MICRO Flashcards
(169 cards)
1
Q
WHAT ARE POSITIVE STATEMENTS?
A
POSITIVE STATEMENTS ARE OBJECTIVE AND CAN BE TESTED IN EXPERIMENTS.
2
Q
WHAT ARE NORMATIVE STATEMENTS?
A
NORMATIVE STATEMENTS ARE SUBJECTIVE AND CANNOT BE PROVEN OR DISPROVEN.
ETHICAL VALUE BASED JUDGEMENTS.
3
Q
WHAT IS AN OPPORTUNITY COST?
A
THE COST OF GIVING UP THE NEXT BEST ALTERNATIVE BY MAKING A CHOICE.
4
Q
WHAT IS THE ECONOMIC PROBLEM AND HOW CAN IT BE SOLVED?
A
THE QUESTION OF HOW SCARCE RESOURCES CAN BE ALLOCATED TO SATISFY UNLIMITED WANTS.
CAN BE SOLVED BY QUEUING AND THE ABILITY TO PAY
5
Q
WHAT IS THE PRODUCTION POSSIBILITY FRONTIER?
A
REPRESENTS THE MAXIMUM CONBINATIONS OF GOODS AND SERVICES THAT CAN BE PRODUCED IN A GIVEN PERIOD OF TIME WITH AVAILABLE RESOURCES.
REPRESENTS MAXIMUM PRODUCTIVE POTENTIAL OF AN ECONOMY.
6
Q
WHAT ARE THE FACTORS OF PRODUCTION?
A
CAPITAL
ENTERPRISE
LAND
LABOUR
7
Q
WHAT ARE REASONS FOR THE OUTWARD SHIFT OF PPF?
A
IMMIGRATION
EDUCATION AND TRAINING
HIGHER RETIREMENT AGE
INCREASED PARTICIPATION RATE
BUSINESS START UP GRANTS
IMPROVED HEALTHCARE
RECOVERED LAND
INCREASED COMPETITION
8
Q
WHAT ARE REASONS FOR THE INWARD SHIFT OF PPF?
A
NATURAL DISASTERS
WARS
DECLINING BIRTH RATE
RISING SEA LEVELS
DE - SKILLING
EMIGRATION
INCREASED REGULATION
9
Q
WHAT IS A FREE GOOD?
A
RESOURCES WITH NO OPPORTUNITY COST
10
Q
WHAT IS AN EXAMPLE OF A FREE GOOD?
A
BREATHING AIR
11
Q
WHAT IS A RENEWABLE RESOURCE?
A
RESOURCES WITH STOCK LEVEL THAT IS NATURALLY REPLENISHED E.G WOOD
12
Q
WHAT IS A NON RENEWABLE RESOURCE?
A
RESOURCES WITH STOCK LEVEL THAT DECREASES OVER TIME AS IT IS CONSUMED E.G FOSSIL FUELS.
13
Q
WHY IS PPF CURVED?
A
NOT ALL FACTORS OF PRODUCTION ARE EQUALLY SUITED TO PRODUCTION OF DIFFERENT GOOD.
CAUSES A CHANGING OPPORTUNITY COST.
14
Q
WHAT DOES CETERIS PARIBUS MEAN?
A
ALL OTHER THINGS BEING EQUAL.
15
Q
WHAT IS CAPITAL?
A
GOODS USED TO PRODUCE CONSUMER GOODS.
16
Q
WHAT IS ENTERPRISE?
A
PEOPLE THAT INVEST, INNOVATE AND ORGANISE OTHER FACTORS OF PRODUCTION.
17
Q
WHAT IS LAND?
A
NATURAL RESOURCES.
18
Q
WHAT IS LABOUR?
A
HUMAN INPUT INTO PRODUCTION PROCESS.
19
Q
WHAT ARE ECONOMIC GOODS?
A
RESOURCES THAT ARE SCARCE.
20
Q
WHAT ARE THE FUNCTIONS OF MONEY?
A
MEDIUM OF EXCHANGE
STORE OF VALUE
MEASURE OF VALUE ( UNIT OF ACCOUNT)
MEANS OF DEFERRED PAYMENTS
21
Q
WHAT IS MEDIUM OF EXCHANGE?
A
CAN EXCHANGE RATHER THAN SWAP PRODUCTS
22
Q
WHAT IS UNIT OF ACCOUNT?
A
WAY OF COMPARING VALUES
23
Q
WHAT IS STORE OF VALUE?
A
MONEY CAN BE SAVED AND USED LATER
24
Q
WHAT DOES MEANS OF DEFERRED PAYMENTS?
A
POSSIBLE TO PAY LATER FOR PRODUCTS E.G LOANS
25
WHAT IS DEMAND?
DEMAND IS THE QUANTITY OF A GOOD OR SERVICE THAT A CONSUMER IS WILLING AND ABLE TO BUY AT ANY GIVEN PRICE OVER A PERIOD OF TIME.
26
WHY DOES THE DEMAND CURVE SLOPE DOWNWARDS?
INCOME EFFECT
SUBSTITUTION EFFECT
DIMINISHING MARGINAL UTILITY
27
WHAT IS THE SUBSTITUTION EFFECT?
IF PRICE OF A GOOD INCREASES, CONSUMERS ARE MORE LIKELY TO BUY CHEAPER ALTERNATIVES.
28
WHAT IS THE INCOME EFFECT?
IF THE PRICE OF A GOOD INCREASES, CONSUMERS WON'T BE ABLE TO AFFORD IT AND HENCE CONSUMERS WON'T PAY AS MUCH.
