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Microeconomics > How Markets Work + Government Intervention! > Flashcards

How Markets Work + Government Intervention! Flashcards

1
Q

What’s rational decision making for consumers, firms and the government?

A

Consumers aim to maximise utility, firms aim to maximise profit and governments aim to maximise social welfare.

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2
Q

What’s utility?

A

The satisfaction gained from consuming a product.

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3
Q

What’s demand?

A

The ability and willingness to buy a particular good/service at a given price at a given time.

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4
Q

What factors cause the demand curve to shift?

A

Population
Income
Related goods
Advertising
Tastes/fashion
Expectations
Seasons

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5
Q

Why does the demand curve slope downward?

A

There’s an inverse relationship between price and quantity.

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6
Q

What’s composite demand?

A

When the good demanded has more than one use.

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7
Q

What’s derived demand?

A

When the demand for one good is related for the demand of another.

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8
Q

What’s joint demand?

A

When goods are bought together.

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9
Q

What’s the law of diminishing marginal utility?

A

The satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed.

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10
Q

What’s price elasticity of demand?

A

The responsiveness of quantity demanded to a change in price.
% change in demand / % change in price.

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11
Q

What are the values for PED?

A

Unitary elastic: PED = 1
Elastic: PED > 1
Inelastic: PED < 1
Perfectly inelastic: PED = 0

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12
Q

What factors influence PED?

A

Availability of substitutes.
Time.
Necessity.
Percentage of total expenditure.
Addictiveness.

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13
Q

What’s income elasticity of demand?

A

The responsiveness of quantity demanded to a change in real incomes.
% change in demand / % change in real incomes.

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14
Q

What are the values for YED?

A

Inferior goods: PED < 0
Normal goods: PED > 0
Luxury goods: PED > 1

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15
Q

What’s cross elasticity of demand?

A

The responsiveness of quantity demanded for good x in response to a change in price of good y.

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16
Q

What are the values of XED?

A

Complementary goods: XED < 0
Substitutes: XED > 0
Unrelated goods: XED = 0

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17
Q

What’s supply?

A

The quantity of a good/service that a producer is willing and able to supply at a given price at a given time.

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18
Q

What factors cause the supply curve to shift?

A

Subsidies
Costs of production
Environment
Number of firms
Taxation
Technology

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19
Q

What’s joint supply?

A

When an increase in supply of one good decreases the supply of another.

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20
Q

What’s price elasticity of supply?

A

The responsiveness of quantity supplied to a change in price.
% change in supply / % change in price.

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21
Q

What are the values for PES?

A

Elastic: PES > 1
Inelastic: PES < 1
Perfectly inelastic: PES = 0

22
Q

What factors influence PES?

A

Time scale
Spare capacity
Level of stocks
Barriers to entry/exit
Substitutability of factors of production

23
Q

When is there excess demand?

A

When price is below market clearing price.

24
Q

When is there excess supply?

A

When price is above market clearing price.

25
Q

What are the functions of the price mechanism?

A

Rationing scarce resources
Incentives to change behaviour
Signalling where resources are needed in the market

26
Q

What’s consumer surplus?

A

The difference between the price that a consumer is willing and able to pay and the price they actually pay. It’s based on what the consumer perceives will be the private benefit of the good. It’s the area above the market price and below the demand curve.

27
Q

What’s producer surplus?

A

The price between what the producer is willing to charge and the price they actually charge. It’s the area below market price and above the supply curve.

28
Q

What’s economic welfare?

A

The total benefit society receives from an economic transaction. It’s calculated by the area of the consumer surplus and the area of the producer surplus.

29
Q

What are indirect taxes?

A

Imposed by the government, attempting to increase production costs for producers and restrict supply. There are two types of indirect taxes: ad valorem and specific.

30
Q

What are ad valorem taxes?

A

Taxes that are percentages, e.g, VAT.

31
Q

What are specific taxes?

A

A set tax per unit e.g, fuel duty on unleaded petrol.

32
Q

How does PED affect tax burdens?

A

If PED is elastic, the burden will be more on the producer. If PED is inelastic, the burden is more in the consumer.

33
Q

What are the pros of indirect taxes?

A

They can correct negative externalities.
Governments can spend more on merit goods and public goods.

34
Q

What are the cons of indirect taxes?

A

Could be expensive for the government to collect.
Could be regressive.
Could be inflationary.

35
Q

What’s a subsidy?

A

A payment from the government to a producer to lower costs and encourage greater supply.

36
Q

What are the pros of subsidies?

A

Helps low income families.
Can increase employment.
Can reduce inequality.
Can encourage the consumption of merit goods.
Helps avoid market failure.

37
Q

What are the cons of subsidies?

A

High opportunity cost.
Paid by the tax payer who might not benefit.

38
Q

What’s a minimum price?

A

A fixed price enacted by the government, usually set above market equilibrium price. It’s used in order to protect products from price volatility and to solve market failures.

39
Q

What’s a maximum price?

A

A fixed price enacted by the government, usually set below market equilibrium price. It’s used in order to raise the affordability of necessity goods/services.

40
Q

What are the advantages of tradable pollution permits?

A

WIll benefit the environment.
Government revenue can be reinvested in green technology.
Can raise revenue for greener firms.

41
Q

What are the disadvantages of tradable pollution permits?

A

Can cause firms to relocate.
Increased costs can be passed onto the consumer.
It could create barriers to entry.
It could be expensive for governments to monitor emissions.

42
Q

What are private finance initiatives?

A

Where the public and private sector come together to provide goods/services. The private sector builds it and loans it to the public sector. It’s very expensive in the long run.

43
Q

What are the characteristics of a public good?

A

Non-excludable
Non-rivalrous
Non-rejectable

44
Q

What’s a quasi good?

A

A good that has characteristics of both public and private goods.

45
Q

What are the key concepts when discussing public goods.

A

Free-rider problem
Missing markets

46
Q

What’s the free-rider problem?

A

Some individuals will benefit from a public good/service despite contributing to the cost of providing it.

47
Q

Why is there a missing market for public goods?

A

As they would not be provided without government intervention.

48
Q

What’s market failure?

A

Where the market mechanism fails to allocate resources effectively. If the individual or firm doesn’t correct the market failure, the government must intervene. However, this can lead to government failure and unintended consequences.

49
Q

How do you correct market failure?

A

You must have clearly defined property rights.

50
Q

What’s Coase Theorem?

A

If the market failure is amongst a small number of parties, they can internalise the externalities themselves.

51
Q

What are examples of regulation policies.

A

Ban production/consumption (shadow economy, lost tax revenue, discriminatory)

Regulate (regulatory capture, expensive, bias)

Permits (profiteering, costly, easily achievable)

CMA intervention (limited funds, costly, long)

Privatisation

Microeconomics (15 decks)

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