topic 5 - theme 1 Flashcards
how markets work: the price mechanism in action
what is a commodity?
raw materials used in the production process such as oil, copper, coffee beans and rice
why might commodities have an inelastic supply?
given the absence of substitutes a change in price will have little impact on the quantity demanded
what is the buffer stock system?
operates by buying excess supply of the commodity when the market is oversupplied
why are some markets not a free markets? e.g. oil
as it is controlled by cartels
what is indirect tax?
charge levied (placed) on expenditure on goods and services - can be avoided e.g. VAT, sugar tax
what is an ad valorem tax?
a tax put on a good or service depending on it’s value
what is direct tax?
a charge levied on an individual’s income - can’t be avoided e.g. income tax
what is a subsidy?
a payment given by the government to encourage production and reduce selling price
what is the effect of subsidies?
increases output and lowers prices for consumers - increases consumer surplus
what does a consumer subsidy encourage?
encourages consumers to purchase more of a particular good or service e.g. a direct grant or a loan without interest
what does a producer subsidy do?
lowers the cost of production
what is a cartel?
an agreement between firms in a market on a price and output with the intention of maximising their joint profits
