Market failure

Question 1

How can government achieve the potential welfare gain bcs of consumption externalities?

Answer 1

subsidies, improving information, legislation

Question 2

How can government achieve the potential welfare gain bcs of production externalities?

Answer 2

subsidies, direct provision

Question 3

What are demerit goods?

Answer 3

goods that are harmful to CONSUMERS (petrol creates a negative externality but doesn’t harm the consumer)

Question 4

How can government reduce overconsumption of demerit goods?

Answer 4

indirect taxes, legislation, education

Question 5

Average costs

Answer 5

the total cost divided by the quantity produced.

Question 6

Average tax rate

Answer 6

the proportion of a person’s income that is paid in tax, usually expressed as a percentage.

Question 7

Behavioural economics

Answer 7

branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors. It challenges the assumption that actors will always make rational choices with the aim of maximising utility.

Question 8

Bounded rationality

Answer 8

suggests that most consumers and businesses do not have enough information to make fully-informed choices and so opt to satisfice, rather than maximise their utility.

Question 9

Carbon (emissions) taxes

Answer 9

Taxes levied on the carbon contents of fuel.

Question 10

Centrally planned economy

Answer 10

an economic system where resources are allocated by the government or a central planning authority

Question 11

Ceteris paribus

Answer 11

Latin expression meaning “other things being equal”.

Question 12

Choice architecture

Answer 12

suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available.

Question 13

Consumer surplus

Answer 13

additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.

Question 14

Consumer nudges

Answer 14

Positive reinforcement and indirect suggestions used to influence the behaviour and decision making of consumers.

Question 15

Cross elasticity of demand

Answer 15

responsiveness of the demand for one good to a change in the price of another good.

Question 16

Demand

Answer 16

quantity of goods and services that consumers are willing, and able to buy at each possible price (over a given period of time).

Question 17

Efficiency

Answer 17

quantifiable concept, determined by the ratio of useful output to total input.

Question 18

Equilibrium price

Answer 18

market-clearing price, set where Demand equals Supply.

Question 19

Factors of production

Answer 19

four types of resources used in the production process: land, labor, capital (and possibly entrepreneurship / management / enterprise).

Question 20

GDP or national output

Answer 20

total value of all final goods and services produced in an economy in a given time period (usually one year).

Question 21

Income elasticity of demand

Answer 21

measure of the responsiveness of demand of a good or service to a change in income.

Question 22

Inferior goods

Answer 22

goods where the demand for it decreases as income increases and more superior goods are purchased.

Question 23

Law of demand

Answer 23

As the price of a good falls, the quantity demanded will normally increase.

Question 24

Law of supply

Answer 24

As the price of a good rises, the quantity supplied will normally rise.

Question 25

Leakages

Answer 25

savings, taxes and import expenditure that remove spending from the circular flow of income.

Question 26

Marginal costs

Answer 26

the additional costs of producing one more unit of output.

Question 27

Marginal utility

Answer 27

The extra utility derived from consuming one more unit of a good or service.

Question 28

Market equilibrium

Answer 28

The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.

Question 29

Monopolistic competition

Answer 29

market when there are many buyers and sellers, producing differentiated products, with no barriers to entry

Question 30

Opportunity cost

Answer 30

the cost of an economic decision in terms of the next best alternative foregone.

Question 31

Perfectly elastic demand

Answer 31

This is where an increase in the price of a good or service leads to a fall in the quantity demanded of the good or service to zero. (PED would be infinity.)

Question 32

Perfectly elastic supply

Answer 32

This is where a fall in the price of a good or service leads to a fall in the quantity supplied of the good or service to zero. (PES would be infinity.)

Question 33

Perfectly inelastic demand

Answer 33

where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED would be equal to zero.)

Question 34

Perfectly inelastic supply

Answer 34

where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES would be equal to zero.)

Question 35

Planned economy

Answer 35

An economy where the means of production are collectively owned (except labour). The state determines what/how much to produce, how to produce, and for whom to produce.

Question 36

Price ceiling (maximum price)

Answer 36

price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Question 37

Price controls

Answer 37

Prices imposed by an authority, set above or below the equilibrium market price.

Question 38

Price elasticity of supply (PES)

Answer 38

measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.

Question 39

Price floor

Answer 39

price (set by the government) above the equilibrium price, below which the price may not fall.

Question 40

Price mechanism

Answer 40

system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.

Question 41

Quantity demanded

Answer 41

willingness and ability to purchase a quantity of a good or service at a certain price over a given time period.

Question 42

Quantity supplied

Answer 42

willingness and ability to produce a quantity of a good or service at a given price over a given time period.

Question 43

Subsidy

Answer 43

a payment made by the government to producers in order to reduce the costs of production, increase output, protect producers from foreign imports, or reduce the price.

Question 44

Utility

Answer 44

measure of the satisfaction derived from purchasing a good or service

Question 45

Allocative efficiency

Answer 45

Exists where price is equal to marginal cost (or marginal social cost) and resources are allocated in such a way that neither too much nor too little is produced from society’s point of view

Question 46

MSC

Answer 46

Marginal social cost (MSC) The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Question 47

MSB

Answer 47

The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit

Question 48

Positive externalities

Answer 48

The beneficial effects that are enjoyed by a third party when a good or service is consumed/produced.

Question 49

Negative externalities

Answer 49

They are the negative effects that are suffered by a third party when a good or service is produced/consumed

Question 50

Merit goods

Answer 50

goods or services with strong positive externalities that would be under-provided by the market and so under-consumed

Question 51

Demerit goods

Answer 51

goods or services with strong negative externalities that are considered over-consumed