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A level economics > Theme one > Flashcards

Theme one Flashcards

1
Q

What is the definition of micro economics

A

Economics concerned with single factors and the effects of individual decisions - buisnesses

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2
Q

What is macro economics

A

Economics concerned with large scale or general economic factors, such as interest rates and productivity - government

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3
Q

What is the definition of demand

A

The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period

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4
Q

What is the law of demand

A

As price increases, quantity decreases, they have an inversely proportional relationship

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5
Q

What is the opportunity cost

A

The cost of the next best alternative forgone when a choice is made

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6
Q

What is the definition of supply

A

The quantity of a good/ service producers are willing and able to produce at a given price in a given time period

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7
Q

What is the law of supply

A

As price increases, quantity increases, they have a directly proportional relationship

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8
Q

What happens when we increase quantity produced and why

A

The price of the product will increase as increasing price is necessary to maintain profit margins

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9
Q

What can we see from Production possibility curves/ production possibility frontiers

A

Maximum possible production within given factors of production and various combinations of two goods/ services that can be produced

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10
Q

What are the factors that affect demand?

A

Population (directly proportional relationship)
Advertising (directly proportional relationship)
Substitutes price (other businesses increasing price will increase demand)
Income
Fashion/ tastes
Interest rates (If interest rates decrease consumers are more likely to buy luxury goods)
Complements price ( printers + printer ink)

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11
Q

What are normal goods

A

Cars, eating at restaurants

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12
Q

What are inferior goods

A

Fast food or public transport

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13
Q

What are the factors of production

A

Capital (machines and tractors, man made)
Enterprise (entrepreneurs, people at the top)
Land
Labour

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14
Q

What does a linear PPF show

A

Constant opportunity cost

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15
Q

What does a concave PPF show

A

Increasing opportunity cost

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16
Q

What is productive efficiency

A

Using all the factors of production to the maximum availability, this can be seen at any point on the curve

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17
Q

What are some ways businesses could increase production of a product

A

Reallocate factors of production so there is more focus on the desired product
Increase quality/ quantity of factors of production, this will positively affect both goods. They could also do this for just one of the products

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18
Q

What is the term which means all other factors remain unchanged?

A

Ceteris parabus

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19
Q

What is increasing the price known as?

A

Extension of demand

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20
Q

What is decreasing the price known as?

A

Contraction of demand ( due to quantity demanded decreasing )

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21
Q

What is allocative efficiency

A

Whether a product being produced is satisfying to consumers

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22
Q

What is Pareto efficiency?

A

The idea that no one can be made better off without making someone else worse off

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23
Q

What is productive efficiency?

A

Using up all the factors of production to their maximum level

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24
Q

What are the factors which affect supply

A

Productivity (output per worker/ per machine per hour)
Indirect tax (tax on production)
Number of firms (how many of the same business)
Technology
Subsidy (money grant given by the government)
Weather (agricultural businesses)
Cost of production
(oil, raw materials, gas, electricity, rent)

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25
Q

What is the definition of a market?

A

Any place where buyers meet suppliers to exchange goods or services

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26
Q

What is equilibrium

A

Where demand and supply are equal

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27
Q

What does it mean if someone says the market is clear

A

The market is at equilibrium

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28
Q

What is a free market

A

A market without intervention from the government

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29
Q

How does the price mechanism work if the price is too high?

A

A signal is sent to producers that the price is too high, this can be seen through empty tables, fully stocked shelves etc. They are given an incentive to lower their prices, the supply and demand are now at a perfect equilibrium.

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30
Q

How does the price mechanism work if the price is too low

A

A signal is sent to producers, seen by competition between buyers, long queues or huge waiting lists. Producers will raise their price, supply and demand are now at a perfect equilibrium

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31
Q

What are the four functions of the price mechanism

A

Allocate recourses effectively by creating equilibrium, demand is now at the same level as supply (4)
Rationing excess supply/ demand by encouraging or discouraging consumption, raising the price lowers demand, lowering the price raises demand (3)
Sending a signal to producers that prices are too high/ low (1)
Incentivise to change price and increase profit (2)

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32
Q

What is excess supply?

A

If supply is greater than demand, the excess is the amount extra that there is

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33
Q

Where can we see equilibrium on a demand/ supply and price graph

A

At the point where demand and supply are the same

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34
Q

What is consumer surplus?

A

The difference between the price consumers are willing and able to pay for a product and the price they actually pay

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35
Q

How do we calculate consumer surplus

A

The area below the demand curve and above the price line

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36
Q

What happens to consumer surplus as price is decreased?

A

Consumer surplus increases

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37
Q

What is producer surplus?

A

The difference between the price producers are willing and able to produce a good or service for and the price they actually receive

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38
Q

How do we calculate producer surplus?

A

The area above the supply curve and below the price line

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39
Q

What happens to producer surplus as the price is increased?

A

Producer surplus also increases

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40
Q

What is society surplus?

A

The sum of producer and consumer surplus

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41
Q

What happens to the demand of a good if its compliments price increases?

A

It decreases

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42
Q

What happens to the demand of a good if the price of its substitute increases?

A

It will increase as more consumers will be willing to buy it

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43
Q

What is derived demand?

A

When the demand for a good or service comes from the demand for something else, aeroplanes are derived from the demand for holidays

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44
Q

What is an example of derived demand

A

Labour is derived from the demand for goods and services

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45
Q

What is composite demand?

