Theme 4

Question 1

Absolute Poverty

Answer 1

Means not having enough income to provide basic necessities and survive.

Question 2

Allocative efficiency

Answer 2

Achieved when resources are used to yield the maximum benefit to everyone.

It is impossible to redistribute them without making someone worse off.

Consumer satisfaction maximised.

P = MC

Question 3

Anti-competitive practices

Answer 3

Aim to reduce competition; the include price fixing and collusion.

Question 4

Asymmetric information

Answer 4

Occurs when one party knows more about a product than another.

Question 5

Austerity

Answer 5

Refers to cuts in public expenditure and tax increases that reduce public borrowing.

Question 6

Balance of Payments

Answer 6

X - M

Set of accounts that show export revenue and import costs, capital movements and any other international transactions.

Question 7

Barriers to entry

Answer 7

Occur when start-up costs make it difficult for new businesses to enter the industry.

Question 8

Cartel

Answer 8

A group of firms within an Oligopoly which collude on price - reducing competition and do not compete with each other.

Question 9

CMA

Answer 9

The Competition and Markets Authority.

They investigate UK market behaviour to ensure that all businesses are acting in line with competition policy requirements.

Question 10

Consumer protection

Answer 10

Refers to regulations that protect the consumers from unsafe or fraudulent purchases.

Question 11

Contestable markets

Answer 11

Characterised by easy entry, i.e. new firms can set up in business easily.

Question 12

Current Account

Answer 12

The part of the balance of payments that covers imports and exports.

Question 13

Demand-side Policies

Answer 13

Affect the economy by increasing or reducing aggregate demand.

Question 14

De-merit Goods

Answer 14

Over-produced by the free market, in quantities which are greater than the optimal level for society. They are generally thought to be bad for society as a whole.

(Have negative externalities).

Question 15

De-regulation

Answer 15

Reducing the number of regulations which affect a business.

Question 16

Direct Tax

Answer 16

Taken at source and goes directly to the government.

E.g. Income Tax and National Insurance Contributes.

Question 17

EU competition policy

Answer 17

Keeps markets competitive wherever there is trade between EU members.

Question 18

Explicit Collusion

Answer 18

Occurs when there is a meeting or actual agreement between two firms to stop competing and follow a joint strategy.

Question 19

Financial Crisis

Answer 19

The period in 2007-09 when banks were endangered by excessive lending.

Question 20

Fiscal Policy

Answer 20

Changes to levels of taxation and government spending to affect the level of output.

Question 21

Free market policies

Answer 21

Avoid government intervention, functioning on the basis of supply and demand.

Question 22

Free Rider Problem

Answer 22

Occurs when public goods are under-provided or not provided at all because individuals are able to consume the good by paying little or nothing at all towards the cost.

Question 23

Full Capacity Output

Answer 23

The most that the economy can produce without increasing the factors of production.

Question 24

Geographic Immobility

Answer 24

When unemployed people cannot move to places where there are job vacancies.

Question 25

Gini Coefficient

Answer 25

Measures the income equality of an economy. Scale of 0 - 1: 0 = perfect equality (income shared evenly by everyone). 1 = perfect inequality (100% of income belongs to 1 person).

Question 26

Imperfect markets

Answer 26

They are distorted in ways that reduce competition. They include oligopoly and imperfect markets.

Question 27

Incentives

Answer 27

Payments or rewards that enable or motivate a particular course of action, or count as a reason for proffering one choice to alternatives. E.g. Subsidies.

Question 28

Inequality

Answer 28

Occurs when there are large differences in wealth and incomes within society.

Question 29

Innovation

Answer 29

Refers to the development of new ideas or techniques.

Question 30

Intellectual property rights

Answer 30

Ideas or inventions which are protected by patents or copyright.

Question 31

Intervention policies

Answer 31

Designed to control market forces, usually for political reasons.

Question 32

Marginal Costs

Answer 32

The cost for producing one more unit.

Question 33

Marginal Revenue

Answer 33

The extra revenue made from producing one more unit.

Question 34

Merit Goods

Answer 34

Provided by the public sector, but the quantity that the free market provides is lower than the optimum level for society. They are under-supplied.

Question 35

Monetary Policy

Answer 35

Uses interest rates to vary the cost of borrowing and influence the level of aggregate demand.

Question 36

MPC

Answer 36

Monetary Policy Committee. Sets interest rates and seeks to prevent inflation from changing significantly.

