
• To set up a legal framework and to enforce the laws
• To issue property rights
• To regulate markets ensuring fair competition and consumer protection
• To facilitate trade of to stop practices that hinder it
DONE

Question 44

What is the government’s role in a mixed economy?

Answer 44

• Provided high quality merit goods like education, healthcare, public transport and perhaps also libraries, museums and public parks
• Uses the tax and benefits system to reduce inequality
• Ensures a safety net of social housing for the less well-off
• Regulated business activity to ensure adequate protection for consumers, employees and the environment
• Redistribution of income from the rich to the poor
DONE

Question 45

What is a mixed economy?

Answer 45

It’s a mixture of the free market economy and command economy. In practice, there are no absolutely free markets and no absolutely command economies (mostly mixed). In these economies, some resources are allocated by the price mechanism while others are allocated by the state (e.g. Norway, France)
DONE

Question 46

What is a free market economy?

Answer 46

Refers to all the buyers and sellers of a product or service who determine it’s price (e.g. USA, Hong Kong)
DONE

Question 47

What is a command economy?

Answer 47

One in which resources are allocated by the state (e.g. China, North Korea, Cuba).
DONE

Question 48

What are the advantages of a free market economy?

Answer 48

• Consumer sovereignty - this implies that spending decisions by consumers determine what is produced.
• Flexibilty - the free market system can respond quickly to changes in consumer wants
• No officials are needed to allocate resources
• Competition and the profit motive help to promote an efficient allocation of resources
• Increased choice for consumers in comparison to a command economy
• Economic and political freedom for consumers and producers to own resources
DONE

Question 49

What are the disadvantages of a free market economy?

Answer 49

• Inequality - those who own resources are likely to become richer than those who don’t own resources
• Trade cycles - free market economies may suffer from instability in the forms of booms and slumps
• Imperfect information - consumers may be unable to make rational choices if they have inadequate information or if there is asymmetric information
• Monopolies - there is danger that a firm may become the sole supplier of a product and then exploit consumers by charging prices higher than the free market equilibrium
• Externalities - there are costs and benefits to third parties which are not taken into account when goods are produced and consumed
DONE

Question 50

What is the price mechanism?

Answer 50

The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves.
DONE

Question 51

What are the key functions of the price mechanism?

Answer 51

• As a rationing device - market forces will ensure that the amount demanded is equal to the amount supplied
• As an incentive - the prospect of making a profit acts as an incentive to firms to produced goods and services
• As a signalling device to producers to increase or decrease the amount supplied
• To determine change in wants - a change in demand will be reflected in a change in price
DONE

Question 52

What is consumer surplus?

Answer 52

The difference between the price the consumer is willing to pay and the price they actually pay.
DONE

Question 53

What is the law of diminishing marginal utility?

Answer 53

States that the marginal utility of a good or service declines as its available supply increases. As each unit of the good is consumed, the consumer satisfaction decreases.
DONE

Question 54

What is producer surplus?

Answer 54

The difference between the price the producer is willing to charge and the price they actually charge.
DONE

Question 55

What are the advantages of a command economy?

Answer 55

• Greater equality - the state can ensure that everyone enjoys the minimum standard of living and that no one is extremely rich
• Macroeconomic stability - the state can ensure that booms and slumps are smoothed out.
• External benefits and external costs may be taken into account when planning production
• No exploitation - there is no exploitation of workers and consumers by privately owned monopolies
• Full employment - the state can ensure that all workers are employed
DONE

Question 56

What are the disadvantages of a command economy?

Answer 56

• Inefficiency - the absence of the profit motive and competition may reduce incentives for investment
• Lack of incentives to take risks - again the avens economy of profit motive may reduce incentives for investment
• Restriction on freedom of choice - people would be directed into jobs deemed to be needed by the state
• Shortages and surpluses - if the state miscalculates supply and demand then there may be excess demand and/ or excess supply of goods and services
DONE

Question 57

What is the neo-classical theory?

