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IB Economics SL new syllabus > Unit 4 > Flashcards

Unit 4 Flashcards

1
Q

Define price floor.

A
  1. A minimum price set above the equilibrium price.
  2. In order to provide increase the income of low-skilled workers.
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2
Q

What do government often do after imposing a price floor?

A

They buy the surplus.

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3
Q

What is welfare loss?

A

Social surplus lost due to the misallocation of resources.

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4
Q

Define price ceiling.

A
  1. A maximum price set below equilibrium price.
  2. In order to make goods more affordable.
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5
Q

Define indirect tax

A

Expenditure tax that increases cost of production for firms but can be transferred to consumers via higher prices

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5
Q

Define indirect tax

A

Expenditure tax that increases cost of production for firms but can be transferred to consumers via higher prices

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6
Q

Define direct tax

A

Tax on income that can’t be transferred onto consumers

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7
Q

Example of direct tax

A

Income tax, corporation tax, National insurance

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8
Q

What is a specific tax

A

Type of indirect tax per unit of a good (vertical distance represents tax) parellel

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9
Q

Ad valorem tax

A

tax as a percentage of a price being charged (supply curbe will be pivoted) the tax will be the same everywhere despite smaller distance between curve. 20% of high price at more quantity will be higher revenue compared to lower quantity.

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10
Q

Impact on consumers indirect tax

A

Raise price, lower consumer surplus
Indirect tax is regressive and takes a larger proportion of low income households (demand inelastic affects even more)

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11
Q

Impact on producers price ceiling

A

Lower revenue, lower producer surplus
Potential loss of jobs due to lower demand

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12
Q

Impact of tax on government

A

Higher revenue
Fix market failure
Could harm consumers (regressive nature)
Might increase unemployment
Black market creation for illicit goods
This is the deadweight loss creation

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12
Q

Impact of tax on government

A

Higher revenue
Fix market failure
Could harm consumers (regressive nature)
Might increase unemployment
Black market creation for illicit goods
This is the deadweight loss creation

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13
Q

How to evaluate an economic policy?

A
  1. Consequences for society.
  2. Consequences for consumers.
  3. Consequences for producers.
  4. Consequences for government.
  5. Consequences for foreigners.
  6. Effectiveness.
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14
Q

Price elastic demand>1 what happens to consumer and producer burden, and gov revenue

A

Consumer Burden:Lower
Producer Burden:Higher
Government Revenue:Lower
PED=infinity (Producers take entire burden)

15
Q

Price inelastic demand <1 what happens to consumer and producer burden, and gov revenue

A

Consumer Burden:Higher
Producer Burden: Lower
Government Revenue:Higher
PED=0 (Consumer take entire burden)

16
Q

Price inelastic supply <1 what happens to consumer and producer burden, and gov revenue

A

Consumer Burden:Higher
Producer Burden:Lower
PED=infinity (consumer burden will be everything)

17
Q

Price inelastic supply >1 what happens to consumer and producer burden, and gov revenue

A

Consumer Burden:Lower
Producer Burden:Higher
PES=0 producer burden will be everything

18
Q

Benefits of price floor

A

Protect producers from price volatility:
Minimum income: The price floor guarantees that producers will receive at least the minimum price set by the government. This ensures a certain level of income and protects them from extremely low prices that could result in financial losses.

Stability: Price floors offer producers stability by preventing extreme price drops. They provide a safety net during periods of price volatility, ensuring that producers can cover their production costs and continue operating even when market conditions are unfavorable.

Solve market failure:
Higher prices, less demand

19
Q

What happens to producer revenue when minimum price floor induced

A

increase if intervention buying
Decrease without intervention buying

20
Q

Key impact on minimum price floor on consumers, government and producers

A

Paying higher prices
consumer surplus decreases
Take greater proportion of income of poorer, regressive outcome

Consumers:
depends if intervention buying or not
If yes increased revenue, increases quality of life, if not revenue might not increase revenue

Government:
Could form blakck market
IB cost, Excess supply stock problem if IB, creates deadweight loss

21
Q

Maximum price floor (price ceiling)

A

A fixed price (price ceiling) enacted by the government usually set below the equilibrium market price

22
Q

main function of Max price floor

A

Increase affordability of goods/services

23
Q

Main effects of price ceiling

A

Price:decrease
Demand:Increase
Creates excess demand
Producer revenue: decreases

24
Q

Main effects of min price

A

Price:increase
Demand:decrease
Creates excess supply
Producer revenue: decreases (could increase if IB)
Creates deadweight loss

25
Q

Key impact on maximum price floor on consumers, government and producers

A

Consumers:
Greater affordability
consumer surplus rising
However, high demand could mean lack of accessibility
Source alternative supply such as smuggling (black market)

Producers:
Negative, fall producer surplus, fall supply, fall revenue and living standard

Government:
Some consumers are benefiting
Not happy about consumers being affected
And excess demand
Black markets forming, might need to intervene

26
Q

How to evaluate an economic policy?

A
  1. Consequences for society.
  2. Consequences for consumers.
  3. Consequences for producers.
  4. Consequences for government.
  5. Consequences for foreigners.
  6. Effectiveness.
27
Q

Subsidy definition

A

Money grant to firms by the government to reduce costs of production and encourage an increase in output

28
Q

Main functions of subsidy

A

Solve market failure
Increase affordability

29
Q

Where will Supply curve shift after subsidy

A

Shift downwards (right)
Vertical divergence is amount of subsidy

30
Q

Key impact of subsidy on consumers, government and producers

A

Consumer:
Prices fall, higher quantity, greater affordability, greater consumer welfare

Producers:
Increase revenue, big increase producer surplus, greater employment due to greater demand

Government:
solving market failure, helping low income households, long run funding cost, how subsidies being used by producers, long run producers becoming dependent when producing

31
Q

How to calculate cost of government

A

At new equilibrium look at vertical distance and draw line to the price curve and times price by quantity (box)

32
Q

Main effects of Subsidy

A

Price: Decrease
Prod revenue: Increase
Consumer saving
Increase quantity supplied

IB Economics SL new syllabus (35 decks)

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