Factors Affecting/Pros & Cons

Question 1

Factors affecting Demand

Answer 1

Price of the good itself, Income, Prices of related goods (substitutes and complements), Tastes and preferences, Expectations of future prices, Size and structure of the population, Advertising and marketing, Government policies (e.g., taxes, subsidies)

Question 2

Factors affecting Supply

Answer 2

Price of the good itself, Cost of production (land, labour, capital, enterprise), Technology, Government policies (e.g., taxes, subsidies, regulations), Prices of related goods (goods in joint supply or competitive supply), Expectations of future prices, Number of sellers in the market, External shocks (e.g., natural disasters)

Question 3

Factors affecting Market Equilibrium

Answer 3

Changes in demand (as listed above), Changes in supply (as listed above), Interaction and relative magnitudes of shifts in demand and supply curves.

Question 4

Factors affecting Price Elasticity of Demand (PED)

Answer 4

Availability of substitutes, Necessity of the good, Proportion of income spent on the good, Time period, Habit-forming nature of the good, Breadth of the market definition

Question 5

Factors affecting Price Elasticity of Supply (PES)

Answer 5

Time period, Spare capacity, Ease of storage, Mobility of factors of production, Complexity of production

Question 6

Pros of the Price Mechanism

Answer 6

Efficiency in resource allocation (signals, incentives, rationing), Consumer sovereignty, Flexibility and responsiveness to changes in supply and demand, Lack of need for extensive government intervention (in theory)

Question 7

Cons of the Price Mechanism

Answer 7

Market failures (externalities, public goods, information gaps), Inequality in income and wealth distribution, Potential for monopolies and anti-competitive behaviour, Instability (price volatility, booms and busts), Under-provision of merit goods and over-provision of demerit goods

Question 8

Free Market Economy Pros

Answer 8

Efficiency, innovation, choice

Question 9

Free Market Economy Cons

Answer 9

Market failures and inequality being unchecked

Question 10

Mixed Economy Pros

Answer 10

Combines benefits of free market with some government intervention for social welfare and stability

Question 11

Mixed Economy Cons

Answer 11

Risk of government failure, finding the right balance is difficult

Question 12

Command Economy Pros

Answer 12

Potential for rapid resource allocation towards specific goals, greater equality in theory

Question 13

Command Economy Cons

Answer 13

Inefficiency, lack of consumer sovereignty, lack of innovation

Question 14

Factors affecting the Extent of Externalities

Answer 14

Nature of the production or consumption activity, Magnitude of the external cost or benefit per unit, Number of people affected, Ability to quantify and value the externality

Question 15

Factors affecting the Seriousness of Market Failure

Answer 15

Magnitude of the externality (private vs. social cost/benefit divergence), Number of people affected by the externality, Long-term consequences of the market failure, Availability and effectiveness of potential solutions

Question 16

Pros of Government Intervention to Correct Externalities

Answer 16

Can lead to a more socially efficient allocation of resources, Reduces the negative impacts of demerit goods and encourages merit goods, Generates revenue (e.g., from taxes, permits), Can improve overall welfare

Question 17

Cons of Government Intervention to Correct Externalities

Answer 17

Government failure (imperfect information, regulatory capture, unintended consequences), Difficulty in accurately valuing externalities, Potential for market distortions, High administrative and enforcement costs, Political opposition and lobbying

Question 18

Factors affecting the Provision of Public Goods

Answer 18

Non-excludability, Non-rivalry, Free-rider problem, Difficulty in determining optimal quantity

Question 19

Pros of Government Provision of Public Goods

Answer 19

Ensures provision of essential goods and services, Can achieve socially optimal levels of provision, Potential for economies of scale

Question 20

Cons of Government Provision of Public Goods

Answer 20

Inefficiency due to lack of profit motive, Potential for over or under-provision, Difficulty in responding to consumer preferences, Opportunity cost of government spending

Question 21

Pros and Cons of Pure Public Goods

Answer 21

Stronger case for government provision due to strict non-excludability and non-rivalry (e.g., national defense, lighthouse)

Question 22

Pros and Cons of Quasi-Public Goods

Answer 22

Potential for market provision or mixed models due to some degree of excludability or rivalry (e.g., toll roads, crowded beaches)

Question 23

Factors affecting Information Gaps (Asymmetric Information)

Answer 23

Complexity of the product or service, Frequency of purchase, Trust and reputation of sellers, Expertise of buyers and sellers

Question 24

Pros of Government Intervention to Address Information Gaps

Answer 24

Empowers consumers to make more informed decisions, Reduces exploitation and unfair trading practices, Can improve market efficiency

Question 25

Cons of Government Intervention to Address Information Gaps

Answer 25

Cost of providing information, Information overload, Consumers may not act on the information, Potential for government bias or inaccuracy

Question 26

What factors affect the success or failure of government intervention?

Answer 26

Quality of information available to the government, political influences and lobbying, administrative efficiency and costs, unintended consequences, market responsiveness to the intervention, time lags, and regulatory capture.

Question 27

What should be analyzed regarding the pros and cons of specific regulations?

Answer 27

They should be analyzed based on their specific aims and impacts.

Question 28

What factors affect the effectiveness of nudges?

Answer 28

Context and framing of the nudge, individual biases and susceptibility to nudges, transparency and ethical considerations, and magnitude of the desired behavioural change.

Question 29

What factors affect the degree of competition in a market?

Answer 29

Number and size of firms, barriers to entry and exit, nature of the product (homogenous or differentiated), availability of information, and pricing power of firms.

Question 30

What factors affect barriers to entry and exit?

Answer 30

Sunk costs, legal restrictions (patents, licenses), economies of scale, brand loyalty, predatory pricing, and vertical integration.

Question 31

What factors affect the pricing and output decisions of firms in different market structures?

Answer 31

Cost structures (fixed vs. variable costs, economies of scale), demand elasticity, behaviour of rivals (in oligopoly), profit maximization goals, and regulatory constraints.