A

The idea that two goods need the same input to make them

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46
Q

What is an example of composite demand?

A

Cheese and butter both need milk

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47
Q

What will happen to the quantity production of a good if its composites demand increases?

A

It will decrease

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48
Q

What is joint supply

A

The idea that the increase of the production of one good will also increase the production of another good due to the second good being a byproduct of the first

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49
Q

What is an example of joint supply

A

Honey and beeswax

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50
Q

What is the definition of price elasticity of demand (PED)

A

Measures the responsiveness of quantity demanded given a change in price

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51
Q

What is the equation for PED

A

%change in quantity/ % change in price

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52
Q

What does it mean if the PED is more than one

A

Demand is price elastic

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53
Q

What does it mean if the PED is less than one?

A

Demand is price inelastic

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54
Q

What does it mean if PED is 0?

A

Demand is perfectly inelastic

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55
Q

What does it mean if PED is infinity?

A

Demand is perfectly price elastic

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56
Q

What does it mean if PED is 1?

A

Demand is unit price elastic

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57
Q

What is price inelasticity mean?

A

Quantity changes by proportionally less than price

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58
Q

What does price elasticity mean?

A

Quantity changes by proportionally more than price

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59
Q

How do we draw price inelasticity?

A

Vertical line

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60
Q

How do we draw price elasticity?

A

Horizontal line

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61
Q

Price is elastic if there are

A

Substitutes (more of)
Percentage of income (more of)
Luxury (more) necessity (less)
Addictive (inelastic)
Time period (inelastic in the short term, becomes more elastic)

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62
Q

What is division of labour?

A

Dividing the production of a product into smaller tasks and allocating labour to each task

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63
Q

What are the advantages of specialisation of labour

A
  1. Increased efficiency as workers become more efficient in their small area
  2. Less time/ money spent on training
  3. More specialist tools can be made
  4. Less time moving tools/ moving between jobs so more time efficient
    5.
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64
Q

What are the four functions of money?

A
  1. Method of exchange- of goods and services
  2. Store of value - workers can earn their wages and store them for later
  3. Measure of value - money helps us to understand how much things are worth
  4. Measure of deferred payment - banks can loan people money and add interest so that when the money is payed back it still has the same value
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65
Q

What is an economy with no money known as?

A

A barter economy

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66
Q

What is a positive statement

A

A factual statement

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67
Q

What is a normative statement?

A

A value judgement

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68
Q

What are constraints?

A

Limits to what we can afford to consume

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69
Q

How do we calculate total revenue?

A

Price of a product x quantity sold

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70
Q

What is total revenue?

A

Total income

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71
Q

What happens to revenue if the price is elastic

A

If we increase the price, revenue will decrease
If we decrease the price, revenue will increase

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72
Q

What happens to revenue if the price is inelastic?

A

If we increase the price, revenue will increase
If we decrease the price, revenue will decrease

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73
Q

What is PES?

A

Price elasticity of supply

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74
Q

What does PES measure?

A

The responsiveness of quantity supplied given a change in price

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75
Q

How to calculate PES?

A

Change in quantity supplied/ change in price

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76
Q

What type of number is PES?

A

Positive

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77
Q

How do we show that supply is price elastic?

A

Horizontal line

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78
Q

How do we show that supply is price inelastic?

A

Vertical line

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79
Q

What are the factors affecting PES?

A

Production lag - the longer it is the more inelastic price is
Stocks - the more you have the more elastic
Spare capacity- more is more elastic
Substitutability of factors of production- how quickly you can switch to producing more of a different good
Time - inelastic to elastic

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80
Q

What is XED?

A

Measures the responsiveness of quantity demanded of a good/ service given a change in the price of another

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81
Q

How do you calculate XED?

A

% change in quantity demanded of good A/ % change in price of good B

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82
Q

What does it mean if XED is positive?

A

Goods are substitutes

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83
Q

What does it mean if XED is negative?

A

Goods are compliments

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84
Q

What does it mean if XED is more than one?

A

Demand is price elastic (strongly related)

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85
Q

What does it mean if XED is less than one?

A

Demand is price inelastic ( weakly related)

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86
Q

What does it mean if XED is 0?

A

Demand is perfectly price inelastic ( no relationship)

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87
Q

How do we draw XED> 1

A

Horizontal line

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88
Q

How do we draw XED<1?

A

Vertical line

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89
Q

What does YED measure?

A

The responsiveness of quantity demanded given a change in income

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90
Q

How do we calculate YED?

A

YED = % change in quantity demanded/ % change in income

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91
Q

What does it mean if the YED is positive?

A

It is a normal good

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92
Q

What does it mean if the YED is negative?

A

It is an inferior good

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93
Q

What does it mean if YED is more than one?

A

Demand is price elastic and the good is a normal luxury

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94
Q

What does it mean if YED is less than one?

A

Demand is inelastic normal necessity

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95
Q

What is PED useful for?

A

Useful for pricing decisions to increase total revenue, if price is elastic and they know it is going to fall in the near future, they need to increase employment, output and stocks

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96
Q

What is the use of PES?

A

Find ways to make supply price elastic by increasing the effectiveness of the PSSST factors

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97
Q

Why is XED useful?