Answer 57

A theory of Economics which typically starts with the assumption that economic agents will maximise their benefits and act rationally, and which develops how resources will be allocated in markets and at what price through the forces of demand and supply (margin is a key concept).
DONE

Question 58

What does utility mean?

Answer 58

Refers to the level of satisfaction a consumer receives from the consumption of a product or service.
DONE

Question 59

What is demand?

Answer 59

The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of time
DONE

Question 60

What assumptions are made about consumers’ and firms’ behaviour?

Answer 60

• Consumers act rationally by aiming to maximise their utility
• Firms act rationally by aiming to maximise profits
DONE

Question 61

What does the demand curve demonstrate?

Answer 61

How a fall in price will cause an increase in the quantity demanded (or an extension in demand) and a rise in price will cause a decrease in quantity demanded (or contraction in demand).
DONE

Question 62

What is the demonstration of the demand curve based on?

Answer 62

• The substitution effect : When there’s a rise in price, the consumer (whose income has remained the same) will tend to buy more of a relatively lower priced hood and less of a higher priced one
• The income effect : When there is a rise in price, consumers will suffer a fall in their real incomes. With normal goods, the fall in real incomes will reduce the quantity demanded so the income effect reduced the substitution effect
DONE

Question 63

Who are the economic agents?

Answer 63

Individuals, firms and the government.

DONE

Question 64

What does rational mean in the neoclassical theory?

Answer 64

Economic agents are able to rank the order of different outcomes from an action in terms of their net benefits from them.
DONE

Question 65

What causes a movement along the demand curve?

Answer 65

Price changes. Given the demand curve has a negative slope, then a rise in price would cause a fall in quantity demanded and a fall in price would cause a rise in quantity demanded.
DONE

Question 66

What causes a shift in demand curve?

Answer 66

• Real incomes - An increase in real incomes implies that incomes (after discounting the effects of inflation) have increase. This would result in an increase in means for most goods and services, causing a rightward shift in the demand curve.
• Size or age distribution of the population - An increase in the size of the population will cause an increase in the demand for most goods and services. And ageing population would cause demand for some goods and services to rise and the demand for others to fall
• Tastes, fashions or preferences- e.g. W decrease in the popularity of cabbage will cause a leftward shift in its demand curve
•The amount of advertising or promotion - A successful advertising campaign would cause an increase in demand
• Interest rated - They affect the cost of borrowing money (e.g. increase in interest rates increased the cost of borrowing money for mortgages. The demand for houses decreases)
• Prices of substituted or complements - If there is a change in the price of a related hood, it will effect the demand curve for the product.
DONE

Question 67

If there’s a decrease in demand, what way does the curve shift?

Answer 67

To the left.

DONE

Question 68

If there’s an increase in demand, what way does the curve shift?

Answer 68

To the right.

DONE

Question 69

What does decisions being made at the margin mean?

Answer 69

To look at the one decision in isolation.

DONE

Question 70

What does it mean to think at the margin?

Answer 70

You’re thinking about what the next or additional action means to you. You compare the costs and benefits (which decision will give you the greatest utility).
DONE

Question 71

What is total utility?

Answer 71

The amount of satisfaction a person derived from the total amount of a product consumed.
DONE

Question 72

What is marginal utility?

Answer 72

The change in tootle utility from consuming an extra unit of a product.
DONE

Question 73

What is the law of diminishing marginal utility?

Answer 73

As an extra unit of that good is consumed, the marginal utility (benefit derived from consuming the good) falls.
DONE

Question 74

What is price elasticity of demand (PED)?

Answer 74

It’s a measure of the responsiveness of quantity demanded for a product to a change in its price.
DONE

Question 75

What does it mean if the PED is relatively elastic?

Answer 75

The price increase causes a large drop in the quantity demanded.
DONE

Question 76

What does it mean if the PED is relatively inelastic?

