Unit 2 Flashcards

Question

What is market supply?

Answer 1

Market supply is the total supply of a product supplied/produced by all firms in the industry. - aggregation of supply from all producers.

Answer 2

-Improvements in technology. -Cost of production. -Taxes. -Subsidies. -Prices of other products, competitive pricing. -Weather conditions.

Answer 3

A shift to the right in supply signifies that a larger quantity is being produced at any given price.

Answer 4

A shift to the left in supply signifies that a smaller quantity is being produced at any given price.

Answer 5

Consumers are willing to buy more of a product if the price is low, while producers are willing to supply more if the prices are high. Eventually though, a middle ground is found. This is known as the equilibrium price.

Answer 6

Equilibrium price is the price where demand and supply are equal. At the equilibrium, the allocation of goods is most efficient because the amount of goods being demanded is the same as the amount of goods being supplied. This means that everyone is satisfied.

Answer 7

A surplus is when there is excess supply. This occurs when prices are set too high leading to the products not being consumed. This means that there is allocative inefficiency .

Answer 8

A shortage is when there is excess demand. This occurs when the price is set too low and demand is very high (many consumers want the good) while the producers are not supplying enough of the good.

Answer 9

PED is a measure of the responsiveness of demand relative to a change in price.

Answer 10

% change in Q.D. / % change in Price.

Answer 11

Inelastic demand is when a change in price has little effect on the quantity demanded. The necessity of the product is high. It is either an essential or habitual.

Answer 12

Inelastic demand has a PED lower than 1.

Answer 13

It tends to be more vertical.

Answer 14

Elastic demand is when demand responds quickly and more drastically to a change in price. The necessity of the product is relatively low.

Answer 15

Elastic demand has a PED greater than 1.

Answer 16

The graph for elastic demand tends to be more horizontal.

Answer 17

If demand for a product if price inelastic and there is an increase in price, the revenue of producers would increase. This is because the necessity of the product is very high because it is either an essential of habitual, so a change in price has a small effect on the demand. An increase in revenue is only if there aren't other factors affecting producers such as inflation (which makes their raw materials more expensive too).

Answer 18

If demand for a product is price elastic and there is an increase in price, the revenue of producers will decrease. This is because the demand is elastic meaning the products are not essential or habitual. A rise in price will disincentivise consumers from purchasing them.

Answer 19

-Availability of substitutes. -Proportion of income spent on the product. -Necessary or luxury? -Can the purchase be postponed? -How the market is defined. -Time period. -Is the good addictive? e.g. iPhones are a luxury for addictive constituents.

Answer 20

PES is a measure of the responsiveness of the quantity supplied relative to a change in price.

Answer 21

Percentage change in quantity / Percentage change in price.

Answer 22

Inelastic supply is when a large change in the price of a product has little effect on the quantity supplied.

Answer 23

Inelastic supply has a PES digit of below 1.

Answer 24

Elastic supply is when a large change in the price of a product has a large effect on the quantity supplied.

Answer 25

Elastic supply has a PES digit of greater than 1.

Answer 26

-Stock availability. -Time taken to produce the product. -Spare capacity. -Costs of altering supply.

Answer 27

A market economic system is when most resources are owned and controlled by individuals and business and are allocated through market forces. - A system where demand and supply regulate the economy,

Answer 28

The private sector is the part of the economy where businesses are owned by individuals or shareholders.

Answer 29

The public sector is the part of the economy controlled by the government.

Answer 30

Advantages of a market economic system: -Very responsive to changes in consumer demand (reflects cd). -Price mechanism is an efficient way of allocating resources. -Competition promotes efficiency and low prices. -Quality of products is high -Innovation and enterprise are encouraged.

Answer 31

Disadvantages of a market economic system: -Market failure occurs when market forces are not efficient and do not work well. -A lack of government regulations can have external costs such as environmental damage. -Income inequality are likely to widen over time since no income redistribution by government. -Less social policies to protect the more vulnerable groups - minorities. eg. disabled. Those that are mistreated in the workplace.

Answer 32

Market failure is when the market mechanism fails to allocate resources efficiently. -Market forces = demand and supply.

Answer 33

Private costs are costs borne by those directly consuming or producing a product.

Answer 34

External costs are costs imposed on those who are not directly involved in the consumption and production activities of others. e.g. Consumer throws trash onto street and the govt has to hire cleaners to collect the litter.

Answer 35

Social costs are the total costs to a society of an economic activity. Social costs = private cost + external cost.

