Markets and market failure
How are Indirect taxes used to intervene? - correct answer-Shifts Qe to Qopt helping correct
a negative externality of production
How are max and min prices used to intervene? - correct answer-Max prices cause excess
demand, min prices cause excess supply. Example of min prices is the NMW.
How are subsidies used to intervene? - correct answer-Used to encourage production or
consumption of merit goods. Shifts Qe to Qopt.
How do market changes affect consumer and producer surplus? - correct answer-In the
diagram consumer surplus moves from AEC to BED and producer surplus from ACF to
BDG. This is a result of an increase in supply. It is measured to the new equilibrium,
essentially
How else can governments intervene in markets? - correct answer-Trade pollution permits -
pollution permit market, essentially a tax on pollution that discourages pollution and
encourages sustainability.
State provision of public goods, provided through general taxation
Provision of information to correct asymmetric information
Regulation agencies using fines and imprisonment to maintain the rules
Interpreting YED values - correct answer-Inferior goods: less than 1
Normal goods: more than 0 less than 1
Luxury goods: more than 1
Negative externality of consumption - correct answer-
Negative externality of production - correct answer-
Positive externality of consumption - correct answer-
Positive externality of production - correct answer-
What are advantages of specialisation and division of labour? - correct answer--Higher
productivity, lowers cost/unit, can be passed on to consumers in the form of lower prices, or
to firms as increased profit.
, -Lower prices can increase international competitiveness, higher exports and therefore
economic growth, leading to higher living standards
-Creates many low skilled jobs
-Imports may be bought and increase standard of living
What are alternative views of consumer behaviour? - correct answer-Consumers are often
more influenced by other factors rather than their own calculation of net benefits.
-Other people's behaviour influencing them. Peer pressure, forces decisions that go against
a computation of net benefits. Also emotional decisions and based off advertising.
Behavioural psychology
-Habitual behaviour to speed up the process(rule of thumb, out of date info), Consumers
continuing to buy a product even when superior options exist(inertia), purchasing decisions
that harm them(alcohol), Sellers exploit these patterns
-Consumer weakness in computation. Wide range of choice. Hard to recognise net benefits.
Sellers make it harder to recognise relative prices and shelf placement
What are disadvantages of specialisation and division of labour? - correct answer--Task
repetition leads to boredom
-Fall in motivation leads to lower productivity/manufacturing quality
-Increases worker turnover rates - want a role more stimulating
-Lacks variety in products
-if workers lose their job it's harder to find a new one as they are only trained in one skill
-Some industries may not be able to compete and go out of business
-Could create dependency on resources at home or abroad
What are externalities? - correct answer-Occur when there is an external impact(cost or
benefit) on a third party not involved in the economic transaction.
Positive/negative externalities of consumption.
Positive: Electric vehicles, CO2 falls
Negative: Alcohol, anti social behaviour
Positive/negative externalities of production.
Positive: Managed pine forests produce wood and cut co2
Negative: Electricity production releases co2
What are factors affecting PED? - correct answer--Availability of substitutes
-Addictiveness of the product
-Price of product as a proportion of income
-Time period
What are factors affecting YED? - correct answer--During a recession, demand for inferior
goods rise and luxury goods falls
-during growth vice versa
-minimum wage legislation, taxation, increased international trade
What are factors influencing PES? - correct answer--Mobility of the factors of production
-Availability of raw materials
-Ability to store goods
-Spare capacity
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