Answer 76

The price increase causes a small drop in the quantity demanded.
DONE

Question 77

What does it mean if the PED is between 0 and 1?

Answer 77

It’s inelastic, meaning the price change has not had a very significant effect on the quantity demanded.
DONE

Question 78

What does it mean if the the PED is greater than 1?

Answer 78

The PED is elastic, meaning that a price change has had a relatively significant effect on the quantity demanded.
DONE

Question 79

What does it mean if the PED is 0?

Answer 79

Perfectly inelastic

DONE

Question 80

What does it mean if the PED is 1?

Answer 80

Unitary elasticity

DONE

Question 81

What does it mean if the PED is infinity?

Answer 81

Perfectly elastic

DONE

Question 82

What is the difference between a vertical and horizontal demand curve?

Answer 82

Vertical - inelastic
Horizontal- elastic
DONE

Question 83

What does a curved PED curve mean?

Answer 83

It’s a curve with unitary elasticity and it’s a rectangular hyperbola with the formula PQ=k.

Question 84

What does supply mean?

Answer 84

Quantity of goods that sellers ate prepared to sell at a given price.
DONE

Question 85

What factors influence PED?

Answer 85

• Availability of substitutes - If substitutes are available there will be a strong incentive to shift consumption to them when the price of the product rises. The existence of substitutes will there gore tend to make demand for the product elastic.
• Nature of the product - if the product is affected then demand will tend to be inelastic
• Durability of the product - if the product is long-lasting then it will be fairly elastic since it is possible to postpone purchases. However, demand for non durable goods tend to be inelastic as these need to be replaced regularly
• Proportion of income spent of product - if only a small percentage of income is spent on a product (like salt) then demand will be inelastic, whereas if a high percentage is spent on a product (like holidays) then the demand tends to be elastic
DONE

Question 86

What is total revenue?

Answer 86

The value of goods sold by a firm and is calculated by multiplying price times quantity sold.
DONE

Question 87

What are the key relationships between PED and total revenue?

Answer 87

• When demand is inelastic, a price change causes total revenue to change in the same direction
• When demand is elastic, a price change causes total revenue to change in the opposite direction
• When demand is unit elastic, a price change causes total revenue to remain unchanged
• When demand is perfectly inelastic, a price change causes total revenue to change in the same direction by the same proportion
• When demand is perfectly elastic, a price rise causes total revenue to fall to zero
DONE

Question 88

What is the significance of PED for firms?

Answer 88

If firms know that demand for their product is inelastic then they know they can increase total revenue by increasing price. However, if they know it’s elastic, they can increase total revenue by reducing the price.
DONE

Question 89

What is the significance of PED for the government?

Answer 89

If the government wishes to maximise tax revenue then it will place indirect taxes on those products whose demand is price inelastic (e.g. alcohol, petrol and tobacco). However, in this case the consumer will bear most of the tax burden.
The government may therefore also tax products and services whose demand is price elastic, in which case the producers will bear a higher proportion of the tax burden.
DONE

Question 90

What does cross elasticity of demand (XED)mean?

Answer 90

It’s a measure of the responsiveness of quantity demanded for one product (Y) to add change in the price of another product (X).
DONE

Question 91

What is the equation for XED and what do the results mean?

Answer 91

• Percentage change in quantity demanded of good A over percentage change in price of good B
• Positive XED = products are substitutes (as price of good B rises, quantity for good A rises)
•Negative XED = products are complements (as price of good B rises, quantity of good A falls )
(If XED is close to zero it implies that the products are not closely related)
DONE

Question 92

Why is knowing the XED helpful to a business?

Answer 92

It helps them set prices for their products. Firms know that complementary goods can command high prices (printed is relatively cheap but the ink is relatively expensive. If a firm is selling a product with a close substitute, if they increase the price of that product the demand for the product will decrease.
DONE

Question 93

What does income elasticity of demand (YED) mean?