29
WHAT IS DIMINISHING MARGINAL UTILITY?
AS YOU CONSUME MORE OF A PRODUCT, AMOUNT OF SATISFATION PRODUCED BY EACH ADDITIONAL UNIT OF THAT GOOD DECLINES.
30
WHAT ARE EXCEPTIONS TO EXPLANATIONS AS TO WHY DEMAND CURVES ARE DOWNWARD SLOPING? (extra)
VEBLEN GOODS
GIFFEN GOODS
ASYMETRIC INFORMATION
PANIC BUYING
SPECULATION
31
WHAT IS CONSUMER SURPLUS?
DIFFERENCE BETWEEN HOW MUCH BUYERS ARE PREPARED TO PAY FOR A GOOD AND WHAT THEY ACTUALLY PAY.
32
WHAT CAUSES A SHIFT IN DEMAND?
POPULATION
ADVERTISEMENT
SUBSTITUTES
INCOME
FASHION AND TRENDS
INTEREST RATES
COMPLEMENTS
33
WHAT IS SUPPLY?
SUPPLY IS THE QUANTITY OF SELLERS WHO ARE WILLING AND ABLE TO SELL AT ANY GIVEN PRICE OVER A PERIOD OF TIME.
34
WHAT CAUSES A SHIFT OF SUPPLY?
POLICIES AND REGULATIONS
INDIRECT TAXES
NUMBER OF FIRMS
TECHNOLOGY
SUBSIDIES
WEATHER
COST OF PRODUCTION
35
WHAT IS PRODUCER SURPLUS?
THE DIFFERENCE BETWEEN THE MARKET PRICE WHICH FIRMS RECEIVE AND THE PRICE AT WHICH THEY ARE PREPARED TO SUPPLY.
36
WHAT IS THE PRICE MECHANISM?
SHOWS HOW PRICE IS SET THROUGH THE INTERACTION OF DEMAND AND SUPPLY.
37
WHAT IS THE INCENTIVE EFFECT?
CHANGES IN PRICE WILL INCENTIVISE EXISTING PRODUCERS TO ACT DIFFERENTLY
38
WHAT IS AN EXAMPLE OF THE INCENTIVE EFFECT?
HIGHER OIL PRICES ENCOURAGE EXISTING PRODUCERS TO INCREASE OUTPUT.
39
WHAT IS THE RATIONING EFFECT?
WHEN THERE IS INSUFFICIENT SUPPLY TO MEET DEMAND, A CHANGE IN THE PRICE WILL RATION THE RESOURCE BY CONSUMERS WILLINGNESS TO PAY
40
WHAT IS AN EXAMPLE OF THE RATIONING EFFECT?
IF RARE FOOTBALL STICKERS ARE AUCTIONED ONLINE, THE PRICE MIGHT RISE TO THE POINT WHERE ONLY A FEW PEOPLE CAN AFFORD THEM.
41
WHAT IS THE SIGNALLING EFFECT?
CHANGES IN PRICE INFORM ECONOMIC AGENTS WHERE RESOURCES ARE NEEDED AND ENCOURAGE ENTRY OR EXIT INTO THE MARKET.
42
WHAT IS AN EXAMPLE OF THE SIGNALLING EFFECT?
IF PRICES ARE HIGH IN THE MARKET FOR SHIRTS THEN NEW PRODUCERS WILL ENTER THE MARKET TO ATTEMPT TO BENEFIT FROM THESE HIGHER PRICES.
43
WHAT IS PED?
MEASURES THE RESPONSIVENESS OF DEMAND TO A CHANGE IN PRICE.
44
WHAT IS PED AND ITS DETERMINANTS?
1. NECESSITY
2. ADDICTIVENESS
3. SUBSTITUTES
4. TIME
5. INCOME
6. QUALITY
7. BRAND LOYALTY
45
WHAT ARE THE DETERMINANTS OF PES?
1. BARRIERS TO ENTRY
2. FACTOR MOBILITY
3. RAW MATERIALS
4. INVENTORY
5. TIME
5. SPARE CAPACITY.
46
WHAT IS ELASTIC DEMAND?
DEMAND IS RESPONSIVE TO A CHANGE IN PRICE. ANY CHANGE IN PRICE LEADS TO A GREATER PERCENTAGE DECREASE IN QUANTITY DEMANDED.
47
WHAT IS INELASTIC DEMAND?
DEMAND IS NOT VERY RESPONSIVE TO A CHANGE IN PRICE. ANY CHANGE IN PRICE LEADS TO A SMALLER PERCENTAGE CHANGE IN QUANTITY DEMANDED.
48
WHAT IS UNITARY ELASTICITY?
PERCENTAGE CHANGE IN QUANTITY DEMANDED EQUALS PERCENTAGE CHANGE IN PRICE.
49
WHAT FIGURES REPRESENTS UNITARY ELASTICITY?
PED OF 1 FOR PES
PED OF -1 FOR PED
50
HOW DO YOU WORK OUT REVENUE?
PRICE x QUANTITY
51
WHAT DOES PERFECTLY ELASTIC DEMAND MEAN?
PED IS INFINITELY NEGATIVE. PURCHASERS WON'T BUY ANY PRODUCT ABOVE A CERTAIN PRICE.
52
WHAT DOES PERFECTLY INELASTIC DEMAND MEAN?
PED IS 0 AS THE SAME AMOUNT IS DEMANDED WHATEVER THE PRICE.
53
WHAT IS PES?
RESPONSIVENESS OF SUPPLY TO A CHANGE IN PRICE.
