Competitive Markets: How they work and why they fail

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  • Created by: Ellie
  • Created on: 01-04-13 19:25
Define Production Possibility Frontiers?
Maximum potential level of output for 2 goods or services that an economy can achieve when all its resources are fully and efficiently employed
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What can a PPF curve illustrate?
scarcity and opportunity cost
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Why is there an increasing opportunity cost?
Because as the production of one good increases, more and more resources are used that are not most suitable for producing that good/service
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Give 5 reasons for a shift in the PPF curve?
increase in quantity/quality, expansion of further & higher education, increase in training schemes, increase in investment and development of new tecnology
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What could cause an inward shift in the PPF curve?
natural disaster and war
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When does scarcity occur?
When there are insufficient resources to provide for everyone's wants
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What countries does scarcity generally affect?
ones that face drought or famine
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What decisions does scarcity lead to and who do they affect?
What to produce, how to produce it and for whom. They affect consumers, producers and the government
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Define opportunity cost?
The cost of the next best alternative foregone
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Characteristics of non-renewable resources and 2 ways in which the rate of decline can be reduced
Stock levels declines over time as it is consumed. It can be slowed down by recycling and higher prices to reduce consumption
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Characteristics of renewable resources
Stock levels can be maintained over time
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What is a free-market economy?
All resources are allocated by the price mechanism. There are none left now but government intervention is low in developing countries
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Give an example of a country which is a mixed economy?
The UK which is 60% private and 40% public
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Is the price mechanism the public or private sector?
private sector
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Define positive economics
Concerned with the facts, a value-free and scientific approach
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Define normative economics?
a value added judgement, non-scientific approach. It will normally contain words like ''right'' ''ought'' ''should'' ''fair'' ''worse''
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Define consumer surplus?
The extra amount consumers are willing to pay over what they actually pay
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Define producer surplus?
The extra amount paid to producers above what they are willing to accept
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What 3 devices could the price mechanism be seen as?
An incentive device (rising prices are used as motivation to produce more), a rationing device (scarce resources are allocated to those who will pay the most) and a signalling device (indicates changes in conditions of demand and supply)
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What is a direct tax?
It is a tax levied directly on an individual/organisation, such as income or corporation tax
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What is an indirect tax?
It is a tax levied on purchase of goods and services. It can be specific tax, such as excise or an ad valorem tax, such as VAT
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Define Total Revenue?
Total payments received by a firm from selling a given quantity of goods or services
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At what point is Total Revenue maximised?
When it reaches unit elasticity
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What is the substitution effect?
When the price of a good decreases, it becomes cheaper relative to its substitutes so they switch from substitutes to that product
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What is the income effect?
When the price of a good decreases, it means more disposable income so the purchasing power increases and consumers buy more of the good.
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Give 7 reasons for a shift in the demand curve?
change in the price of complementary/substitute goods, change in fashions/tastes, increased advertising, increase in income, decrease in income tax, increase in population and increase in credit facilities
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Define Price Elasticity of Demand
The responsiveness of demand for good A to a change in its price
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If PED is greater than 1, is this elastic or inelastic?
elastic
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Give 6 determinants of PED?
availability of substitutes, luxury/necessity goods, addictive/habit-forming goods, proportion of income, time period (inelastic in short run) and brand image
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Define Income Elasticity of Demand
The responsiveness of demand to a change in real income
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If YED is positive, what kind of good is it?
A normal good
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Define Cross Elasticity of Demand?
The responsiveness of demand for good B to a change in price of good A
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If XED is negative, what type of goods are they?
Complementary Goods
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Define Minimum Wage?
The legal minimum hourly rate of pay an employer can pay
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The advantages of a minimum wage?
A reduction in exploitation, wage inequality and voluntary unemployment, an increase in productivity and an increase in cost of living can be kept up with
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Give 4 disadvantages of minimum wage?
Too expensive to employ could lead to unemployment, inflationary pressure, ineffective in reducing poverty and increase in bureaucracy means higher costs