A

Pricing decisions- if there are two compliment goods for example printers and printer ink, reduce the price of printers so people buy one, they will need printer ink so increase the price of that and make more profit
Substitutes - cut the price of your substitute, if they cut their price follow their lead. Compete on non price factors to make yours and your substitutes good less similar- avoid price wars. Be prepared to increase output if substitutes raises price, have less output if substitute lowers price

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98
Q

Why is YED useful?

A

Useful for planning for recessions and booms e.g if producing a normal good and there is a boom increase price, employment, output and stocks

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99
Q

What are the limitations of using price elasticity to make decisions?

A

These figures are only estimates based off data collected through surveys
Some businesses base these figures off data based off competitors and past data which is assuming cetris parabus which is inaccurate
PED varies along the demand curve

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100
Q

What are the uses of indirect tax?

A

Raise government revenue
Solve the market Chris is of goods such as cigerettes/ alcohol/ fuel ( reduce the consumption of goods which do harm to society)

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101
Q

What is direct tax?

A

Tax on income that can’t be transferred such as income tax or national insurance

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102
Q

What is indirect tax?

A

Tax on income that increases cost of production but can be transferred to consumers via higher prices

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103
Q

What is a specific tax?

A

A tax per unit

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104
Q

How do we draw a specific tax on a graph?

A

Can be drawn as a parallel line to the original tax - supply curve shifts upwards

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105
Q

What is AD valorem??

A

Tax as a % of price

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106
Q

How do we draw specific tax on a graph?

A

The supply curve will pivot

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107
Q

How do we work out government revenue from a specific tax diagram?

A

Go to the new equilibrium
Work out the vertical difference between the two supply curves
Multiply by the quantity sold at this point

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108
Q

How to work out consumer burden?

A

Quantity of new equilibrium X the point from the original price to where it matches equilibrium in quantity

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109
Q

How to calculate producer burden?

A

Original price to where it matches equilibrium in quantity down to the same point on the original supply curve X quantity sold

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110
Q

How to calculate producer revenue after indirect tax?

A

Go down from the new equilibrium to the same point on the original supply curve, the price X quantity of this product is the new producer revenue

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111
Q

Dead weight loss?

A

The triangle of original equilibrium, new equilibrium, and the same point on the original supply curve from the new equilibrium

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112
Q

What is the burden for consumers if demand is price elastic?

A

Lower

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113
Q

What is the producer burden if demand is price elastic?

A

Higher

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114
Q

What is the government revenue if demand is price elastic after indirect tax

A

Lower

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115
Q

What is the consumer burden if demand is price inelastic?

A

Higher

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116
Q

What is the producer burden if demand is price inelastic?

A

Lower

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117
Q

What is the government revenue if demand is price inelastic?

A

Higher

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118
Q

What happens if demand is perfectly price elastic?

A

Producers take the entire burden and gov rev is at the lowest

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119
Q

What happens if demand is perfectly price inelastic after indirect tax

A

Consumers take the entire burden and government revenue is at the highest

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120
Q

What is the consumer burden when supply is price elastic after indirect tax

A

Higher

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121
Q

What is the producer burden when supply is elastic?

A

Lower

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122
Q

What is the consumer burden when supply is price inelastic?

A

Lower

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123
Q

What is the producer burden when supply is price inelastic?

A

Higher

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124
Q

Who takes all the burden when supply is perfectly price elastic?

A

Consumer

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125
Q

Who takes all the burden when supply is perfectly inelastic?

A

Producer

126
Q

What is a subsidy?

A

Money grant given to firms by the government to reduce costs in production aims encourage an increase in demand

127
Q

What are the uses of a subsidy?

A

Solve market failures by making goods such as vaccinations, public transport and education ( things that benefit society as a whole)
Increase affordability of necessities

128
Q

What does subsidy do to the supply curve?

A

Shifts it downwards

129
Q

What does subsidy do to price/ quantity

A

Decreases price and increases quantity

130
Q

How do you work out the cost of subsidy to the government?

A

Go to the new equilibrium, find the difference between the two supply curves at this point, multiply by the quantity sold at this point

131
Q

How do we work out producer revenue after subsidy?

A

Go to the new equilibrium and find the same point on the original supply curve X the quantity sold at this point

132
Q

How to work out dead weight loss of a subsidy?

A

Triangle of old equilibrium, new equilibrium, go to new equilibrium up to the same point on the original supply curve

133
Q

How to calculate consumer savings with a subsidy?

A

Quantity at old equilibrium X go to price of new equilibrium, go across until it meets quantity of old equilibrium

134
Q

What is a price floor?

A

Minimum price enacted by the government, usually set above the equilibrium market price

135
Q

Benefits of a price floor?

A

Protect producers from price volatility ( could save them from poverty/going out of business)
Solve market failures by discouraging consumption of demerit goods

136
Q

Costs of a price floor?

A

Take a higher % of income from the poor than they do from the rich
Taxes and opportunity cost, could society benefit more from lower taxes/ money spent elsewhere
Risk of black markets forming

137
Q

What happens to supply and demand given a price change?

A

Contraction of demand
Extension of supply

138
Q

What is intervention buying?

A

Government buying excess supply created by price floor back off producers

139
Q

What is producer revenue with intervention buying after a price floor?

A

QS X P(min)

140
Q

What is producer revenue without intervention buying after a price floor?

