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Economics Micro > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

What is the rationing function?

A
  • Excess demand will increase the price

- There will be a movement along the demand curve showing a decrease in quantity demanded and a decrease in price

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2
Q

What is the incentive function?

A
  • Higher prices act as a motivator for producers to increase the supply of a good or service
  • This is due to greater contribution per unit i.e. the difference between selling price and variable cost
  • As prices rise so do revenue and profit
  • There will be a movement along the supply curve showing an increase in quantity supplied
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3
Q

What is the signalling function?

A
  • An increase in price will give an indication to producers that they should increase supply, an indication to consumers that they should reduce demand
  • A decrease in price will give an indication to producers that they should decrease supply, an indication to consumers that they should increase demand
  • All of these signals will lead to shifts in the supply or demand curves
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4
Q

What is allocative efficiency?

A

Allocative efficiency occurs where consumer satisfaction is maximised in the production of goods and services

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5
Q

What is economic efficiency?

A

Economic efficiency occurs where we have allocative and productive efficiency at the same time

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6
Q

What is the allocative function?

A

allocative function acts to divert resources to where they can maximise their returns and away from uses where they don’t

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7
Q

What is market failure?

A

Whenever a market leads to a misallocation of resources

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8
Q

What are some causes of market failure?

A 
Public goods
Externalities
Merit and demerit goods
Monopoly power
Other market imperfections
Inequalities in the distribution of income and wealth
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9
Q

What are public goods?

A

Non-rival
Non-excludable
e.g army, street lights

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10
Q

What are private goods?

A

Rival

Excludable

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11
Q

What is a free rider?

A

Someone who benefits from a good/service without paying for it

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12
Q

What is meant by non-rival and non-excludable?

A

Non-rival: consumption doesn’t affect the availability for others
Non-excludable: where it is impossible to stop someone else from using it

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13
Q

What are quasi-public goods?

A

Have both private and public good characteristics

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14
Q

How can technical change affect public goods?

A

IPR

Monitor and control systems

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15
Q

What does IPR stand for?

A

Intellectual property rights

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16
Q

What is an externality?

A

are the costs and benefits to a third party created by economic agents when undertaking their activities

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17
Q

What is positive production externalities?

A

When the firm in underproducing

Price is too high, output is too low

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18
Q

What are negative production externalities?

A

When the firm is overproducing
Price is too low,output too high
If you included social costs, S would shift left, increasing the price

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19
Q

What are negative consumption externalities?

A

Consumer is over consuming

D shifts left, decreasing price

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20
Q

What are positive consumption externalities?

A

Consumers under consuming

D shifts right

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21
Q

What is a merit good?

A

Suffer from under provision of the market
Consumers lack perfect information and would under-consume products that society believes would benefit them
Health and education are typical examples of merit goods

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22
Q

What are demerit goods?

A

Over provided by the market
These goods produce negative externalities which are deemed to be bad for society
rugs and cigarettes are typical examples of demerit goods

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23
Q

What is information failure?

A

Information failure is a type of market failure where consumers or producers:

  • do not have perfect knowledge
  • have asymmetric knowledge
24
Q

When is there likely to be an inequitable distribution of income?

A

When there is no government intervention

25
Q

What is equity?

A

Fairness in the allocation of resources

26
Q

What is inequitable distribution of wealth and income?

A

They way in which income is distributed in society is considered unfair

27
Q

What are the 2 viewpoints on acceptable level of inequality?

A

Capitalists say that it creates incentives among economic agents that has a positive impact on national income and can ‘trickle down’ to poorer members of society

Critics say it creates tension between rich and poor, negative standard of living

28
Q

What is the difference between wealth and income?

A

Wealth - a stock concept e.g assets owned, skills

Income - a flow concept e.g wages

29
Q

What factors influence wealth and income distribution?

A 
- The Government
They redistribute incomes
Progressive tax
Welfare system
- Wealth
- Human Capital
Age
Disability
Gender
Race
Religion
Sexual orientation
- Inheritance
- Income
- Marriage
30
Q

What are possible conflicts of inequality?