54
WHAT IS INCOME ELASTICITY OF DEMAND?
RESPONSIVENESS OF DEMAND TO A CHANGE IN INCOME.
55
WHAT IS THE YED OF NORMAL GOODS THAT ARE NECESSITIES?
POSITIVE BUT CLOSE TO 0
56
WHAT IS THE YED OF NORMAL GOODS THAT ARE LUXURIES?
POSITIVE HIGHER NUMERICAL VALUES.
57
WHAT WOULD BE THE YED OF INFERIOR GOODS?
NEGATIVE
58
WHAT IS CROSS ELASTICITY OF DEMAND?
MEASURES RESPONSIVENESS OF DEMAND FOR 1 PRODUCT TO A CHANGE IN PRICE OF ANOTHER PRODUCT.
59
WHAT IS THE XED FOR SUBSTITUTES?
POSITIVE
60
WHAT IS THE XED FOR COMPLEMENTS/ GOODS IM JOINT OR DERIVED DEMAND?
NEGATIVE
61
WHAT IS THE XED FOR UNRELATED PRODUCTS?
62
WHAT ARE EXAMPLES OF GOODS WITH INELASTIC PED?
1. CIGARETTES
2. WATER
3. APPLE PRODUCTS
63
WHAT ARE EXAMPLES OF GOODS WITH ELASTIC PED?
1. SOFT DRINKS
64
WHAT ARE EXAMPLES OF GOODS WITH INELASTIC PES?
1. STRAWBERRIES ( LOW INVENTORY)
2. DOCTORS ( HIGH BARRIERS TO ENTRY)
3. ELECTRIC CARS ( LACK OF RAW MATERIALS)
65
WHAT ARE EXAMPLES OF GOODD WITH ELASTIC PES?
1. WAITERS (HIGH FACTOR MOBILITY)
2. ELECTRICITY ( SPARE CAPACITY)
3. DIGITAL DOWNLOADS E.G SONGS ( PERFECTLY ELASTIC)
66
WHAT IS A DIRECT TAX?
TAX ON AN INDIVIDUAL/ ORGANISATION AND AFFECTS DEMAND.
67
WHAT IS AN INDIRECT TAX?
TAX ON EXPENDITURE ON GOODS AND SERVICES AND AFFECTS SUPPLY AS FIRMS HAVE TO PASS ON THE TAX TO THE GOVT.
68
WHAT ARE THE 2 TYPES OF INDIRECT TAXATION?
1. SPECIFIC TAX
2. AD VALOREM
69
WHAT IS A SPECIFIC TAX?
AMOUNT CHARGED IS FIXED PER UNIT E.G EXCISE DUTIES OF £5 PER PACKET ON CIGARS.
70
WHAT IS AN AD VALOREM?
AMOUNT CHARGED IS A % OF THE PRICE E.G VAT AT 20% OF THE FINAL PRICE.
71
WHAT IS A TAX INCIDENCE?
REFERS TO WHO PAYS FOR A TAX.
72
WHAT IS THE INCIDENCE OF A DIRECT TAX?
DIRECT TAXES CAN'T BE PASSED SO INCIDENCE IS PAID BY THE INDIVIDUAL/ ORGANISATION.
73
WHEN DO PRODUCERS PASS ON MOST OF A TAX TO CONSUMERS?
WHEN DEMAND IS INELASTIC.
74
WHAT IS DEADWEIGHT LOSS?
PORTION OF THE LOST CONSUMER AND PRODUCER SURPLUS WHICH DOES NOT TRANSFER TO THE GOVT. CALLED THE DEADWEIGHT LOSS AS RESOURCES ARE NOT BEING ALLOCATED EFFICIENTLY.
75
WHAT IS A SUBSIDY?
A GRANT USUALLY PROVIDED BY THE GOVT TO ENCOURAGE SUPPLIERS TO INCREASE PRODUCTION OF A GOOD/ SERVICE.
76
WHY DOES THE GOVT GIVE SUBSIDIES?
1. TO INCREASE OUTPUT OF POSITIVE EXTERNALITIES E.G VACCINES.
2. TO REDUCE INEQUALITY AND MAKE PRODUCTS CHEAPER E.G FREE BUS PASSES.
77
WHY ARE SPECIFIC TAXES IMPOSED?
1. REDUCE CONSUMPTION OF NEGATIVE EXTERNALITIES
2. RAISE REVENUE
78
HOW DO TAXES AFFECT CONSUMER AND PRODUCER SURPLUS?
1. DECREASE IN BOTH AS CONSUMERS PAY MORE AND PRODUCERS RECEIVE LESS.
79
WHAT IS MARKET FAIILURE?
WHEN MARKET FORCES FAIL TO ACHIEVE AN ECONOMICALLY EFFICIENT EQUILIBRIUM.
80
WHAT ARE THE DIFFERENT TYPES OF MARKET FAILURE?
1. IRRATIONAL BEHAVIOUR
2. PUBLIC GOODS
3. EXTERNALITIES
4. IMPERFECT INFO
5. INEQUALITY
6. FACTOR IMMOBILITY
7. MARKET POWER
81
WHAT IS IRRATIONAL BEHAVIOUR?
CONSUMERS DON'T ALWAYS ACT IN THEIR BEST INTERESTS TO MAXIMISE UTILITY.
82
WHAT IS THE PUBLIC GOODS EXPLANATION?
THE PRICE MECHANISM FAILS TO PROVIDE SOME GOODS AND SERVICES E.G STREET LIGHTING
83
WHAT IS THE EXPLANATION FOR IMPERFECT INFORMATION?