A

P(min) X QD

141
Q

What is the cost to the government of intervention buying?

A

QS-QD X P(min)

142
Q

What is the dead weight loss of intervention buying?

A

Triangle of original equilibrium, new demand X P (min) and QD on supply curve

143
Q

What is a price ceiling?

A

A fixed price enacted by the government and usually set below the equilibrium market price?

144
Q

Benefit of price ceiling?

A

Increase affordability of necessity goods

145
Q

What happens to demand and supply given a price ceiling?

A

Contraction of supply
Extension of demand

146
Q

Costs of a price ceiling?

A

Creates excess demand - could lead to long waiting lists of black markets forming
Producer revenue lost -some may leave the market

147
Q

What is the dead weight loss given a price ceiling?

A

Triangle of equilibrium, QS X P (max), same quantity of original demand curve

148
Q

What are private costs and what are they abbreviated to?

A

MPC and they are the producers costs of production

149
Q

What is a marginal private cost?

A

The cost of producing one more unit

150
Q

What are external costs?

A

Any impact on third parties e.g environment as a result of production

151
Q

How do we calculate social cost?

A

Private costs + external costs

152
Q

What is the supply curve equal to?

A

Private costs + external costs however in an allocatively efficient market, we assume there are no external costs

153
Q

What is an individual benefit and what does it abbreviate to?

A

MPB and it is the benefit the consumer gets from consuming a product

154
Q

What is marginal individual benefit?

A

The increased benefit consumers get per extra unit consumed

155
Q

How do we calculate social benefits?

A

Individual benefits + external costs/ benefits as a result of consumption

156
Q

What is the demand curve equal to?

A

Individual benefits (MPB) + external costs however we assume there are none of these in an allocatively efficient market

157
Q

How do we know we have achieved allocative efficiency?

A

Maximisation of society surplus
Maximisation of net social benefit
Where resources perfectly follow consumer demand

158
Q

What is maximisation of net social benefit?

A

Not having any excess supply or demand

159
Q

What is private optimum?

A

MPC=MPB

160
Q

What is social optimum?

A

MSC=MSB

161
Q

What are public goods?

A

A service that is provided without benefit to all members of society

162
Q

What is the free rider problem?

A

People who benefit from public goods either not paying for them or not paying enough

163
Q

What are common access resources?

A

Recourses which are not owned by anyone, do not have a price and are available for anyone to use

164
Q

What is market failure?

A

When the free market fails to allocate resources at the socially optimum level of output

165
Q

What are the causes of market failure?

A

Positive/ negative externalities being ignored by producers and consumers as producers are profit maximisers and consumers are utility maximisers both are acting out of their own self interest
Information failure around merit/ demerit goods
Free rider problem around public goods
Overproduction of common access recourses
Income inequality- at what point does it become unfair?
Monopoly power- barriers to entry for other firms, the firm at the top has the power to charge unfairly high prices
Factor immobility- supply unable to increase given an increase in demand

166
Q

What is a negative externality?

A

Costs on a third party as a result of the actions of a separate agent

167
Q

Examples of negative externalities as a result of production?

A

Air pollution, recourses depletion, resource degradation, deforestation

168
Q

What is resource degradation

A

If recourses are dumped and this causes further damage for example in the sea

169
Q

What is resource deprecation?

A

Using up resources to the extent that there is none left for future generations

170
Q

How do social costs affect equilibrium?

A

If production then supply curve shifts upwards, if consumption then demand curve shifts down, markets will continue at original equilibrium so true allocative efficiency is not reached

171
Q

What is the result of social costs not being taken into account?

A

Over production + over consumption
Supply: price too low
Demand: price too high
Mis allocation of recourses

172
Q

Examples of negative externalities in consumption

A

Second hand smoking, cost to NHS+ police for overconsumption of alcohol, lost productivity to employers

173
Q

What is a third party?

A

Am economic agent not involved in the transaction

174
Q

How to calculate welfare loss of negative externalities of production?

A

Market equilibrium, up to same quantity on new supply curve and new equilibrium

175
Q

What are positive externalities?

A

Benefits to third parties as a result of the actions of a separate agent

176
Q

Examples of positive externalities in consumption?

A

Vaccines (less chance of others getting ill)
Education (higher income can pay more tax benefit society)
Gyms + healthy food ( higher productivity at work)

177
Q

How do positive externalities in consumption affect allocative efficiency?

A

Demand shifts outwards but markets continue to operate at private optimum

178
Q

How do we calculate dead weight loss of positive externalities of consumption?

A

Old equilibrium, same point on original demand curve, new equilibrium

179
Q

What are the problems with ignoring positive externalities?

A

Under production/ consumption and mis allocation of recourses, prove is too low

180
Q

Examples of positive externalities in production?

A

In work training- other companies can poach higher skilled workers
New technology can be copied - no R&D costs (research and development)

181
Q

What happens to supply if positive externalities of production are considered?

A

Supply curve shifts down

182
Q

How to calculate the dead weight loss of positive externalities?

A

Old equilibrium, down to same point on original supply curve, new equilibrium

183
Q

What are the effects of not considering positive externalities

A

Under production/ consumption
Misallocation of recourses
Allocative efficiency is not achieved

184
Q

Definition of merit goods?

A

Goods which are deemed to be more beneficial to society than people realise

185
Q

What is information failure?

