Theme 1 - micro - 1.2.5 - 1.2.10

Question 1

Incentives

Answer 1

For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.

Question 2

Price mechanism

Answer 2

The means by which decisions of consumers and businesses interact to determine the allocation of resources. The free-market price mechanism clearly does NOT ensure an equitable distribution of resources —> can lead to market failure.

Question 3

Price signals

Answer 3

Changes in price act as a signal about how resources should be allocated. A rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product

Question 4

Rationing signalling

Answer 4

Prices have a signalling function because the price in a market sends important information to producers and consumers.

Question 5

Community surplus

Answer 5

Community surplus is the sum of consumer and producer surplus at a given market price and output. Community surplus is maximised in competitive markets at an equilibrium output when price = marginal cost.

Question 6

Consumer surplus

Answer 6

measure of the welfare people gain from consuming —> when the total amount that consumers are willing and able to pay for a good or service is higher than the market price paid (they get it cheaper)

Question 7

Producer surplus

Answer 7

difference between what producers are willing and able to supply a good for and the actual price –> the total amount that a producer benefits from producing and selling a quantity of a good at the market price.

Question 8

Ad Valorem tax

Answer 8

indirect tax based on a percentage of the sales price of a good or service.
- causes an inward shift in the supply curve.

Question 9

Alcohol duties

Answer 9

Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content.

Question 10

Black market

Answer 10

• illegal market where price is higher than the legally imposed price ceiling
• develops from an excess demand

Question 11

Direct tax

Answer 11

tax on income and wealth e.g. income tax or corporation tax where the burden of the tax cannot be passed on to someone else.

Question 12

Emission tax

Answer 12

charge made to firms that pollute the environment based on the quantity of pollution they emit i.e. the volume of CO2 emissions.

Question 13

Excise duties

Answer 13

Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.

Question 14

Incidence of tax

Answer 14

How the final burden of a tax is shared out. If demand for a good is price elastic & tax occurs —> tax may fall mainly on the producer as they will be unable to put prices up without demand loss.

Question 15

Indirect tax

Answer 15

imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax.

Question 16

Specific tax

Answer 16

set tax per unit imposed by the government, a good example is the specific tax (duty) on fuel sold in the UK.

Question 17

Subsidy

Answer 17

Payments by the government to suppliers that reduce their costs.
- increase supply
- reduce the market equilibrium price.

Question 18

Tax incidence

Answer 18

manner in which the burden of an indirect tax is shared between participants in the market i.e. consumers and producers.

Question 19

Unit tax

Answer 19

specific tax per unit sold e.g. the duty on a litre of fuel might be 80 pence.

Question 20

Computational weakness

Answer 20

Irrationality arises when consumer’s decisions are dominated by computational weakness.
- occurs when consumers find it difficult to calculate the probability of something happening when purchasing
- e.g. people may underestimate the long-term health consequences of eating processed meats

Question 21

Habitual consumption

Answer 21

Habitual behaviour occurs when people have strong default choices. Repeat choices / purchases often become automatic because default choices don’t involve much mental (cognitive) effort.

Question 22

Herd behaviour

Answer 22

When individuals in a group act collectively without centralised direction.