THERE MAY NOT BE ENOUGH INFO TO MAKE A RATIONAL DECISION.
84
WHAT IS THE EXPLANATION FOR MARKET POWER?
IF ONE FIRM HAS TOO MUCH MARKET POWER, IT CAN USE THIS TO EXPLOIT CONSUMERS AND RAISE PRICES.
85
WHAT ARE WAYS THAT THE GOVT CAN INTERVENE WITH MARKET FAILURE?
1. PROVISION OF INFO
2. REGULATION
3. STATE PROVISION
4. TRADEABLE PERMITS
5. MAX PRICES
6. MIN PRICES
7. SUBSIDIES
8. INDIRECT TAXATION
9. NUDGES
86
WHY MAY ECONOMIC AGENTS HAVE IMPERFECT KNOWLEDGE?
1. ASYMMETRIC INFO
2. ADVERSE SELECTION
3. MORAL HAZARD
87
WHAT IS ASYMMETRIC INFO?
A SITUATION WHERE 1 ECONOMIC AGENT HAS MORE INFO THAN ANOTHER.
88
WHAT IS THE EXPLANATION FOR ASYMMETRIC INFO?
THIS CAN OFTEN LEAD TO CONSUMERS BEING OVERCHARGED OR SOLD A GOOD OF INFERIOR QUALITY AS THEY DON'T KNOW HOW TO ASSESS THE VALUE OF A PRODUCT.
89
WHAT R EXAMPLES OF ASYMMETRIC INFO?
1. BUYING A HOUSE
2. LOANS
3. MOTs
90
WHAT IS THE EXPLANATION FOR ADVERSE SELECTION?
OCCURS WHEN PARTICIPATION IN THE MARKET IS AFFECTED BY ASYMMETRIC INFO E.G HEALTH INSURES DON'T KNOW IF U R A SMOKER OR NON SMOKER SO OFFER THE AVERAGE PRICE. NON SMOKERS FEEL THAT IT'S TOO EXPENSIVE AND LEAVE THE MARKET PUSHING UP THE PRICE AS ONLY HIGH RISK SMOKERS REMAIN
91
WHAT R EXAMPLES OF ADVERSE SELECTION?
HEALTH INSURANCE
2ND HAND CARS
ALL U CAN EAT BUFFETS
92
WHAT IS THE EXPLANATION FOR MORAL HAZARD?
OCCURS WHEN PEOPLE R LIKELY TO BEHAVE MORE RECKLESSLY BECAUSE THEY HAVE INSURANCE E.G U MAY BE LESS PROTECTIVE OF UR MOBILE PHONE IF IT'S INSURED.
93
WHAT R EXAMPLES OF MORAL HAZARD?
BENEFITS
BANK BAILOUTS
GREEK EUROZONE DEBT
CRASH FOR CASH
94
WHAT R EXAMLLES OF STATE PROVISION OF INFO?
ANTI SMOKING ADS
FOOD LABELLING
95
WHAT IS THE EXPLANATION OF STATE PROVISION OF INFO?
INFO GAPS CAUSE MARKET FAILURE. GOVTS CAN INTERVENE BY THE PROVISION OF INFO THROUGH SOCIAL MEDIA, SUCH AS THE INTERNET. ALTERNATIVELY, THEY CAN FORCE COMPANIES TO PUBLISH DATA.
96
WHAT R THE ADVANTAGES OF STATE PROVISION OF INFO?
1. ENSURES PRODUCERS AND CONSUMERS R WELL INFORMED WHICH SHOULD LEAD TO LOWER CONSUMPTION OF HARMFUL PRODUCTS.
2. CONSUMERS RETAIN CHOICE (AVOIDS BLACK MARKET)
97
WHAT R THE DISADVANTAGES OF STATE PROVISION OF INFO?
1. CONSUMERS MAY NOT UNDERSTAND/ IGNORE THE INFO
2. CONSUMERS MAY BEHAVE IRRATIONALLY ( HABIT/PEER PRESSURE )
3. RISK OF REGULATORY CAPTURE
4. OPPORTUNITY COST
98
WHAT IS REGULATORY CAPTURE?
WHEN THE GOVT ACTS IN INDUSTRY INTERESTS.
99
WHAT IS NUDGE THEORY?
NUDGE THEORY SUGGESTS THAT CONSUMER BEHAVIOUR CAN BE INFLUENCED BY SMALL SUGGESTIONS AND POSITIVE REINFORCEMENTS.
100
WHAT R THE DIFFERENT TYPES OF NUDGES?
1. STATUS QUO BIAS
2. CONFORMING
3. FEEDBACK
4. CHOICE ARCHITECTURE
5. FRAMING
6. NAMING CONVENTIONS
7. POSITIONING
101
WHAT R THE ADVANTAGES OF NUDGES?
USES HUMAN PSYCHOLOGY TO ENCOURAGE PEOPLE TO MAKE THE BEST CHOICE BUT CRUCIALLY CONSUMERS R STILL LEFT WITH THE FREEDOM TO MAKE A CHOICE.
102
WHAT R THE DISADVANTAGES OF NUDGES?
1. MAY NOT WORK IF DESIRES R TOO STRONG E.G SMOKING ADDICTION
2. MAY HE SEEN AS UNDERHAND/SNEAKY BY CONSUMERS
3. DOESN'T ENCOURAGE PEOPLE TO THINK FOR THEMSELVES
4. ONLY WORKS IF IT CHANGES THE CULTURE DUE TO HERDING BEHAVIOUR
103
WHAT IS A PRIVATE GOOD?
