Theme 1 (Micro) Flashcards

Question

Disadvantages of Command Economy ? | (1.1.6) ## Footnote Markets

Answer 1

- Price controls lead to shortages and surpluses - Inefficient firms are protected and keep going, therefore firms cant respond to consumer preferences efficiently - Creates a climate where government can extend control into peoples lives

Answer 2

Mixed Economy - Where markets allocate resources, but governments interveen to different extents to ensure a minimum standard of living snd to correct other market failures

Answer 3

You will continue to consume as long as the marginal private benefit is greater than the marginal private cost

Answer 4

Information can be hard or complex to understand If consumers are not aware of the full private benefit or full private cost and the alternatives The choice they make may not lead to the highest level of utility

Answer 5

This is referred to as herding behaviour As people consciously or unconsciously follow what others are doing - the market as a whole can display irrationality Humans have a desire to not be left out - this can encourage market sentiment

Answer 6

Def : A ridgid pattern of behaviour followed by an individual Because of this consumers may stick to previous choice even though its now irrational

Answer 7

- The private benefit of consumption is subjective - The risks of irrational behaviour increase when the private benefit and cost are hard to calculate

Answer 8

Def : quantity of a good or service that consumers are willing and able to buy at different prices during a certain time

Answer 9

Population - Influeneces amount of possible consumers Advertising - Increase awareness and perception of quality Substitutes - Change in price or quality of competition effects opportunity cost Income - Influenece ability to consume G/S Fashion - Social trends cause high levels of utility for short time period Interest Rate - Determines cost of borrowing, therefore sales of big ticket items Complementary G/S - Where a products use is linked to another | PASIFIC

Answer 10

Marginal utility is the additional utility, or amount of satisfaction, gained from each additional unit of consumption Marginal utility will usually decrease with each additional increase in the consumption of a good

Answer 11

The responsivness of quanitity demanded to a change in price Elastic = Change is more than proportional Inelastic = Change is less than proportional

Answer 12

%Δ in QD %Δ in P

Answer 13

An increase in price will see demand fall to zero

Answer 14

If there is a change in price there will be no change in demand

Answer 15

- Availability of substitutes - Addictiveness of the G/S - Price of product as % of income - Time period that product is needed (Emergency = High Price)

Answer 16

PED is an estimated average and therefore can be incorrect

Answer 17

Perfectly Inelastic = 0 Relatively Inelastic = 0 to -1 Unitary = -1 Relatively Elastic = -1 to infinity Perfectly Elastic = infinity

Answer 18

This is when a change in demand is directly proportional to a change in price

Answer 19

The government will seek to reduce consumption of G/S with high private cost or negative externalities If such products are inelastic the government will need to add a high priced tax to promote change | Opposite for G/S with high private benefit and positive externalities

Answer 20

As the price of one good increases the demand of another will increase Subsitutes = positive number

Answer 21

As the price for good Y increases the demand for good x falls Complementary = negative number

Answer 22

The goods are independant of eachother and therfore dont affect one another

Answer 23

A good whose demand drops when people's incomes rise Inferior = Negative number = <0

Answer 24

A good whose demand increases with an increase in income Normal = Positive numbers Normal inelastic = 0-1 Luxury = 1 to inifinity

Answer 25

YED of over 1 = luxury item

Answer 26

Elastic Normal Good - 1 to Infinity

Answer 27

Supply refers to the amount that producers are willing and able to sell at any given price in a given period of time.

Answer 28

1. The supply curve is upward sloping to show that the suppliers increase their supply of a good when the price increases 2. The law of supply shows supplier’s behavior who moves the supply of a good in the same direction as the change in the price of a good when other factors are constant.

Answer 29

Increase in : Productivity Indirect Tax Number of firms Tech Subsidy Weather Costs

Answer 30

Decrease In: PINTSWC Factors

Answer 31

Productivity Indirect Tax Number of Firms Tech Subsidy Weather Costs

Answer 32

the responsiveness of quantity supplied to a change in price. PES= % change in Quantity Supplied % change in Price

Answer 33

- Complexity to make - Time Frame - Scarcity of raw materials

Answer 34

Answer between 0 & 1 = inelastic PES (less than proportional) Answer greater than 1 = elastic PES (more than proportional)

Answer 35

Perfectly inelastic = no change in supply at any price Perfectly elastic = Price fell by any amount, supply falls by 100% Unitary = answer = 1, directly proportional

Answer 36

All FOP are variable

Answer 37

at least one FOP is fixed

Answer 38

Equilibrium is where supply and demand meet

Answer 39

Shortage = not enough of a G/S to meet demand Surplus = demand is below the amount that is being produced

Answer 40

Shortages are resolved by increasing the price to meet the new high demand

Answer 41

Surpluses are resolved b reducing price to meet the low demand

Answer 42

Demand: When prices increase this signals a G/S is valued by consumers Supply: When prices increase this signals that FOP is becoming scarce

