Theme 1 - micro - 1.2.5 - 1.2.10

Question 1

Elastic supply

Answer 1

Where the coefficient of price elasticity of supply is greater than +1.

Question 2

Elasticity of supply

Answer 2

Price elasticity of supply measures the relationship between change in quantity supplied and a change in market price.

Question 3

Inelastic suppky

Answer 3

When the coefficient of price elasticity of supply is less than +1.

Question 4

Price elasticity of supply

Answer 4

(PES) measures the relationship between change in quantity supplied and a change in price. Supply responds positively to price, so PES is positive.

Question 5

Price elasticity of supply

Answer 5

(PES) measures the relationship between change in quantity supplied and a change in price. Supply responds positively to price, so PES is positive.

Question 6

Disequilibrium

Answer 6

Prices where demand and supply are out of balance are points of disequilibrium. There is either excess demand (market prices too low) or excess supply (market prices too high).

Question 7

Equilibrium

Answer 7

means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change - microeconomics (e.g. equilibrium prices in a market) - macroeconomics (e.g. equilibrium national income).

Question 8

Excess demand

Answer 8

A situation where quantity demanded is greater that quantity supplied.

Question 9

Excess supply

Answer 9

A situation where quantity supplied is greater than quantity demanded.

Question 10

Health rationing

Answer 10

Health rationing occurs when the demand for health care services outstrips the available resources leading to waiting lists and delays for health treatment.

Question 11

Shortage

Answer 11

A situation in which quantity demanded is greater than quantity supplied.

Question 12

Incentives

Answer 12

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

Question 13

Price mechanism

Answer 13

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 14

Price signals

Answer 14

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 15

Rationing signalling

Answer 15

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

Question 16

Community surplus

Answer 16

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 17

Consumer surplus

Answer 17

measure of the welfare people gain from consuming goods and services (benefits) derived from the goods —> difference between the total amount that consumers are willing and able to pay for a good or service (the demand curve) and the market price paid

Question 18

Producer surplus

Answer 18

difference between what producers are willing and able to supply a good for and the price they actually receive.

Question 19

Ad Valorem tax

Answer 19

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

Question 20

Alcohol duties

Answer 20

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 21

Black market

Answer 21

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

Question 22

Direct tax

Answer 22

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 23

Emission tax

Answer 23

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

Question 24

Excise duties

Answer 24

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 25

Incidence of tax

Answer 25

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 26

Indirect tax

Answer 26

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

Question 27

Specific tax

Answer 27

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

Question 28

Subsidy

Answer 28

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

Question 29

Tax incidence

Answer 29

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

Question 30

Unit tax

Answer 30

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

Question 31

Computational weakness

Answer 31

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 32

Habitual consumption

Answer 32

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.