ECONOMIC GOODS THAT R EXCLUDABLE, RIVALROUS AND REJECTABLE.
104
WHAT DOES EXCLUDABE MEAN?
PEOPLE OTHER THAN WHO THE GOOD WAS PRODUCED FOR CANNOT BENEFIT FROM IT E.G BUYING A CAR STOPS OTHERS FROM DRIVING IT.
105
WHAT DOES RIVALROUS MEAN?
CONSUMPTION OF THE GOOD AFFEFTS ABILITY OTHERS' ABILITY TO CONSUME THE GOOD E.G 2 PEOPLE CANNOT WEAR THE SAME SHIRT AT THE SAME TIME.
106
WHAT DOES REJECTABLE MEAN?
YOU HAVE THE CHOICE WHETHER TO CONSUME IT E.G IT IS NOT COMPULSORY TO BUY A WIRELESS STEREO.
107
WHAT R EXAMPLES OF PRIVATE GOODS?
1. BANANAS
2. CARS
3. PHONE
4. SURGERIES
108
WHAT R PUBLIC GOODS?
GOODS THAT R NON-EXCLUDABLE, NON-RIVALROUS AND NON-REJECTABLE.
109
WHAT R EXAMPLES OF PURE PUBLIC GOODS?
1. STREET LIGHTING
2. NATIONAL DEFENSE
3. LIGHTHOUSES
4. FLOOD PROTECTION
110
WHAT R QUASI PUBLIC GOODS?
A GOOD WHICH FULFILS THESE CRITERIA UP TO A POINT
111
WHAT R EXAMPLES OF QUASI PUBLIC GOODS?
1. ROADS
2. PARKS
3. WIFI NETWORK
4. LECTURES
112
WILL ENOUGH PUBLIC GOODS BE PROVIDED BY THE FREE MARKET?
IN A PURE FREE MARKET, THERE'D BE UNDER PROVISION OF PUBLIC GOODS DUE TO EXISTENSE OF FREE RIDERS
BECAUSE PUBLIC GOODS R NON EXCLUDABLE, IT IS DIFFICULT TO CHARGE PEOPLE FOR BENEFITTING FROM A GOOD/SERVICE ONCE IT IS PROVIDED.
IF NOT ENOUGH PEOPLE R WILLING TO PAY THEM, THERE WON'T BE ENOUGH MONEY TO PRODUCE SUFFICIENT QUANTITIES OF THE GOOD AND IT WILL BE UNDER PRODUCED.
113
WHAT WILL THE GOVT DO BECAUSE OF THE FREE RIDER PROBLEM?
GOVT MUST PAY FOR PRODUCTION OF PUBLIC GOODS WITH TAX REVENUE
114
WHY IS IT DIFFICULT TO THE GOVT TO WORK OUT THE VALUE OF PUBLIC GOOD PROVISION?
VALUE OF A PRODUCT IS NORMALLY CALCULATED BY LOOKING AT WHAT CONSUMERS WOULD BE WILLING TO PAY BUT BECAUSE OF FREE RIDERS, IT IS DIFFICULT TO WORK OUT HOW MUCH PEOPLE WOULD BE WILLING TO PAY THEREFORE IT IS DIFFICULT TO WORK OUT HOW MANY PUBLIC GOODS TO PRODUCE BECAUSE VALUE CAN'T BE WORKED OUT.
115
WHAT IS A PRIVATE COST?
COSTS INTERNAL TO AN EXCHANGE AND PAID BY AN INDIVIDUAL ECONOMIC AGENT.
116
WHAT IS A NEGATIVE EXTERNALITY/ EXTERNAL COST?
COSTS FROM PRODUCTION/CONSUMPTION THAT HAVE A NEGATIVE EFFECT ON A 3RD PARTY NOT INVOLVED IN THE ECONOMIC DECISION.
117
WHAT IS A SOCIAL COST?
OVERALL COST TO SOCIETY OF AN ECONOMIC DECISION (PRIVATE +EXTERNAL COST)
118
WHAT IS A PRIVATE BENEFIT?
BENEFITS INTERNAL TO AN EXCHANGE AND R RECEIVED BY AN INDIVIDUAL ECONOMIC AGENT
119
WHAT IS A POSITIVE EXTERNALITY/EXTERNAL BENEFIT?
BENEFITS FROM PRODUCTION/CONSUMPTION THAT HAVE A POSITIVE EFFEFT ON A 3RD PARTY NOT INVOLVED IN THE ECONOMIC DECISION
120
WHAT IS A SOCIAL BENEFIT?
OVERALL BENEFIT TO SOCIETY OF AN ECONOMIC DECISION (PRIVATE+EXTERNAL BENEFIT)
121
WHAT ARE EXAMPLES OF EXTERNAL COSTS OF PRODUCTION?
POLLUTION
OVERFISHING
FLY TIPPING
DEFORESTATION
122
WHAT ARE EXAMPLES OF EXTERNAL COSTS OF CONSUMPTION?
NOISE POLLUTION
CONGESTION
PASSIVE SMOKING
LITTER
VANDALISM
123
WHAT ARE EXAMPLES OF EXTERNAL BENEFITS OF PRODUCTION?
JOBS
INNOVATION
BIODIVERSITY
124
WHAT ARE EXAMPLES OF THE EXTERNAL BENEFITS OF CONSUMPTION?
TRAINING AND EDUCATION
VACCINATIONS
RECYCLING
125
WHAT IS GOVERNMENT FAILURE?