Question 37

Moral Hazard

Answer 37

People take greater risks when they know they will not personally have to cover the costs of the mistake.

Question 38

Natural Monopoly

Answer 38

Occurs when the most efficient scale of production is a monopoly. More than one producer or supplier would involve wasteful duplicates of resources.

Question 39

Non Excludable

Answer 39

Means that it is impossible to prevent people who have not paid for a good from consuming it.

Question 40

Non Rivalrous

Answer 40

Means that if one person consumes a good it does not affect or reduce the amount left for someone else to consume.

Question 41

Normal Profit

Answer 41

When a firm breaks even.

Question 42

Occupational Immobility

Answer 42

Occurs when unemployed people lack the skills needed to do the jobs that are available.

Question 43

Overheating

Answer 43

Occurs when aggregate demand exceeds aggregate supply and inflation is accelerating due to shortages.

Question 44

Perfect Competition

Answer 44

Market model which describes a market where all products are homogenous (identical) and there are many competing businesses. Also, only normal profit can be made and everyone has perfect market knowledge. (No barriers to entry).

Question 45

Poverty Trap

Answer 45

A situation in which an unemployed person would be even poorer or not much richer in work because they would no longer receive benefits.

Question 46

Price Discrimination

Answer 46

Means charging a higher price to people whose price elasticity of demand is low. The seller must be able to identify the groups of people who are more sensitive to prices.

Question 47

Privatisation

Answer 47

Transferring production out of the public sector and into the private sector.

Question 48

Productive Efficiency

Answer 48

Maximises the effective use of resources. (Productivity). Bottom of AC curve.

Question 49

Profit Signalling Mechanism

Answer 49

The means by which resources are allocated. The presence of a profit in a market attracts more resources and creates more output. Losses drive resources away.

Question 50

Progressive Tax

Answer 50

One that takes a greater percentage of income from richer than poorer people.

Question 51

Prudential Regulation Authority

Answer 51

(PRA) is part of the BoE and supervises banks, building societies and insurance companies.

Question 52

Public Sector Deficit

Answer 52

Occurs when public expenditure is greater than tax revenue; the deficit is covered by borrowing.

Question 53

Public Good

Answer 53

A good that the free market will not provide at all. There is no incentive to produce this type of good as it is impossible to charge for it and make a profit because it's impossible to prevent anyone else from consuming it for free.

Question 54

Public Interest

Answer 54

The welfare or wellbeing of the public in general, as opposed to the selfish interests of individuals, groups or businesses. - Interests of consumers rather than businesses.

Question 55

Redistribution

Answer 55

Refers to the use of tax revenue to raise the standard of living of poorer people.

Question 56

Regulations

Answer 56

Are legal and other rules that apply to businesses. They may come from governments, the EU or trade associations.

Question 57

Regulatory Body

Answer 57

A public authority or government agency responsible for enforcing government regulations.

Question 58

Regulatory Capture

Answer 58

Happens when the regulator is more influenced by the industry's point of view than the consumer's.

Question 59

Relative Poverty

Answer 59

When someone does not have enough income to participate fully in the society in which they live.

Question 60

R&D

Answer 60

Research and Development: Helps to develop products or processes that are new, better or cheaper.

Question 61

Restrictive Practices

Answer 61

Include any action that a business uses to limit competition.

Question 62

Shocks

Answer 62

Unexpected events that affect the economy and often come from outside sources - they are unpredictable.

Question 63

Supply-Side Policies

Answer 63

Include all measures designed to influence aggregate supply which will increase the productive capacity of the economy.

Question 64

Tacit Collusion

Answer 64

When competing firms appear to follow a similar strategy to reach the same aim, such as avoiding price cutting, but without meeting or having any formal agreement.

Question 65

Trade

Answer 65

X - M

Question 66

Tradable Pollution Permits

Answer 66

Permits which allow some businesses to pollute the atmosphere to a certain limit. The total allowed can be reduced over time, allowing businesses to reduce their polluting processes gradually. If cuts in pollution are faster than it needs to be, businesses can sell its unused permits to another business. This creates an incentive to reduce pollution.

Question 67

Vacancies

Answer 67

Unfilled jobs; when they increase it is likely there is a skill shortage.

Question 68

Dynamic Efficiency

Answer 68

Firms have incentive to innovate in order to lower costs and improve their product.