Answer 36

Private benefits are benefits received by those directly consuming or producing a product. E.g. a bee farm gains the private benefit of the income from selling their honey

Answer 37

External benefits are benefits enjoyed by those who are not directly involved in the consumption and production activities of others.

Answer 38

Social benefits are the total benefits to a society of an economic activity. social benefits = private benefit + external benefit.

Answer 39

Third parties are those not directly involved in producing or consuming a product.

Answer 40

Causes of market failure: -Demerit goods. -Merit goods. -Public goods. -Abuse of monopoly power. -Factor immobility. -External costs and benefits

Answer 41

Merit goods are goods that are more beneficial to consumers than they realise and these are under consumed and underproduced. Merit goods generate private or external benefits. There will be information failure since consumers do not understand the benefits. Merit goods are underprovided in a market despite their consumption generating private and/or external benefits. This leads to governments having to subsidise these goods in order to lower the price and/or increase the quantities consumed. -Education, vaccinations and renewable energy

Answer 42

Demerit goods are goods that are more harmful to consumers than they realise and may generate negative externalities. These are overproduced and over consumed. This means there is information failure since consumers are not fully aware of the benefits or costs of consumption. Demerit goods are over-provided in a market despite their consumption generating external costs. This leads to governments often having to regulate these goods in such a way that they raise the prices and/or limit the quantities consumed. -Alcohol and drugs.

Answer 43

Public goods are products which are non-rival and non-excludable and hence need to be financed by tax revenue. -National defence, parks and libraries.

Answer 44

Public goods are very beneficial to society but could be under-provided by a free market as there is little opportunity for sellers to make profits from providing goods and services that are non-excludable and non-rivalrous in consumption. This leads to governments having to provide these beneficial goods themselves - using tax revenue.

Answer 45

Private goods are products that are both rival and excludable. -Phones and takeaway food.

Answer 46

The development of monopoly markets is a natural outcome of a market system. This is because with less competition, firms can raise prices and thus reduce the consumer choice and availability of subsidies (control the supply) to force consumers to pay their high prices. Goods and services are purposely under provided in order to raise prices and profits. Firms can eliminate competition by buying out competitors and increasing their ownership of F.O.P. Governments often intervene to ensure that there is healthy competition is markets and sufficient provision of goods and services.

Answer 47

Factor immobility occurs when it is difficult for F.O.P to move or switch between different uses/ locations. There are two main types: -Geographical -Occupational

Answer 48

Factor immobility results in an inefficient allocation of resources in a market. This causes governments to have to implement programs to reduce the factor immobility in order to raise production and output;

Answer 49

A positive externality of consumption occurs when there is a positive external benefit in consumption, such as when electric vehicles are consumed CO2 emissions fall A positive externality of production occurs when there is a positive external benefit in production, such as when managed pine forests produce timber but also increase CO2 absorption A negative externality of consumption occurs when there is an external cost in consumption such as when the consumption of alcohol increases anti social behaviour A negative externality of production occurs when there is an external cost in production such as when the production of electricity increases air pollution

Answer 50

A mixed economic system is an economy in which both the private and public sector plays an important role. - blend of a market and planned economy. The higher the level of government intervention, the more the economy leans towards a planned economy.

Answer 51

-Subsidy - a payment by government to encourage production or consumption. -Indirect tax - applied on goods and services to reduce their consumption and thus production. -Regulation - various means by which the governments seek to control the production and consumption. -Privatisation - the sale of public sector assets to the private sector. -Nationalisation - moving the ownership and control of an industry from the private to public sector/govt. -Direct provision - a government provides essential goods and services.

Answer 52

-To correct market failure. -To support firms. -To support poorer households. -To promote equity. -To collect government revenue.

Answer 53

In many markets, there is a less than optimal allocation of resources from society's point of view. Firms and individuals are focused on their self-interest (objectives such as profit) and will thus not self-correct this misallocation of resources. So, governments intervene by influencing the levels of production or consumption.

Answer 54

Governments need funding to provide essential goods such as public and merit goods. This funding is provided through intervention such as taxation, privatisation, sale of licenses and the sale of goods and services.

Answer 55

Governments intervene to promote equity to reduce the opportunity gap between the rich and poor.

Answer 56

In the global economy that has been developed and is still developing by globalisation, govt support key industries to help them remain competitive. They can also support start-ups to increase the local competition and to increase economic growth or other macro economic objectives such as low unemployment.

Answer 57

Governments intervene to support poorer households because poverty has multiple impacts on both the individual and the economy. Governments can intervene to redistribute income by taxing the rich and giving to the poor (regressive taxes).