A

Consumers not having the correct information about goods due to the information not being present at all, information not being clear, or consumers choosing to ignore information

186
Q

What is asymmetric information?

A

One party in a transaction having more information than another party

187
Q

Reasons for incorrect consumption of merit/ demerit goods?

A

Information failure and asymmetric information

188
Q

What are demerit goods?

A

Goods which are more harmful to society than people realise

189
Q

What are public goods?

A

Goods which are non excludable and non rivalry

190
Q

What is non excludable?

A

No price can be charged for the good

191
Q

What is non rivalry?

A

The quantity of the good doesn’t diminish under consumption

192
Q

Why may a good be non excludable?

A

The benefits of consuming a good cannot be confined to the individual who has paid
No efficient way of charging

193
Q

Issues with public goods?

A

Causes free rider problem- means there is no private motive to supply (missing market)

194
Q

What is a quasi public good?

A

Sometimes shows characteristics of public goods, sometimes private

195
Q

What is a club good?

A

Rival but non excludable

196
Q

What is a common resource?

A

Non excludable but rival, natural recourses over which no private ownership has been established

197
Q

What is the tragedy of the commons?

A

Private producers acting out of self interest and using up so much that it leads to a depletion of these recourses

198
Q

Examples of common recourses?

A

Anything in the sea or forests

199
Q

Why might private producers keep taking common recourses even when they can see depletion is happening

A

Profit motive
If one producer stops and all others continue, only the one who stops loses out, unlikely to do this

200
Q

What is the tragedy of the commons an example of?

A

A negative externality of production

201
Q

What is government failure?

A

When the costs of intervention outweigh the benefits

202
Q

What is the result of government failure?

A

Worsening of the allocation of scarce resources- harming social welfare

203
Q

What are the four causes of government failure?

A

Information failure, costs of intervention, unintended consequences, regulatory capture

204
Q

Describe information failure?

A

Politicians are not always experts. Most externalities are very difficult to value, therefore the policy could be too strict or too loose

205
Q

Describe intervention costs?

A

Admin + enforcement of the policy itself, for example intervention buying, opportunity cost + fairness to the taxpayer has to be considered

206
Q

Describe regulatory capture

A

If the regulator is trying to control monopoly power, the CEO may influence the regulator and they may end up helping the firm instead of the society

207
Q

Describe unintended consequences

A

Black markets may arise
Impact on low income families (e.g taxes and minimum prices increase price)
Impact on firms (may become too reliant on subsidies)
Indirect tax or minimum wage (price floor) may cause unemployment

208
Q

How can an indirect tax help to solve market failure?

A

Increases cost of production (also increases price)
Internalises externality
Solves overconsumption/ production
Gains allocative efficiency + gov rev

209
Q

How do we show an indirect tax correcting market failure in production?

A

Draw an arrow from the MPC curve to the MSC curve

210
Q

How do we show an indirect tax correcting market failure in consumption?

A

Draw a second supply curve shifted upwards
The point where it meets the original demand curve should be the same quantity as Qstar

211
Q

Why is price inelastic demand a problem when using indirect tax to solve market faliure?

A

If there is no change in quantity, the size of the externality stays the same or does not change much, the tax is ineffective, one reason for this could be addiction

212
Q

Why is regression a problem when using indirect tax to solve market failure?

A

Takes a higher % of income of the poor than it does of the rich, causes inequity which most view as unethical

213
Q

Why is it a problem that using indirect tax to solve market failure causes black markets?

A

Quality of product is likely to be lower- externalities grow
Black markets need policing, enforcement cost
Government revenue is lost

214
Q

What is the cause of over/ under taxing when using indirect tax to solve market failure and why is this a problem?

A

Information gap, externalities are difficult to measure
Undertaxing is ineffective
Overtaxing is unfair to the poor, may cause firms to leave the business, leads to the rising of black markets

215
Q

How to we show subsidy correcting market failure in production?

A

An arrow from MPC to MSC

216
Q

How do we show a subsidy correcting market failure in consumption?

A

Shift the supply curve downwards, the point where it meets MPC should be parallel with Q*

217
Q

How does a subsidy help to solve market failure?

A

Lowers production costs
Lowers price
Increases quantity
Solves underproduction and consumption
Allocative efficiency and welfare are gained

218
Q

Why is cost an issue when using subsidy to correct market faliure?

A

Opportunity cost
Fairness to tax payer
Debt/ interest on debt if the money has been borrowed

219
Q

Why is inelastic demand an issue when using subsidy to correct market faliure?

A

If demand is inelastic e.g public transport the size of the externality will not change very much and Q* is not reached

220
Q

Why are over and under subsidising an issue when using subsidy to correct market faliure?

A

Under- externality is not fixed and Q* is not reached
Over- cost argument grows even more
Caused by the information gap- externalities are hard to measure

221
Q

What could the firms do with a subsidy that would be an issue and not correct market faliure, why is this an issue?

A

Use it to cover debt, CEO could keep it for themself, pay their staff higher salaries
Price does not change, demand does not change, ineffective use of money

222
Q

What is regulation?

A

A law enacted by the government that must be followed by economic agents to encourage a change in behaviour

223
Q

What type of approach is regulation?

