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Economics > MICRO - Unit 5 > Flashcards

MICRO - Unit 5 Flashcards

1
Q

What are the 4 functions of pricing?

A

rationing
signalling
incentive
allocative

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2
Q

What is rationing functioning?

A

as price rises, excess demand is removed and only the consumers with the ability to pay are able to purchase the good

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3
Q

What is signalling functioning?

A

provide important market signals to market participants - increase or decrease production

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4
Q

What is contribution per unit of a product?

A

the difference between the selling price of a product and the variable cost

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5
Q

What is incentive functioning?

A

increased prices strengthen incentives to firms to produce more in order to make a profit
- this is due to greater contribution per unit

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6
Q

When does allocative efficiency occur?

A

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

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7
Q

When does economic efficiency occurs?

A

occurs when the maximum amount of products are produced at their minimum cost whilst maximising their benefit to society

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8
Q

When does allocative efficiency occur?

A

where no additional (or maximum) output can be produced from the factor inputs available at the lowest possible average or unit cost

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9
Q

What is allocative functioning?

A

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

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10
Q

When does market failure occur?

A

when the market is unable to efficiently allocate scarce resources to meet the needs of society

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11
Q

What helps market failure?

A

government intervention

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12
Q

When does government intervention occur?

A

when the government takes action to remedy allocatively inefficient markets

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13
Q

What does the government try to do?

A

ensure that markets work both efficiently and in a fair (equitable) manner.

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14
Q

What can cause misallocation of resources?

A
  • merit/ demerit goods
  • public good
  • externalities
  • monopoly power
  • other market imperfections
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15
Q

When does complete market failure occur?

A

when there is no market whatsoever

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16
Q

When does partial market failure occur?

A

when a market exists but there is a misallocation of resources

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17
Q

What are the 3 features of public goods?

A

non-rival goods
non-excludable goods
can have positive or negative externalities

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18
Q

What does non-rival mean?

A

where consumption of the good does not reduce the amount available for consumption by others

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19
Q

What is a public good?

A

is one where its use by an individual does not stop others from using it whilst its consumption does not reduce the amount available for consumption by others.

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20
Q

What does non-excludable mean?

A

where, once provided, it is impossible to stop other individuals from using them

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21
Q

What is a pure public good?

A

is one where it is impossible to exclude someone from consuming it if they are unwilling to pay for its us e.g air

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22
Q

When does market failure occur for public goods?

A

when there is a free rider problem

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23
Q

What is a free rider?

A

is someone who benefits from a good or service without paying for it

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24
Q

What is valuation?

A

is a method used to try and estimate the worth public goods

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25
Q

What type of market failure are public goods an example of?

A

complete market failure - as free market have no incentive to provide for them

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26
Q

What are the features of a private good?

A

rival
excludable
can have positive or negative externalities

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27
Q

What is rival?

A

where consumption of the good reduces the amount available for consumption by others

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28
Q

What is a private good?

A

is one where its use by an individual stops others from using it whilst its consumption reduces the amount available for consumption by others

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29
Q

What is excludable?

A

where, once provided, it is possible to stop other individuals from using them

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30
Q

What is a quasi-public good?

A

is similar to a public good but has elements of a private good that provide some ability to stop non-paying consumers from using it

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31
Q

What is technical change?

A

describes the process of innovation, invention and the widespread use of technology in society

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32
Q

What can technical change lead to?

A

markets efficiently providing goods previously regarded as non-excludable and non-rival

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33
Q

What does technical change mean for a public good?

A

can become a public good

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34
Q

How can a public good become a public good be achieved?

A
  • intellectual property rights (IPR)

- monitoring and control systems

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35
Q

What are externalities?

A

are the knock on effects of economic transactions upon third parties

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36
Q

When do negative externalities occur?

A

as a result of the divergence between private costs and social costs

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37
Q

What are private costs?

A

are those costs of consuming or producing goods or services that have to be paid for by third parties

38
Q

What are social costs?

A

costs of consuming or producing goods or services that are paid for by society

39
Q

When do we have negative externalities?

A

when social costs are greater than private costs

40
Q

When do positive externalities occur?

A

arise as a result of the divergence between private benefits and social benefits

41
Q

What are private benefits?

A

are those benefits of consuming or producing goods or services that are received by an economic unit

42
Q

What are social benefits?

A

benefits of consuming or producing goods or services that are received by society

43
Q

When do we have positive externalities?

A

when social benefits are greater than private benefits

44
Q

What are the 4 categories which externalities be broken down into?

A
  • negative production externalities
  • negative consumption externalities
  • positive production externalities
  • positive consumption externalities
45
Q

Draw a negative production externality on a diagram

A

https://docs.google.com/presentation/d/1DQQdb6MHBkwcL0goLe81TPDNZHpFCUh6esFNU9Nufco/edit#slide=id.g525cc88914_0_453

46
Q

Draw a positive production externality on a diagram

A

https://docs.google.com/presentation/d/1DQQdb6MHBkwcL0goLe81TPDNZHpFCUh6esFNU9Nufco/edit#slide=id.g525cc88914_0_453

47
Q

Draw a negative consumption externality on a diagram

A

https://docs.google.com/presentation/d/1DQQdb6MHBkwcL0goLe81TPDNZHpFCUh6esFNU9Nufco/edit#slide=id.g525cc88914_0_453

48
Q

Draw a positive consumption externality on a diagram

A

https://docs.google.com/presentation/d/1DQQdb6MHBkwcL0goLe81TPDNZHpFCUh6esFNU9Nufco/edit#slide=id.g525cc88914_0_453

49
Q

What is a merit good?