WHEN GOVT INTERVENTION CAUSES A NET WELFARE LOSS LEADING TO ALLOCATION OF RESOURCES WORSE THAN THE FREE MARKET OUTCOME.
126
WHAT R REASONS FOR GOVT FAILURE?
1. DISTORTION OF PRICE SIGNALS
2. UNINTENDED CONSEQUENCES
3. EXCESSIVE ADMINISTRATION COSTS
4. INFORMATION GAPS
127
WHAT R THE EXAMPLES OF IRRATIONAL BEHAVIOUR?
1. CONSIDERATION OF OTHER PEOPLE'S BEHAVIOUR
2. HABITUAL BEHAVIOUR
3. CONSUMER WEAKNESS AT COMPUTATION
128
WHAT IS THE EXPLANATION FOR CONSIDERATION OF OTHER PEOPLE'S BEHAVIOUR?
HUMANS DON'T LIKE TO FEEL LEFT OUT AND FACE PEER PRESSURE TO CONFORM. THIS HERD LIKE MENTALITY CAN BE SEEN IN VARIOUS MARKETS E.G SMOKING WHERE AN INDIVIDUAL MAY DISLIKE SMOKING BUT STILL CONTINUE TO FIT INTO A SOCIAL GROUP.
129
WHAT IS THE EXPLANATION FOR HABITUAL BEHAVIOUR?
CONSUMERS FORM HABITS AND R NOT WILLING TO RISK SOMETHING NEW WHERE THERE IS MORE UNCERTAINTY E.G CHANGING BANKS. MAY NOT WISH TO DEAL WITH THE DIFFICULTIES OF CHANGING AND R HENCE MORE LIKELY TO STICK WITH THE STATUS QUO EVEN IF CHANGING IS EASY AND THE NEW PRODUCT IS OBJECTIVELY SUPERIOR.
130
WHAT IS THE EXPLANATION FOR CONSUMER WEAKNESS AT COMPUTATION?
CONSUMERS LACK MATHEMATICAL ABILITY TO CALCULATE BEST BUYS. ALSO UNREALISTIC ABOUT THEIR OWN FUTURE BEHAVIOUR E.G SIGNING UP FOR 1 YR GYM MEMBERSHIPS.
131
WHAT IS THE EXPLANATION FOR DISTORTION OF PRICE SIGNALS?
GOVT INTERVENTION CAN CAUSE THE MARKET TO MOVE AWAY FROM EQUILIBRIUM AND CREATE SHORTAGES.
132
WHAT IS THE EXPLANATION FOR UNINTENDED CONSEQUENCES?
GOVT INTERVENTION CAN CAUSE UNEXPECTED ADVERSE EFFECTS E.G INCREASING BENEFITS MAY INCREASE UNEMPLOYMENT.
133
WHAT IS THE EXPLANATION FOR INFORRMATION GAPS?
IMPERFECT INFO MAY CREATE A WELFARE LOSS AS THE GOVT MAY UNDER SUBSIDISE/TAX/REGULATE PRODUCTS.
134
WHAT IS THE EXPLANATION FOR EXCESSIVE ADMINISTRATION COSTS?
GOVT BUREACRACY CAN HAVE HUGE COSTS FOR TAXPAYERS.
135
WHAT IS THE INVISIBLE HAND?
CONCEPT INTRODUCED BY ADAM SMITH WHICH ARGUED THAN WHEN PEOPLE ACT IN THEIR OWN SELF INTERESTS, VIA THE OPERATION OF THE PRICE MECHANISM, OPTIMUM RESOURCE ALLOCATION IS ACHIEVED AND THEREFORE THE BEST OUTCOME FOR SOCIETY.
136
WHY IS SPECIALISATION IMPORTANT TO ADAM SMITH?
1. CREATES PRODUCTION AND WEALTH. BREAKING DOWN PRODUCTION INTO SMALLER SPECIALISED PARTS INCREASES PRODUCTIVITY AS THE PROCESS HELPS INCORPORATE SOME AUTOMATION INTO THE PRODUCTION PROCESS.
2. ALSO LESS TIME IS SPENT SWITCHING BETWEEN TASKS AND THE REPETITION MAKES EFFICIENCY INCREASE.
137
WHAT R THE PROBLEMS OF CAPITALISM ACCORDING TO KARL MARX?
OBJECTIVE TO MAKE PROFIT IS ONLY ACHIEVED BY EXPLOITING WORKERS E.G WAGES LOWER THAN TRUE VALUE AND INCENTIVE FOR FIRMS TO REPLACE LABOUR WITH MACHINERY CREATING BOTH MONOTONOUS JOBS AS WELL AS UNEMPLOYMENT. HIGHER COMPETITON MAY ALSO MAKE FIRMS GO BUST LEADING TO MONOPOLIES AND MORE EXPLOITATION.
138
WHAT IS CAPITALISM?
SYSTEM WHERE SMALL MINORITY ARE THE RULING CLASS AND THE MASSES PROVIDE THE LABOUR TO PRODUCE GOODS AND SERVICES.
139
WHY DO WE NEED GOVT INTERVENTION ACCORDING TO KEYNES?
TO STABILISE MARKETS AND PREVENT ECONOMIC DOWNTURN. DEMAND DRIVES THE ECONOMY SO IF SPENDING STOPS, RECESSIONS CAN SPIRAL OUT OF CONTROL SO WITHOUT GOVT INTERVENTION, UNEMPLOYMENT CAN PERSIST INDEFINITELY AS SEEN IN THE GREAT DEPRESSION. ARGUED THAT IN A RECESSION, GOVT SHOULD SPEND MORE EVEN IF IT MEANS RUNNING A DEFICIT TO STIMULATE A POSITIVE MULTIPLIER EFFECT.