A
  • Increased poverty
  • Increased crime
  • Less safe environment
  • Social Tension
  • Reduced happiness
31
Q

Why do governments intervene in markets?

A
  • Correct market failure
  • Achieve a fairer distribution of income and wealth
  • Achieve macro objectives
32
Q

Why do they intervene to stop market failure?

A
  • Reduce negative externalities
  • Increase positive externalities
  • Increase supply of merit goods
  • Reduce demerit goods
  • Supply public goods
33
Q

Why do they intervene for distribution of income?

A
  • Tension
  • Poverty
  • Breakdown can cause further failure
34
Q

Why do governments intervene to support UK industry?

A
  • Reduce unemployment
  • Some industries are larger than others
  • Infrastructure is needed
35
Q

How do governments influence the allocation of resources?

A 
Public Expenditure (health, education and infrastructure)
Taxation (high prices for negative externality products)
Regulation (protection from monopoly power)
36
Q

Benefits of resource allocation for economic growth?

A
  • Job creation
  • Rising incomes
  • Improved standards of living
  • Improved competitiveness
  • Improved consumer and investment confidence
  • Low gov spending on JSA
  • More tax
37
Q

Benefits of resource allocation for unemployment?

A
  • High demand
  • High incomes
  • Improved standards of living
  • Higher tax revenue
  • Low gov spending
  • Improved productivity
  • Reduced poverty
  • Social benefits (reduced crime)
38
Q

How can governments intervene?

A
  • Price controls
  • Indirect Taxation
  • Subsidies
  • State provision
  • Regulation
39
Q

What 2 indirect taxes can governments add to alter supply?

A
  • Specific or unit tax

- VAT

40
Q

Advantages of indirect taxation?

A
  • Inelastic demand (high revenues)
  • Internalise an external cost (negative impact upon price and quantity)
  • Price mechanism leaves it upon consumers and producers to adjust their behaviour
41
Q

DIsadvantages of indirect taxation?

A
  • Inelastic demand (qd doesn’t fall much unless tax is very high)
  • Can’t place monetary value on external cost
  • Seen as unfair for poorer people
  • Reduces international competitiveness
42
Q

Advantages of subsidies?

A
  • Increase consumption of merit goods

- Reduces price therefore available to more people

43
Q

Disadvantages of subsidies?

A
  • Difficult to place monetary value
  • Opportunity costs as money could be used elsewhere
  • Firms become reliant on them
  • Can be seen as trade protection from foreign countries
  • If inelastic demand, could reduce price but not consumption
44
Q

What are minimum prices?

A

Price floors that prices are not allowed to fall under

45
Q

Advantages of minimum prices?

A
  • Guarantees a minimum price + income
  • Encourages production of essential items
  • Excess supplies can be sold in future shortages
46
Q

Disadvantages of minimum price?

A
  • Consumers pay higher price, reduce their disposable income
  • Can cause over-production
  • Opportunity cost of purchasing excess supplies
  • Reduces international competitiveness
  • Expensive demerit goods can force people to find dangerous alternatives e.g drugs
47
Q

What is maximum price?

A

Price ceiling where prices can not go above

48
Q

Advantages of maximum price?

A
  • Some people wouldn’t be able to afford certain goods

- Reduce ability of firms with monopoly power

49
Q

Disadvantages of maximum price?

A
  • Some people will not be able to get them, causes dissatisfaction
  • Excess demand causes queues
  • May cause black markets
50
Q

What is direct provision?

A

government will organise the provision of the product in question then raise necessary funds out of tax revenue

51
Q

What is state provision?

A

When the government intervenes in a market in order to supply a good or service

52
Q

When will governments provide state provision?

A

When they believe its a public or merit good

53
Q

What is regulation?

A

Rules or laws used to control or restrict the actions of economic market agents in order to reduce market failure

54
Q

What is government failure?

A

When government intervention in a market leads to a misallocation of resources

55
Q

Reasons for government failure?

A
  • Inadequate information
  • Unintended consequences
  • Market distortions
  • Administrative costs
  • Regulatory capture

Economics Micro (5 decks)

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