Answer 93

It’s a measure of the responsiveness of quantity demanded to a change in real income.
DONE

Question 94

What is the equation for YED and what do the results mean?

Answer 94

• Percentage change in quantity demanded over percentage change in real income
• Positive YED = Product is a normal good (as income rises, quantity demanded rises) (income inelastic is between 0 and 1 and income elastic is greater than 1)
• Negative YED = Product is an inferior good (as income rises, the quantity demanded falls)
DONE

Question 95

Why is PED always negative?

Answer 95

Price and quantity move in opposite direction (since the demand curve is downward sloping)
DONE

Question 96

What would the relationship between demand and income look like on a graph for a normal and inferior good?

Answer 96

Normal - upwards sloping
Inferior - downward sloping
DONE

Question 97

What is the significance of YED for firms?

Answer 97

If firms know that demand for their product is income inelastic then they know that demand and total revenue will increase significantly during periods of rapid economic growth but fall significantly during recessions. Knowledge of income elasticity of demand may be important for firms when making investments decisions.
DONE

Question 98

What is the significance of YED for the government?

Answer 98

If the government wishes to maximise tax revenue during and economics boom it will place indirect taxes on those products whose demand is income elastic. Knowledge of income elasticity might also help the government in estimating tax revenues from indirect taxes on particular goods and services.
DONE

Question 99

How does a price change affect the quantity supplied?

Answer 99

• A rise in price will cause an increase in the quantity supplied or an extension in supply
• a fall in price will cause a decrease in quantity supplied or a contraction in supply
DONE

Question 100

What causes a movement along a supply curve?

Answer 100

Price changes. Has a positive slope so a rise in price will cause a rise in quantity supplied.
DONE

Question 101

What causes a shift in the supply curve?

Answer 101

• Costs of production - Wages, raw materials, electricity (increase in costs of production causes the whole supply curve to shift to the left)
• Productivity of the workforce - If there’s a rise in productivity then the whole supply curve will shift to the right
• Indirect taxes - An I direct tax raises the cost of supply and so cause the supply curve to shift to the left. A rise in VAT will cause the supply curve to become steeper, whereas a rise in specific tax (tax per unit) will cause a parallel leftward shift in the supply curve
• Technology - There’s an increase in productivity so the supply curve shifts to the right
• Discovery of raw materials - Shifts to the right
DONE

Question 102

What’s a necessity?

Answer 102

It’s a basic good and they’re income inelastic.

DONE

Question 103

What’s a luxury?

Answer 103

It’s a superior good and it’s income elastic.

DONE

Question 104

What’s the difference between necessities and luxuries?

Answer 104

Necessities have a lower PED because we need them. However, this isn’t always true as strong branding and advertising will reduce the PED of a product
DONE

Question 105

What’s a market?

Answer 105

Where buyers and seller meet to exchange goods at services.

DONE

Question 106

What is the point where demand and supply meet called?

Answer 106

Equilibrium. Quantity supplied is equal to the quantity demanded.
DONE

Question 107

What factors cause the supply curve to shift (acronym)?

Answer 107

Productivity
Indirect taxes
Number if firms in the market
Technology
Subsidies
Weather
Costs
PINTS WC
DONE

Question 108

What does price elasticity of supply (PES) mean?

Answer 108

It’s a measure of the responsiveness of quantity supplied for a product to a change in its price.
DONE

Question 109

What’s the equation for PES and what do the results mean?

Answer 109

• Percentage change in quantity supplied over percentage change in its price
• PES will always have a positive value because price and quantity move in the same direction (since the supply curve is upward sloping)
DONE

Question 110

What’s are the determinants of PES (acronym)?

Answer 110

Barriers to entry
Raw materials 
Inventory
Time
Spare capacity 
BRITS
DONE

Question 111

What’s a producer substitute?

Answer 111

An alternative producers can easily switch to. The wiser this is, the more highly elastic the PES (e.g. can workers be substituted for machinery?)
DONE

Question 112

What factors influence price elasticity of supply?