140
WHY SHOULD THE GOVT NOT INTERVENE IN THE ECONOMY ACCORDING TO HAYEK?
SPOTANEOUS RESOURCE ALLOCATION VIA THE OPERATION OF MARKET FORCES WOULD BE FAR SUPERIOR TO ANY STATE PLANNING SYSTEM. BEAUSE CONSUMERS HAVE THE BEST KNOWLEDGE OF THEIR SITUATION.
141
WHAT IS A FREE MARKET SYSTEM?
PRICES OF GOODS AND SERVICES R SET FREELY BY FORCES OF SUPPLY AND DEMAND WITHOUT GOVT INTERVENTION.
142
WHAT IS AN EXAMPLE OF A FREE MARKET SYSTEM?
USA
143
WHAT R THE ADVANTAGES OF FREE MARKET ECONOMIES?
1. PROFIT MOTIVE AND COMPETITION MAY LEAD TO LOWER PRICES AND CREATION OF NEW GOODS
2. FREEDOM FOR CONSUMERS TO BUY AND WORK FOR WHO THEY WANT
3. INCENTIVE FOR LABOUR TO WORK HARD
4. INVISIBLE HAND WILL ENSURE THE RIGHT QUANTITIES OF GOODS AND SERVICES ARE PRODUCED.
144
WHAT R THE DISADVANTAGES OF FREE MARKET ECONOMIES?
1. IMPERFECT INFO TO MAKE CHOICES OR MAY CHOOSE TO BE IRRATIONAL
2. OVER PROVISION OF NEGATIVE EXTERNALITIES
3. UNDER PROVISION OF POSITIVE EXTERNALITIES
4. POTENTIAL EXPLOITATION OF WORKERS AND CONSUMERS BY MONOPOLIES
5. INEQUALITY
6. NO PROVISION OF PUBLIC GOODS E.G STREET LIGHTS.
145
WHAT IS A COMMAND ECONOMY?
RELIES EXCLUSIVELY ON THE STATE. GOVT DECIDES WHAT IS MADE, HOW, HOW MUCH AND HOW DISTRIBUTION TAKES PLACE. RESOURCES ARE CONTROLLED BY THE GOVT AND PRICE LEVELS R FIXED BY THE GOVT RATHER THAN THE OPERATION OF SUPPLY AND DEMAND.
146
WHAT IS AN EXAMPLE OF A COMMAND ECONOMY?
NORTH KOREA
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WHAT R THE ADVANTAGES OF COMMAND ECONOMIES?
1. GREATER INCOME EQUALITY AS RESOURCES R DISTRIBUTED BY GOVT
2. EXTERNALITIES ELIMINATED AS GOVT CONSIDERS TOTAL BENEFITS AND COSTS TO SOCIETY
3. WITH 1 PRODUCER, THERE SHOULD BE INCREASED EFFICIENCY THROUGH ECONOMIES OF SCALE E.G LONDON UNDERGROUND.
148
WHAT R THE DISADVANTAGES OF COMMAND ECONOMIES?
1. PRICES OFTEN KEPT LOW LEADING TO SHORTAGES AND QUEUES
2. WITHOUT PROFIT INCENTIVE, LESS NEED FOR GOVT TO CREATE NEW PRODUCTS
3. LITTLE ECONOMIC FREEDOM AND CHOICE FOR CONSUMERS
4. HIGH LEVELS OF BUREAUCRACY.
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WHAT IS A MIXED ECONOMY?
RESOURCES R PARTLY ALLOCATED BY THE PRICE MECHANISM AND PARTLY BY THE GOVT
150
WHAT IS AN EXAMPLE OF A MIXED ECONOMY?
UK
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HOW CAN INTRODUCING INDIRECT TAXES REDUCE NEGATIVE EXTERNALITIES?
BY CHARGING PRODUCERS AN ADDITIONAL AMOUNT EQUAL TO THE EXTERNALITY, THE EXTERNALITY HAS BEEN INTERNALISED.
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WHAT R THE ADVANTAGES OF INDIRECT TAXES?
1. FORCES POLLUTER TO PAY AND HENCE INTERNALISE THE EXTERNALITY
2. INCENTIVISES FIRMS TO INNOVATE TO AVOID TAX
3. RAISES REV FOR GOVT
153
WHAT R THE DISADVANTAGES OF INDIRECT TAXES?
1. REGRESSIVE
2. MAY ENCOURAGE BLACK MARKET USE
3. ASYMMETRIC INFO MAY LEAD TO THE TAX BEING SET AT THE WRONG LEVEL
4. IF DEMAND IS INELASTIC, INEFFECTIVE POLICY
154
WHAT R THE ADVANTAGES OF MIN PRICES?
1. REDUCES CONSUMPTION OF HARMFUL GOODS
2. TARGETED AT GROUPS MOST LIKELY TO BE ABUSING THE PRODUCT
3. NO COST TO GOVT
155
WHAT R THE DISADVANTAGES OF MIN PRICES?
1. NO EFFECT IF SET BELOW EQUILIBIUM
2. LESS EFFECTIVE WHEN DEMAND IS INELASTIC
3. NO EXTRA TAX REV GAINED (+LOSS OF VAT AND EXCISE DUTY)
156
WHAT R THE ADVANTAGES OF REGULATION?