A

Command and control approach

224
Q

Types of commands in regulation

A

Limit- e.g age limits or time limits for when you can purchase alcohol
Compulsory- e.g compulsory graphic advertising on cigarette packaging
Innovative regulation e.g pay extra for a plastic bottle and get the money back when you bring it back
Cap- e.g pollution caps
Bans- e.g public smoking bans

225
Q

Types of control in regulation

A

Enforcement
Punishment e.g fine

226
Q

Why is cost a problem with government regulation

A

Cost of administration + cost of enforcement
Opportunity cost
Fairness to taxpayer
Interest on debt if the money is borrowed

227
Q

How is equity a problem in government regulation?

A

Fairness to firms- some firms may struggle more than others to reduce carbon emissions particularly older firms

228
Q

How are black markets + unintended consequences a problem in government regulation?

A

Black markets- policing costs, gov rev is lost, welfare loss to consumers as product is likely to be of lower quality
Producers may find a way to cheat the regulation

229
Q

How is setting the wrong strictness of regulation a problem?

A

Too lax- problem is not solved
Too strict- too burdening to producers as it discourages demand, firms may move to another country or shut which causes unemployment

230
Q

How do tradable pollution permits work?

A

Government sets cap at Q* ( this assumes governments can perfectly measure the negative externality of pollution)
The total amount allowed by the country is divided up between firms, and handed out, this is known as as a permit (one permit is 1000 tonnes)
Firms now have a choice: invest in green technology or buy up spare permits

231
Q

Why is it better for firms to invest in green technology over buying spare permits?

A

Firms can profit by selling spare permits
Firms will not be affected when the price of permits increases

232
Q

Why are tradable permits for pollution effective?

A

Internalise the externality
Allocative efficiency is reached

233
Q

Describe the price quantity graph of tradable pollution permits?

A

Demand is normal
Supply is perfectly inelastic (amount of permits will never change)

234
Q

Why may price of a permit increase?

A

Demand may increase
Government may tighten cap

235
Q

Why is enforcement an issue with tradable pollution permits?

A

Low income countries may not be able to afford this
Where there is a cost we must always consider opportunity cost

236
Q

What are the unintended consequences of tradable pollution permits if the externality cannot be perfectly measured?

A

If the cap is too strict:
Some firms may close, which causes unemployment
Some firms may move to other countries, which causes carbon leakage and doesn’t solve the problem
Firms may pass on costs to consumers through higher prices, allocative efficiency and consumer welfare are lost
If the cap is too lax:
The problem is not fixed

237
Q

Why is lack of international corporation a problem with tradable pollution permits?

A

China and USA, the two biggest pollutants, have not joined the agreement, is it effective?
Many developing countries will not join as they want the opportunity for economic growth, this is bad because these countries are some of the biggest polluters

238
Q

What is state provision?

A

Direct provision of goods and services by the government for free at the point of consumption

239
Q

What are examples of state provision?

A

Healthcare and education

240
Q

How does state provision work?

A

Government provides the socially optimum quantity of recourses( healthcare and education) this assumes that the government can perfectly measure externality
It is now free at point of consumption
Underproduction/ consumption is solved
Allocative efficiency is reached

241
Q

Describe the price quantity graph for state provision

A

Supply is perfectly inelastic
Demand is normal

242
Q

When is state provision needed?

A

When a good would be under consumed and underproduced in the free market
When there is inequity over a good

243
Q

Why is excess demand an issue with state provision?

A

Medical- long waiting list of people who have to live in pain- who deserves to be treated first is normative
Education- may be larger class sizes- people pay in non monatory ways

244
Q

Why is inefficiency of state organisations an issue with state provision?

A

No profit motive= organisations may be unproductive, this is very wasteful

245
Q

Why is cost an issue with state provision?

A

Opportunity cost
Fairness to taxpayer
Debt if money is borrowed

246
Q

Why is imperfect information an issue with state provision?

A

Externalities are difficult to measure, may be an over or under allocation of these goods

247
Q

How will (theoretically) a price floor help to resolve market failure?

A

Contract demand - discourage consumption-quantity will fall
Externality is internalised
Welfare is maximised as socially optimum level is reached

248
Q

Why would price inelastic demand be a problem when using a price floor to resolve market failure?

A

There will be no contraction of demand therefore Q* will not be reached

249
Q

Why does a price floor lead to regression?

A

Higher prices burden the poor more than the rich, increases income inequality ( regression)

250
Q

What are the problems with black markets being created when using a price floor to solve market failure?

A

Monitoring cost- opportunity cost
Consumer welfare is lost as this product is likely to be of a lower quality
Gov rev is decreased, due to legal businesses making less money to pay to the government

251
Q

What are the problems with difficulty setting the price floor at the right level in solving market failure?

A

Externality’s are difficult to measure, governments are very unlikely to have perfect information, therefore it is unlikely the price floor will be set at Q*
If it is too high, it will burden producers too much, they may leave the country, or close down, which would cause unemployment
If it is too low then Q* is not reached

252
Q

How does a price ceiling (theoretically) solve market failure?

A

Extension of demand of essentials, equity is increased, e.g rent controls

253
Q

Why is excess demand a problem when using a price ceiling to resolve market failure?

A

Leads to a shortage and people going without essentials e.g accommodation

254
Q

Why re black markets a problem when using a price ceiling to resolve market failure?

