Theme 1 - Markets And Market Failure Flashcards
What is consumer/producer surplus?
Consumer surplus: The difference between the amount of money consumers are willing to pay and the amount they actually pay.
Producer surplus: The difference between the amount that the producer is willing to sell a product for and the actual price they do.
What are the price mechanism 3 functions? Explain.
Rationing - An increase in the price of scarce resources, discourages demand. Only those who are willing to pay will receive.
Signalling - Prices provide information to producer & consumers where resources are required and where they are not.
Incentive - when prices for a g/s rise, it incentivises producers to reallocate resources, to maximise profits.
What are the positive effects of subsidies? (3)
Increase output and lower prices for consumer, which could help families on low fixed incomes.
They increase the employment rate, by making workers more skilled through apprenticeship schemes and lowering the cost of employing workers.
Could help control inflation, by keeping cost of production low.
What is a subsidy?
A payment from the Government to a producer to lower their costs of production and encourage them to produce more.
Explain how different PEDs affect the burden of tax. (2)
If demand is more elastic, the incidence (share) of the tax will fall mainly on the supplier.
If demand is more Inelastic the incidence (share) of the tax will fall mainly in the consumer.
What factors influence YED?
Any factors in an economy which change the wage of workers.
Examples: During recession, Minimum wage legislation, taxation
What are the two types of indirect taxes?
Ad valorem: Percentages e.g. VAT, which adds 20% of the unit price
Specific taxes: Set tax per unit, e.g. 58p per litre fuel duty on petrol.
How do you interpret YED values?
0 -> 1: Normal Necessity (Inelastic)
> 1: Luxury (Elastic)
< 0: Inferior good
What are the two types of Indirect taxes?
- Ad valorem: Percentages e.g. VAT, which adds 20% of the unit price.
- Specific taxes: Set tax per unit, e.g. 58p per litre fuel duty on petrol.
What is Economic welfare and how is it calculated?
The total benefit society receives from an economic transaction.
Calculated by the area of Consumer surplus and Producer surplus added together
What is Diminishing marginal utility?
As consumption increases, the satisfaction/utility derived from each additional unit decreases.
What does the positive externality diagram of consumption show?
The free market is failing due to to under-consumption of this g/s.
There is an opportunity for Gov. intervention (subsidies, partial provision etc.) to make it more socially efficient.
What does the negative externality diagram of production show?
The free market is failing due to over-provision of this g/s.
There is an opportunity for Gov. intervention (indirect taxes etc.)
What does non-rivalry and non-excludability mean?
Non-rivalry: The inability of the product to be used up, so there is no competitive rivalry in consumption.
Non-excludibility: Inability of private firms to exclude certain customers from using their products.
What are the 3 types of Market failure?
• Externality - cost or benefit a third party receives from an economic transaction.
• The under-provision of public goods - under provided in a free market due to the free-rider problem.
• Information gaps - leads to misallocation of resources.
What are the causes of Government failure? (4)
• Distortion of price signals - by distorting the free market mechanism
• Unintended consequences
• Excessive administration costs
• Information gaps
What is a minimum price?
The Gov. might set a minimum price where the consumption or production of a good is to be discouraged. This ensures the good never falls below a certain price.
What is a maximum price?
• The Gov. might set a maximum price where the consumption or production of a good is to be encouraged (merit good). This is so the good does not become too expensive to produce or consume.
How are consumers influenced? (4)
• Peer pressure (friends/family)
• Habitual behaviours (habits)
• Computational weakness (difficulty of calculating)
• Imperfect Info. (do not have all info. to make a perfect decision)
How do you interpret XED values?
• Negative - Compliment
Example: Price of A ⬆️ -> Demand of A ⬇️ -> Demand of B ⬇️
• Positive - Substitute
Example: Price of A ⬆️ -> Demand of A ⬇️ -> Demand of B ⬆️
How do you interpret PED/PES values?
0: Perfectly Inelastic
0 - 1: Relatively Inelastic
1 - ∞: Relatively Elastic
∞: Perfectly Elastic
Within a supply/demand diagram, where does the consumer surplus and producer surplus lay?
• Consumer Surplus: Area between equilibrium and demand curve.
• Producer Surplus: Area between equilibrium and supply curve.
What is the PED formula?
What is the PES formula?
What is the YED formula?
What is the XED formula?
