Theme 1: Introduction to markets and market failure

Question 1

Normative statement

Answer 1

Subjective and value based

Question 2

Positive statement

Answer 2

Objective and fact based

Question 3

Opportunity cost

Answer 3

The cost of any choice in terms of the next best alternative foregone

Question 4

Capital good

Answer 4

Any good used to increase future levels of production

Question 5

Consumer good

Answer 5

Satisfies the wants and needs of the consumer directly

Question 6

4 functions of money

Answer 6

1. Medium of exchange
2. Store of value
3. Unit of account - allows the value of something to be expressed in an understandable way so that it can be compared
4. Standard of deferred payment

Question 7

Pros and cons of free market economy

Answer 7

\+ ensures competition
\+ consumers' demand determines pricing
- market failure
- inequality
- economic instability

Question 8

Pros and cons of command economy

Answer 8

+ considers the effect of externalities and looks to achieve the common good
+ greater equality (in theory)
- lack of competition, efficiency and incentive

Question 9

Price elasticity of demand

Answer 9

percentage change in quantity demanded divided by percentage change in price

Question 10

Income elasticity of demand

Answer 10

percentage change in quantity demanded divided by percentage change in income

Question 11

Cross elasticity of demand

Answer 11

percentage change in quantity demanded of X divided by percentage change in price of Y

Question 12

Inferior good

Answer 12

Demand for the good declines as income increases e.g. staple goods

Question 13

Normal good

Answer 13

Demand increases when income increases

Question 14

Luxury good

Answer 14

A good that is not necessary for living but may be desired amongst those with higher incomes.

Question 15

3 factors affecting demand elasticity

Answer 15

Availability of substitutes, necessity, time (may be able to afford a good in the short run, but buying it everyday in the long run is unaffordable)

Question 16

XED of substitutes

Answer 16

The closer the substitute, the more elastic the XED

Question 17

Complementary goods XED

Answer 17

The closer the complementary good, the more elastic the XED

Question 18

Unrelated goods XED

Answer 18

0

Question 19

PES

Answer 19

Percentage change in quantity supplied divided by the percentage change in price

Question 20

Factors that affect elasticity of supply (4)

Answer 20

Spare production capacity, stocks of finished products and components, the ease and cost of factor substitution/mobility, time period and production speed

Question 21

Short run

Answer 21

At least one input is fixed and the quantities of other inputs can be varied.

Question 22

Long run

Answer 22

A period of time in which the quantities of all inputs can be varied

Question 23

3 functions of price

Answer 23

1. Rationing - when there is a shortage of a product, price will rise and deter some consumers from buying the product.
2. Incentive - through their choices, consumers send information to producers about the changing nature of their needs and wants.
3. Signalling - adjust to demonstrate where resources are required/not.

Question 24

Producer surplus

Answer 24

The difference between what producers are willing and able to supply a good for and the price they actually receive.

Question 25

What two shifts of S and D lead to increases in producer surplus

Answer 25

Increase in S, increase in D

Question 26

Consumer surplus

Answer 26

Difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay

Question 27

What is the relationship between PED and consumer surplus

Answer 27

When demand is perfectly elastic, consumer surplus is zero because the price that people pay matches exactly what they are willing to pay

Question 28

What will be the effect of increases in S/D on consumer surplus

Answer 28

Increase in S, fall in consumer surplus, increase in demand increase in consumer surplus

Question 29

Social cost/benefit

Answer 29

Private cost/benefit + externality

Question 30

Private cost

Answer 30

The cost paid for a good by the consumer or firm

Question 31

Externality

Answer 31

Effects on a third party arising from the consumption/production of a good or service for which no appropriate compensation is paid.

Question 32

3 aspects of a public good

Answer 32

1. Non-excludability - the benefits from pure public goods cannot be confined to those solely who have paid for it (free rider problem) 2. Non-rivalrous - consumption by one consumer does not restrict the consumption of others, MC=0 3. Non-rejectable - cannot be rejected by individuals

Question 33

Asymmetric information

Answer 33

Where one party in an economic transaction possesses greater material knowledge than the other party.