A

Monitoring costs- opportunity cost.
Consumer welfare is lost as this product is likely to be of a lower quality than a similar product sold in a legal market
Gov rev is lost as legal businesses are making less profit and are therefore paying less tax

255
Q

Why is decreased quality of good/ service an issue when using price ceilings to resolve market failure?

A

Landlords/ producers have no profit motive, therefore will not try to improve their product
Landlords may “cheat” for example by charging for a key or to rent furniture, therefore the real price of rent would not change

256
Q

Why is setting the right level of price ceiling a problem when trying to resolve market failure?

A

Externalities are difficult to measure, especially as governments usually have imperfect information
If the price ceiling is too low, there will be massive amounts of excess demand
Too high: equity not reached

257
Q

What are the costs involved with using a price ceiling to resolve market failure?

A

Enforcement cost- opportunity cost
Government may have to subsidies landlords/ bus companies for a price ceiling- opportunity cost and fairness to taxpayer have to be considered

258
Q

What is information provision?

A

Government funded information provision/ advertising/ education in order to encourage or discourage consumption of certain goods

259
Q

What are some examples of information provision?

A

School curriculum, TV, newspapers, billboards, magazines, news, radio

260
Q

After information provision for a merit good, what would happen to the demand curve?

A

It shifts upwards

261
Q

After information provision for a demerit good, what happens to the demand curve?

A

It shifts downwards

262
Q

What is the purpose of information provision?

A

Consumers now have more information about the goods they are consuming, so will now have a better understanding of the utility they will gain (mpb)
This will shift the demand curve in the desired direction
Allocative efficiency is now reached
This is a market friendly, less paternalistic technique

263
Q

Why is cost an issue with information provision?

A

Administration cost- opportunity cost
If the money is international debt then this will have to be payed back with interest

264
Q

Why is the fact that there is no success guarantee an issue when using information provision to correct market failure?

A

Lots of cost involved which could be money wasted- inefficient allocation of resources
Consumers may continue to act irrationally, as they may of understand the information or choose to ignore it- consumer weakness at computation

265
Q

What kind of technique is information provision?

A

Long run not short run, this means that results may not show very quickly

266
Q

What are property rights for market failure?

A

Giving a private producer the right to own part of a common access resource

267
Q

How does giving property rights of common access resources help to solve market failure?

A

The producer will have no incentive to exploit the recourse as this will lead to resource depletion which will affect future profits
Negative externalitity internalised
Supply will now be at Q*

268
Q

Why is difficultly with effective distribution an issue when using property rights for common access resources to solve market failure?

A

The air/ sea cannot be divided up

269
Q

Why is cost an issue when using property rights for common access recourses to resolve market failure?

A

Enforcement cost (opportunity cost) if this cannot be afforded them there will be mass trespassing

270
Q

Why is inequity an issue when using property rights for common access recourses to resolve market failure?

A

If two parties both desire ownership of the same common access recourse, only one can be granted this. The party with ownership rights can sell access to the other, however this will burden the consumers financially. Who deserves ownership rights more is normative

271
Q

Describe the ownership of different economies?

A

Private- everything is privately owned
Command- everything is publicly owned
Mixed- There is a mixture of privately and public ally owned goods and services

272
Q

Describe the motives of different economies?

A

Private-profit motive MPC
Command: welfare maximisation MSC
Mixed: Goods/ services which are privately owned will have a profit maximisation motive and those which are publicly owned wil have a welfare maximisation motive

273
Q

Describe the freedom of choice in different economies?

A

High in a private economy
Low in a command economy
Medium in a mixed economy

274
Q

Describe the competition in different economies?

A

Higher in private economies
Lower in command economies
Medium in mixed economies

275
Q

Describe the extent of the role of the government in different economies?

A

Private- extremely low
Command - extremely high
Mixed- in the middle

276
Q

Describe the variety and quality of different goods and services in different markets?

A

Market- high
Command- low
Mixed- in the middle

277
Q

Describe the response to demand in different economies?

A

Private- quick
Command- slow
Mixed- medium

278
Q

Describe the efficiency of different types of markets?

A

Market economies- allocative efficiency is reached as wants and needs of consumers are being met, however Q* is not reached as externalities will not be accounted for
Command economies- lower efficiency as there is no profit motive therefore no incentive to cut costs, this means there is a higher probability of wasteful production. However, these economies are less likely to suffer from market failure
Mixed economies- total efficiency is maximised

279
Q

Describe the shortages/ surpluses created by different types of markets?

A

Market economies- non existent
Command economies- yes due to lack of price mechanism and imperfect information
Mixed economies- there will be some within the privately owned parts of these economies but none within the publicly owned parts

280
Q

Describe how merit goods are allocated in different types of economies

A

Private economies- merit goods will be under provided
Command economies- merit goods will be provided at socially optimum rate
Mixed economies- there is likely to be government intervention

281
Q

How are demerit goods allocated in different types of economies?