1. ENSURES SOCIAL OPTIMUM IS REACHED
2. REQUIRED IF DEMAND IS INELASTIC AND POLICIES CHANGING PRICES DON'T WORK
3. CAN INCENTIVISE FIRMS TO INNOVATE E/G E-CIGARS
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WHAT R THE DISADVANTAGES OF SUBSIDIES?
1. PRODUCTIVE INEFFIENCY IF FIRMS RELY ON SUBSIDIES
2. OPPORTUNITY COST FOR GOVT
3. DIFFICULT TO QUANTIFY EXTERNAL BENEFITS WHICH MAY MEAN AMOUNT OF SUBSIDY IS INCORRECT
4. MAY BE GIVEN OUT FOR POLITICAL AND NOT ECONOMIC REASONS
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WHAT IS THE EXPLANATION FOR EXTENDED PROPERTY RIGHTS?
IF A RESOURCE HAS NO OWNER, ITS LIBALE TO BE OVERUSED OR ABUSED. THIS IS OFTEN CALLED THE TRAGEDY OF THE COMMONSM THE GOVERNMENT THEREFORE ADVOCATES OWNERSHIP RIGHTS OF AN AREA TO AN ORGANISATION WHO CAN CHARGE OR SUE THROUGH THE COURTS FOR THE USE OR ABISE OF THIS RESOURCE.
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WHAT IS AN EXAMPLE OF RESOURCES THAT HAVE NO OWNER BEING ABUSED?
OVERFISHING IN THE SEA
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WHAT R THE ADVANTAGES OF EXTENDED PROPERTY RIGHTS?
1. ENSURES EXTERNALITIES R INTERNALISED.
2. OWNERS CAN BE COMPENSATED
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WHAT R THE DISADVANTAGES OF EXTENDED PROPERTY RIGHTS?
1. DIFFICULT TO CALCULATE VALUE OF DAMAGES
2. EXTERNALITIES DIFFICULT TO TRACE
3. TIME TAKEN TO RESOLVE
4. DIFFICULT TO USE FOR INTERNALISED ISSUES
162
WHAT IS THE EXPLANATION FOR TRADABLE PERMITS?
INVOLVES THE GOVT SETTING A QUOTA ON THE AMOUNT OF POLLUTION ALLOWED IN AN INDISTRY THEN ALLOCATING POLLUTION PERMITS TO INDIVIDUAL FIRMS. EACH FIRM IS ALLOWED TO POLLUTE UP TO THE LEVEL SET BY ITS PERMIT. ALSO POSSIBLE FOR FIRMS TO BUY AND SEEL PERMITS OR TO BANK THEM FOR UEE IN FUTURE.
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WHAT R THE ADVANTAGES OF TRADABLE PERMITS?
1. INTERNALISES EXTERNALITY
2. REVENUE FOR GOVT IF AUCTIONED
3. INCENTIVE TO INVEST IN CLEAN TECH
4. MARKET DECIDES ON PRICE OF CARBON
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WHAT R THE DISADVANTAGES OF TRADABLE PERMITS?
1. DIFFICULT TO ISSUE THE RIGHT NUMBER OF PERMITS DUE TO IMPERFECT INFO OR REGULATORY CAPTURE
2. HIGH COST OF MONITORING FOR GOVT PARTICULARLY FOR CARBON ASSETS IN DEVELOPING COUNTRIES
3. PRICE MAY GO TOO HIHH DUE TO SPECULATION OR MARKET RIGGING BY LARGE FIRMS
165
WHAT R THE ADVANTAGES OF SUBSIDIES?
1. ENSURES EXTERNAL BENEFITS
2. LOWER PRICES FOR THE CONSUMER(INCREASED CONSUMER SURPLUS
3. HIGHER PRICES FOR FIRMS ( INCREASED PRODUCER SURPLUS)
4. REDUCED INEQUALITY
166
WHAT R THE ADVANTAGES OF MAX PRICES?
1. REDUCES INEQUALITY
2. STOPS EXPLOITATION OF CONSUMERS (IMPORTANT IN MONOPOLIES)
3. LOW COST TO GOVT
4. MIGHT ENCOURAGE MORE PRODUCTIVE EFFIENCY
167
WHAT R THE DISADVANTAGES OF MAX PRICES?
1. SHORTAGES
2. NO EFFECT IF SET BELOW EQUILIBRIUM
3. NEED FOR GOVT TO ENFORCE AND MONITOR
4. NO INCENTIVE TO IMPROVE QUALITY
5. LESS PROFIT FOR PRODUCERS MEANS LESS INVESTMENT
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WHAT R THE ADVANTAGES OF GURANTEED MIN PRICES?
1. PRODUCES REASONABLE LEVEL OF INCOME FOR PRODUCERS
2. STOPS FARMERS BEING EXPLOITED BY WHOLESALERS
3. PROVIDES CUSHION AGAINST FUTURE SUPPLY SHOCKS
4. MORE CERTAINTY ABOUT INCOME WOULD HELP FACILITATE INVESTMENT
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WHAT R THE DISADVANTAGES OF GURANTEED MIN PRICES?
1. NO EFFECT IF SET BELOW EQUILIBRIUM
2. HIGHER PRICES FOR CONSUMERS
3. MAY CREATE INCENTIVES FOR WASTEFUL EXCESS SUPPLY
4. OPPORTUNITY COST TO GOVT OF BUYING EXCESS PRODUCTION
5. ALLOCATIVELY INEFFICIENT (LARGE DWL)