A

is one that is deemed to be beneficial for society but is under-provided by the market.

50
Q

What leads to market failure for merit goods?

A

under-consumption

51
Q

When will a merit good operate?

A

where social benefit is greater than private benefit

52
Q

Why is the government likely to intervene with merit goods?

A

here is a positive externality from providing the good

53
Q

Draw a merit good diagram

A

https://docs.google.com/presentation/d/1_ayzF_BZtKS-6Ju2NJPlj-upzeJ5zQu-6iYE38mX16Q/edit#slide=id.g525d76c1aa_0_244

54
Q

Draw a demerit good diagram

A

https://docs.google.com/presentation/d/1_ayzF_BZtKS-6Ju2NJPlj-upzeJ5zQu-6iYE38mX16Q/edit#slide=id.g525d76c1aa_0_244

55
Q

When will a demerit good operate?

A

where private benefit is greater than social benefit

56
Q

What do merit goods produce?

A

positive externalities

57
Q

What do demerit goods produce?

A

negative externalities which are deemed bad for society e.g cigarettes

58
Q

What leads to market failure for demerit goods?

A

over-consumption

59
Q

Why is the government likely to intervene with demerit goods?

A

in the market in order to reduce or eliminate the supply of this type of good or service

60
Q

What is perfect knowledge and information?

A

theoretical concept which occurs when all consumers in a market are fully aware of price, quantity available and all other relevant information for all products when making buying decisions.

61
Q

What is information asymmetry ?

A

occurs when some parties in a transaction have more information regarding the product than others.

62
Q

What is information failure?

A

is a type of market failure where consumers or producers:

  • do not have perfect knowledge
  • have asymmetric knowledge
  • do not have symmetric information
  • have asymmetric information
63
Q

What does provision of information ensure?

A

that economic units can maximise decisions when consuming and producing goods and services

64
Q

What is symmetric information?

A

is when all the relevant information is known by both parties

65
Q

What is information asymmetric?

A

occurs when some parties in a transaction have more information regarding the product than others

66
Q

When does factor mobility occur?

A

because it is difficult for factors of production to be put to alternative uses

67
Q

What can immobility of factors cause?

A

misallocation of resources and then market failure

68
Q

What can labour immobility occur as a result of?

A
  • geographical immobility

- occupational immobility

69
Q

What is geographical immobility?

A

where workers in an economy find it difficult to move from one region to another

70
Q

When might geographical immobility occur?

A

The cost of moving e.g housing
Imperfect information e.g. not being aware of jobs
Not wanting to move away from family and friends

71
Q

What is occupational immobility?

A

workers are not equipped for different types of work e.g. a coal miner cannot easily transfer to become an accountant

72
Q

What can capital immobility occur as a result of?

A
  • rapid technological change

- structural change in the economy

73
Q

What can land immobility occur as a result of?

A
  • inability to change the use of land due to:
    + climate conditions where it is not possible to produce
    certain crops
    + EU subsidises the growing of certain foodstuff so
    farmers and fishermen continue to produce these
74
Q

What is inequitable distribution of income and wealth?

A

the way in which income and wealth are distributed in society is considered unfair.

75
Q

How is income measured?

A

by the flow of earnings of individuals or households

76
Q

How is wealth measured?

A

by the stock of financial assets

77
Q

what are the factors which influence the distribution of income and wealth?

A 
government 
wealth
human capital
wage differentials
age
low wages and unwaged
inheritance
income
marriage
78
Q

How does the government influence the distribution of income and wealth?

A
  • government policy redistributes income from richer to poorer members of society
  • progressive tax will increase the proportion of tax as workers earn more, a regressive tax the opposite
  • UK has a welfare system
79
Q

What are the consequences of inequality?

A
  • increased poverty as more people live below the poverty line
  • if people don’t feel a part of society problems are likely to occur leading to:
    increased crime
    less safe environment for all
    social tension
  • reduced happiness
  • income redistributed back to higher earners with increased saving and wealth
80
Q

What is price control?

A

is when the government set maximum or minimum prices for a good or service

81
Q

Why do governments intervene in markets?

A
  • correct any market failure
  • achieve a fairer (more equitable) distribution of income and wealth
  • achieve the government’s macroeconomic objectives for the economy
82
Q

What are the reasons government intervene in order to reduce market failure?

A

Reduce or eliminate negative externalities
Increase or maximise positive externalities
Increase the supply of merit goods
Reduce the supply of demerit goods
Supply public goods that would be undersupplied by the market

83
Q

What are the reasons government intervene in order to reduce inequalities in the distribution of income and wealth:?

A

Unequal distribution can lead to poverty
Tensions in society can be created
A breakdown in society can cause further market failure

84
Q

What are the reasons governments intervene in order to support UK industry?

A

Full employment is a government target
Certain industries are more important than others as they employ large amounts of labour
Infrastructure is essential if business are to provide quality services

85
Q

How does governments influence the allocation of resources?

A

Taxation and subsidies

Public expenditure

86
Q

What is public expenditure?

A

government spending to pay for the needs of society

87
Q

What is taxation and subsidies?

A

making it more expensive for products that cause high negative externalities and cheaper for those that cause positive externalities

88
Q

When does government failure occur?

A

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

89
Q

What are the reasons for government failure occur?

A 
Inadequate information
Unintended consequences
Market distortions
Administrative costs
Regulatory capture
90
Q

What does conflicting objectives mean?

A

that those people who have been appointed to represent the public interest might exploit their positions to represent their own interests

91
Q

What are administrative costs?

A

are the expenditures that the government spends on intervening in markets

Economics (9 decks)

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