Theme 1: Introduction to markets and market failure

Question 1

normative statement

Answer 1

a value judgement that is subjective

Question 2

positive statement

Answer 2

a statement that can be tested to be proven true or false

Question 3

the economic problem

Answer 3

resources are scarce but wants are unlimited

Question 4

4 factors of production

Answer 4

• land
• labour
• capital
• enterprise

Question 5

division of labour

Answer 5

specialisation on individuals to break down the production process into smaller tasks

Question 6

opportunity cost

Answer 6

the value of the next best alternative foregone

Question 7

free market economy

Answer 7

where markets allocate resources through the price mechanism

Question 8

planned/command economy

Answer 8

where the government allocate all resources in an economy

Question 9

mixed economy

Answer 9

where both the price mechanism and government allocate resources

Question 10

4 functions of money

Answer 10

• medium of exchange
• store of value
• measure of value
• method of deferred payment

Question 11

production possibility frontier (PPF)

Answer 11

shows the maximum output combinations an economy can produce when all its factors of production are fully employed

Question 12

3 reasons why consumers don’t always behave rationally

Answer 12

• consideration of the influence of other people’s behaviour (herd mentality)
• the importance of habitual behaviour
• consumer weakness at computation

Question 13

demand

Answer 13

the amount of a good or service consumers are willing and able to buy at any given price

Question 14

supply

Answer 14

the amount of a product producers are willing and able to provide at any given price

Question 15

price mechanism

Answer 15

the interaction of demand and supply to allocate resources

Question 16

3 functions of the price mechanism

Answer 16

• rationing
• signalling
• incentive

Question 17

consumer surplus

Answer 17

the difference between the price consumers are willing and able to pay and the market equilibrium price

Question 18

producer surplus

Answer 18

the difference between the price that producers would be willing and able to provide a product and the market equilibrium price

Question 19

price elasticity of demand (PeD)

Answer 19

measures the responsiveness of quantity demanded to a change in price

Question 20

PeD formula

Answer 20

PeD = % change in quantity demanded ÷ % change in price

Question 21

income elasticity of demand (YeD)

Answer 21

measures the responsiveness of quantity demanded to a change in income

Question 22

YeD formula

Answer 22

YeD = % change in quantity demanded ÷ % change in income

Question 23

cross price elasticity of demand (XeD)

Answer 23

measures the responsiveness of quantity demanded for one good following a change in the price of another good

Question 24

XeD formula

Answer 24

XeD a = % change in quantity demanded a ÷ % change in price b

Question 25

price elasticity of supply (PeS)

Answer 25

measures the responsiveness of quantity supplied to a change in price

Question 26

PeS formula

Answer 26

% change in quantity supplied ÷ % change in price

Question 27

indirect tax

Answer 27

taxes on suppliers in a market which affect their costs of production, they raise the costs of production

Question 28

subsidy

Answer 28

a government grant given to producers, it lowers their costs of production

Question 29

market failure

Answer 29

misallocation of resources by the market mechanism

Question 30

asymmetric information

Answer 30

when one party in the economic transaction has more information than the other

Question 31

public goods

Answer 31

goods that if left to the market mechanism would not be provided and therefore need to be provided by the government

Question 32

characteristic of a public good

Answer 32

• non-excludable (people can enjoy the benefits of consumption at no financial cost) • non-rejectable (if a public good is provided people cannot avoid it) • non-rivalrous (consumption of a public good by one person does not reduce the availability of the good to others)

Question 33

free rider

Answer 33

consumers who receive the benefits without contributing to the cost of provision

Question 34

negative externalities in production

Answer 34

where the social costs of producing a good are greater than the private costs of producing the good

Question 35

marginal private costs (MPC)

Answer 35

the costs that the producers pay in making the product

Question 36

marginal external cost (MEC)

Answer 36

the costs to third parties not directly involved in the economic transaction

Question 37

marginal social cost (MSC)

Answer 37

the true costs to all of society

Question 38

positive externality in consumption

Answer 38

where the social benefits of consuming a good are greater than the private benefits of consuming that good

Question 39

marginal private benefit (MPB)

Answer 39

the benefits to individuals involved in the economic transaction

Question 40

marginal external benefits (MEB)

Answer 40

benefits to third parties not directly involved in the economic transaction

Question 41

marginal social benefits (MSB)

Answer 41

the benefits to all of society

Question 42

government failure

Answer 42

misallocation of resources through government intervention, which results in a net welfare loss in society

Question 43

maximum price

Answer 43

a price set by the government below the existing free-market equilibrium price and sellers cannot legally sell goods and services at a higher price

Question 44

minimum price

Answer 44

a price set by the government above the existing free-market equilibrium price and sellers cannot legally sell goods and services at a lower price

Question 45

tradable pollution permits

Answer 45

licenses which allow businesses to pollute up to a certain amount, and the government control the number of licenses so that they can control the amount of pollution