Answer 112

• Time - It’s hard to change supply quickly in response to price change in the short run, making supply inelastic. However, in the long run supply is likely to be more elastic and all resources are variable.
• Stocks - if stocks of finished goods are available, the supply will be relatively elastic as manufacturers will be able to respond quickly to a price change
• Spare capacity - if a firm has under-utilised machinery and under-employed workers then supply is likely to be elastic
• Availability and cost of switching resources - of resources, such as labour, have a specific skills or machinery is highly specific, or it is expensive to reallocate resources from one use to another, then supply will be relatively inelastic
DONE

Question 113

What does the long run mean in Economics?

Answer 113

Period of time when all factors of production are variable.

DONE

Question 114

What is the short run in Economics?

Answer 114

Period of time when at least one factor is fixed.

DONE

Question 115

What are the equilibrium price and output determined by?

Answer 115

Interaction of supply and demand.

DONE

Question 116

What can a change in the equilibrium price be caused by?

Answer 116

• A change in the conditions of demand (demand curve shifts)
• A change in the conditions supply (supply curve shifts)
DONE

Question 117

What is the price mechanism?

Answer 117

The price mechanism describes the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses.
DONE

Question 118

What factors affect consumer surplus?

Answer 118

• The gradient of the demand curve (the steeper it is the the greater the consumer surplus would be)
• Changes in the conditions of demand (increase in demand will increase the amount of consumer surplus)
DONE

Question 119

What factors affect producer surplus?

Answer 119

• The gradient of the supply curve
• Changes in the contains of supply (increase in supply will increase the amount of consumer surplus)
DONE

Question 120

What are indirect taxes?

Answer 120

Taxes on expenditure. For example, Value Added Tax (VAT), excise taxes and taxes on gambling. Such taxes cause an increase in the cost of supply so the supply curves shifts to the left.
DONE

Question 121

What are the two types of indirect taxes?

Answer 121

Ad valorem taxes - percentage of the price of a product (causes supply curve to shift to the left and become steeper than the original curve)
Specific taxes - set amount per unit of the product (supply curve shifts to the left, parallel to the original supply curve)
DONE

Question 122

What does the incidence of tax measure?

Answer 122

The burden on the tax payer (usually partly on the consumer and partly on the producer)
DONE

Question 123

When does the incidence of tax fall wholly on the consumer?

Answer 123

When supply is perfectly elastic or demand is perfectly inelastic.
DONE

Question 124

When does the incidence of tax fall wholly on the producer?

Answer 124

When the supply in perfectly inelastic or demand is perfectly elastic.
DONE

Question 125

What is a subsidy?

Answer 125

It’s a grant from the government which has the effect of reducing costs of production (cause supply curve to shift to the right).
DONE

Question 126

What is behavioural economics?

Answer 126

Method of economic analysis that applies psychological insights to human behaviour to explain economic decision making.
DONE

Question 127

When are subsidises most effective in lowering prices?

Answer 127

When PED is inelastic and PES is very elastic.

DONE

Question 128

Why might consumers not behave rationally?

Answer 128

• Consideration of the influence of other people’s behaviour - a person subconscious mot learns from the behaviour of others as a guide (social learning).
• The importance of habitual behaviour - the frequency of our past behaviour influenced our current behaviour. Such behaviour required little or no thought (done automatically) habits are difficult to change if they are related frequently and if they’re associated with rewards which arise quickly after the action. Incentives may be required to change such habits.
• Inertia - Consumers may not change their behaviour due to information overload, the complexity of the information or too much choice available
• Consumer weakness and computation - people tend to pay more attention to recent events than distant events when they make decisions. Consumers find it difficult calculating things.
DONE

Question 129

What are the implications of behavioural economics?

Answer 129

The neoclassical principles of rationality will not accurately describe human behaviour. Consequently, they might have perverse and unintended results when used to formulate a policy.
DONE