Answer 43

Firms want to produce high priced G/S in seek of profit maximising This means exisiting firms may increase output or new firms will enter the market | (Demand)

Answer 44

Some consumers will not be able to afford higher price or not believe G/S is worth higher price | (Supply)

Answer 45

1. If a G/S is to complex to make 2. Monopolies have the power to choose qty sold or price set 3. Government intervention

Answer 46

CS - The difference between the amount consumers are willing to pay and the price they pay PS - The difference between the amount producers are willing to sell for and the price they actually receive

Answer 47

A compulsory contribution to state revenue, levied by the government

Answer 48

Direct tax is tax placed on an individual whereby money goes straight to the government Ex. Income tax Indirect tax is a tax placed on G/S that consumers buy whereby money will first go to a third party than the government Ex. VAT

Answer 49

Specific - adds a fixed set amount Ad-valorem - adds a varying amount

Answer 50

1. Discouragement of production of harmful goods 2. To control inflation 3. To raise revenue

Answer 51

Deadweight loss is the loss of something good economically that occurs because of the tax imposed Taxes cause this because prevent people from buying a product that costs more than it would before the tax was applied

Answer 52

Government financial support

Answer 53

Because total surplus in a market is lower than in a free market, which creates economic inefficiency

Answer 54

When the price mechanism leads to an insufficient allocation of resources

Answer 55

Negative externalities = over-consumption of goods with a large private and social cost Positive externalities = under-consumption of goods with a large private and social benefit Caused by information failure

Answer 56

A good that is non-excludable and non-rivalrous

Answer 57

Firms are profit maximising and will not produce public goods as they present no profit incentive Some goods have a high private and external cost if they do not exist If the government feels the good/service is in society's best interest they will pay for the good/service to be put in place

Answer 58

when consumers are unaware of the full private benefit or cost of a good/service the decision made on the good/service is likely to be inneficient

Answer 59

External benefit = When a 3rd party is impacted by the comsumption (social benefit > private benefit) External cost = When a 3rd party is impacted by the consumption/prodcution (social cost > private cost)

Answer 60

Social benefit = private benefit + external benefit Social cost = private cost + external cost

Answer 61

Non-excludable Non-rivalrous If a good does not have both or only one it is a private good

Answer 62

Non-excludable - Once a good is provided it is impossible to stop people from using it Non-rivalrous - The consumption of a good by one person will not prevent anothers ability to consume the good

Answer 63

Where consumers will benefit from a product without paying for it

Answer 64

A good that is semi-non-rival and semi-non-excludable Argues that some public goods may not be pure Technology has found ways to privatize goods ex - toll roads

Answer 65

When one economic agents know more than another or information is incomplete/imperfect

Answer 66

Over consmuption of G/S with high preivate cost = irrational and insufficient allocation of resources

Answer 67

Where a firm is not allowed to charge above the set price cap has to be set underneath 'e'

Answer 68

The G/S is considered an essential item Monopolies are abusing there power

Answer 69

Leads to a shortage = No profit incentive to produce G/S = innefficient Leads to lack of investment into a market = couls result in black market trade

Answer 70

Maximum pricing is very reactive to a problem Makes markets more competitive = if monopolies are abusing power

Answer 71

legally-imposed price floors

Answer 72

To stop consumption of goods with high private cost

Answer 73

Harms low income groups the most Creates a black market Increasing the rate of tax is better = polluter pays principle

Answer 74

The government decides desired level of pollution and then releases permits

Answer 75

Restricts supply = (MPB=MSC)

Answer 76

1. Gradual reductions in permits = reduce CO2 2. Potentially global solution 3. Will lead to firms increasing productive efficiency so they can increase their profit margins

Answer 77

1. Difficult to know how many permits to provide 2. Difficult to measure pollution levels

Answer 78

Tax revenue

Answer 79

When left to the market G/S are underconsumed due to the free rider problem Leads to MF whereby MSB doesnt equal MSC

Answer 80

1. MF can occur through inefficent allocation of resources 2. Higher tax rates for all = to fund projects 3. Information failure from government can limit the effectivness

Answer 81

1. Often simple to understand 2. Can eliminate whole markets 3. It is fairer than taxes

Answer 82

1. Risk of government failure of tax receipts 2. Could lead to black markets

Answer 83

1. Polluter pays principle 2. Tax revenue 3. Promotes innovation to avoid tax

Answer 84

1. Lower income groups pay higher percentage of wealth 2. Consumers may seek substitute G/S = Black market 3.

Answer 85

Government intervention to correct market failure leads to a more innneficient allocation of resources

Answer 86

1. Distortion of price mechanism 2. Unintended consequences 3. Excessive administrative cost 4. Information gaps

Theme 1 (Micro) Flashcards

(128 cards)