A

Will be over provided in a market economy
Will be provided at socially optimum rate in a command economy
In a mixed economy there is likely to be government intervention

282
Q

Describe the allocation of public goods in different types of markets

A

In a market economy there is likely to be missing markets
In a command economy they will be provided at the socially optimum rate
In a mixed economy there is likely to be government intervention

283
Q

Describe the income distribution in different types of markets

A

Most economists argue that the distribution of income in a market economy is too unequal and is unfair
In a command economy it is usually more even
In a mixed economy there is progressive tax (using income tax which is primarily taken from the rich and using it to help the poor) and welfare state (ways of people having an income without working for example benefits or state pensions)

284
Q

Describe the extent of negative externalities in different economies

A

Market economies- overproduction of goods and services which generate negative externalities
In command economies all externalities will be accounted for so production and consumption will be at the socially optimum level
In mixed economies there is likely to be government intervention

285
Q

Describe the likelihood of monopoly’s in different markets

A

Likely to exist in market economies
Impossible to exist in command economies
In a mixed economy there is likely to be some government intervention

286
Q

What are different types of markets like in the real world?

A

Pure market economies don’t exist in the real world, however some economies which are mainly market based include the USA and Singapore
Pure command economies also don’t exist, however some economies which are mostly command are North Korea and Cuba
The majority of economies are mixed economies

287
Q

Why is it good that the free market creates allocative efficiency?

A

There will never be a long run disequilibrium

288
Q

Why is it good that free markets encourage competition?

A

More choices, higher quality of goods and services, firms will strive to produce efficiently in order to enter competitive prices, consumer welfare is high

289
Q

What is the risk of government failure in a free market?

A

Non existent

290
Q

Why is it positive that consumer have more choice in a free market?

A

More individual liberty and freedom, higher consumer welfare is

291
Q

What is dynamic efficiency and why is it positive that this exists in the free market?

A

Profits made going back into the firm in order to improve it, for example more in work training or improving capital

This will increase the quality and quantity of goods and services produced
As quantity is at its maximum, jobs in this industry will also be maximised, meaning people have the ability to earn higher incomes
This will mean they have more purchasing power, which will lead to economic growth

292
Q

What are the failures and why is risk of market failure a negative of free markets?

A

Monopoly power may mean high barriers to entry for other firms
There may be imperfect information which could lead to irrational decisions from consumers as they do not understand the true utility the good or service is providing them
There would be missing markets of public goods
Externalities are ignored, meaning it is unlikely that production and consumption will be at socially optimum level

293
Q

Why is inequity an issue in free markets?

A

Some consumers may be excluded from consuming necessary goods and services

294
Q

Why is excessive profiteering an issue in the free market?

A

Firms may cut wages, costs for health and safety or costs for things which are beneficial to society

295
Q

Why is creative destruction an issue in the free market?

A

If there was monopoly power for one good, and another good was introduced which consumers believed would provide them more utility, consumers are likely to switch meaning the original firm may close

296
Q

Why is price volatility in the free market an issue?

A

If prices are too high, there is an extreme burden on consumers
If prices are too low, there is an extreme burden on producers

297
Q

What is specialisation?

A

The concentration of production on a narrow range of goods and services

298
Q

What is the advantage of maximisation of output after specialisation?

A

Countries will only produce what they are most efficient at, which will mean they will make more revenue when trading with other countries. This will lead to global economic growth

299
Q

What are some other advantages of specialisation?

A

Wider variety of goods and services
The problem of scarcity is overcome which leads to greater allocative efficiency
Costs of production are lower as workers are more specialised

300
Q

What are the disadvantages of specialisation?

A

A change in fashion or trends could lead to firms shutting down
National interdependence is required- if there are international relations issues the entire system will fail
Finite resources- if a business only produces petroleum and oil runs out, then this firm will shut down.
De-industrialisation - if a foreign firm becomes more efficient at production, then the original, less efficient firm will shut down

301
Q

What is division of labour?

A

Breaking down the production process into separate tasks upon specialisation

302
Q

What are the advantages of division of labour?

A

Workers are highly productive- this saves time which lowers the cost of production. This means that the profit ability for the firm is high, which can be passed onto consumers through lower prices.
Specialist capital for workers can be created.

There are lower prices, higher quality and quantity of goods and more choices, which means that consumer welfare is maximised

303
Q

What are the disadvantages of specialisation of labour?

A

Demotivating of workers- over time productivity may decrease, which may lead to high staff turnover- this may increase training costs and be inefficient in the long run

Risk of structural unemployment long term for workers if they are only qualified to do one thing and it gets replaced by capital

Goods become highly standardised, uniqueness which many consumers love is lost

304
Q

What is a primary commodity?

A

Output from the primary sector, whose activities supply unprocessed raw materials

305
Q

Why is PED inelastic for primary commodities?

A

They are necessities an there is often a lack of good substitutes

306
Q

Why is PES inelastic for primary commodities?

A

Large production lag
Hard to store- low stock

307
Q

Why are there regular changes in the demand curve of primary commodities?

A

If there is global economic growth there will be an increase in demand. If there is a slow down in economic growth there will be a reduction in demand for primary commodities

308
Q

Why are there regular shifts in the supply curve for primary commodities?

A

Changes in weather affects production of agricultural goods

309
Q

What happens if demand of primary commodities increases?

A

Producer revenue will increase, could lead to greater dynamic efficiency, the business has higher profitability potential and producer living standards increases

310
Q

What happens if prices of primary commodities fall

A

Revenue falls drastically, living standards and profit ability also fall, in developing countries this leads to absolute poverty

If many producers leave the market, there could be supply concerns

Government revenue and export revenue both decrease, this could worsen poverty particularly in developing countries

Investment will decrease as producers won’t spend on capital

A level economics (1 decks)

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