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Define Specialisation?
When an individual, firm, region or country concentrates on the production of a limited range of goods or services
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Gives 2 advantages of specialisation?
increases productivity and living standards
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Give 2 disadvantages of specialisation?
a fall in demand would mean significant unemployment and there is the problem of resource depletion
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What is division of labour?
When production is split into a series of tasks and workers
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5 advantages of division of labour?
Workers become highly skilled, there is no time wasted, capital equipment can be used continuously, there is less time/ money on training and more choice of jobs to fit skill sets
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Give 3 disadvantages of division of labour?
It is easy to replace workers with machinery, boredom and interdepence
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What is a product market?
A market of goods and services which consumers can derive utility from, like chocolate, wine and fast food
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What is a commodity market?
A market with raw materials/minerals used in production, like wheat, sugar, oil and gold
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What is a labour market?
The buying and selling of labour time
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What is demand and effective demand?
Quantity of a good or service purchased at a given price over a given time. Effective demand is want backed up by ability to pay
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Define Supply
It is the quantity of goods or services that firms are willing to sell at a given price over a given period of time
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Why does the supply curve slope upwards?
As the price rises, firms are encouraged to produce more. As output rises, production costs rise and they charge higher prices to cover costs in the short run but in the long run, economies of scale occured
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Give 9 causes for a shift in supply?
tecnology, reduced labour costs, capital costs and transport costs, discovery of new suppliers, increase in number of firms, good conditions, reduction in indirect tax and increase in subsidy
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Define Price Elasticity of Supply
The responsiveness of supply to a change in price (%change in supply/ %change in price)
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Give 6 determinants of PES?
level of spare capacity, state of economy, stock level, perishability, ease of entry and time period.
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When does market failure occur?
It occurs when the price mechanism causes an inefficient allocation of resources
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What are the 6 different types of market failure?
externalities, public goods, private goods, imperfect market knowledge, labour immobility and unstable commodity markets
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What does government failure occur?
It occurs if government intervention leads to welfare loss
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What are the 7 types of government failure?
high taxation on tobacco, alcohol and waste, subsidies to bus transport, road pricing, buffer stock, NMW, allocation of fish quotas and government bureaucracy
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Define a subsidy?
A grant given by the government to encourage suppliers to increase production
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Give 6 determinants for demand of labour?
Demand for final product, wage rate, other labour costs, price of other factors, productivity of labour and government regulation
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Give 8 determinants for supply of labour
wage rate, other net advantages, benefit reforms, trade unions, government regulations, social trends, income tax and net migration
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Give 9 types of government intervention that can be used to correct market failure?
subsidies, indirect taxation, tradeable pollution permits, carbon offsetting, renewable energy certificates, extension of property rights, government regulation, buffer stock schemes and minimum pricing
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Gives 4 advantages of indirect taxation?
The polluters pay, external cost is internalised, prices increases, output decreases and pollution decreases and increased tax funds can be used to clean up
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Give 6 disadvantages of indirect taxation
Can't put monetary value on it, costs of production increase making firms less competitive, firms may relocate, if inelastic then pollution may not fall, tax revenue might not be enough to clean up and it will encourage the black market
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Give 3 advantages of subsidies?
It will reduce pollution and promotes sustainable growth and internalises benefits
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Give 3 disadvantages of subsidies
There is an opportunity cost, it can be inefficient if it leads to reliance and alternatives like wind power may be less reliable
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Give 5 advantages of tradeable pollution permits
internalises beneifts, permits reduced over time, it costs money if they go over allowance, funds increase by selling reserves and they can bank excess for future
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Give 6 disadvantages of tradeable pollution permits?
too many=little incentive and too few=production costs increase and firms become less competitive, disputes over allowances, costs to consumers, less pressure if they can buy more/bank excess, cost of monitoring and all countries get involved
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Other cards in this set

Card 2

Front

What can a PPF curve illustrate?

Back

scarcity and opportunity cost

Card 3

Front

Why is there an increasing opportunity cost?

Back

Preview of the front of card 3

Card 4

Front

Give 5 reasons for a shift in the PPF curve?

Back

Preview of the front of card 4

Card 5

Front

What could cause an inward shift in the PPF curve?

Back

Preview of the front of card 5
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