Theme 1- Introduction to markets and why they fail

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What is Ceteris Paribus?
"Assuming all other factors are the same" This is used when discussing demand and supply
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What are Positive Statements?
Statement that can be proven either true or false
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What are Normative Statements?
Statements that are opinion, so cannot necessarily be proven true or false
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What are Real Values?
Statistical data that has been adjusted for inflation
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What are Nominal Values?
Statistical data that hasn't been adjusted for inflation
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What is the Economic Problem?
Nearly all resources are scarce. Human wants are infinite. Resources need to be allocated between competing uses.
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What is a Opportunity Cost?
The benefits forgone of the next best alturnative
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What is a Economy?
A social organisation that makes decisions about what, how and for whom to allocate resources
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What are the Factors Of Production?
Land, Labour, Capital and Enterprise
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What is a Production Possibility Frontier (PPF)?
Curve showing the maximum potential output between consumer goods and capital goods.
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What shifts a PPF outwards?
Economic Growth, Consumption, Investment
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What is shown on a PPF?
Opportunity cost, When the economy is inefficient, Where a economy could be with greater technology
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What is Specialisation?
A system of organisation, where economic units aren't self-sufficientbut concentrate on producing certain goods and service and trading surplus with others
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What is Division of Labour?
Specialisation of workers who perform different tasks of production in co-operation with others
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What is the Primary Sector of the Economy?
These are the raw materials. EG. Agriculture, Oil extraction
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What is the Secondary Sector of the Economy?
Where raw materials are transformed into goods. EG. Manufacturing motors, Food production
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What is the Tertiary Sector of the Economy?
Production of services. EG. Transport, Education
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What is the Public Sector?
State/Government sector of the economy.
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What is the Private Sector?
Economy owned by private individuals, companies or charities
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What is a Market?
Any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services
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What is Money?
Anything that is widely accepted as payment for goods received, services performed, or repayment for past debts
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What are the functions of Money?
A medium of exchange, a measure of value, a store of value and a method of deferred payment.
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What does a Medium of Exchange mean?
It's trusted as a method to buy goods and services
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What does a Mesure of Value mean?
Is a unit of account.
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What does a Store of Value mean?
Money links the present and future. So will maintain value in the future.
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What does a Method of Deferred Payment mean?
If borrow lend money today will only do so if think the same amount will be payed back in the future
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What are the Forms of Money in a Modern Economy?
Cash, Money in current accounts, Near monies, Money substitutes and Non-Money financial assets
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What is a Free Market Economy?
All resources are allocated by the market through the invisible hand
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What is a Command Economy ?
Most resources are allocated by the state, by central planners.
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What is a Mixed Economy?
Resources are allocated by the state and the market,
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What did Adam Smith say?
The invisible hand will allocate resources to everyone's advantage. So believed in the free market.
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What did Friedrich Hayek say?
The state leads to totalitarianism and loss of freedom. So believed in the free market.
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What did Karl Marx say?
The state allocates resources to the advantage so believed command economy is the best.
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What do Neo-Classical Economists believe?
Assume all economic actors are rational. Consumers want to maximise their utility. Workers want to maximise their rewards for work. Firms aim to maximise profit. Government aim to maximise welfare of citizens.
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What is Demand?
The quantity of goods and services that will be bought at any given price over a a period of time
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What causes a Shift in Demand to the Right?
Increase in income, price of other goods, Increase in population, Changes in fashion, Change in legislation, Increased advertising
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What is the Law of Diminishing Marginal Utility?
The value attached to consuming the last product bought falls as more units are consumed over a given period of time
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What is Consumer Surplus?
The difference between what consumers are willing to pay and what they actually pay. (Diagram)
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What is the definition of Price Elasticity of Demand?
The responsiveness of changes in quantity demanded to changes in price.
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What is the Formula of Price Elasticity of Demand?
%change in QD/ %change in price. Elastic if greater than 1. Inelastic if less than 1. Unit elastic if equal to 1.
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What are the determinants of Price Elasticity of Demand ?
Availability of substitutes, Width of market definition, Time, Weather a necessity or luxury.
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How do you calculate Total Revenue?
Quantity sold/ Price
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What is Income Elasticity of Demand ?
The responsiveness of changes in price to changes in income.
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What is the formula for Income Elasticity of Demand
%change in QD / %change in income. Elastic if lies between -1 andd+1. Inelastic if greater than +1 or less than-1. Normal good if positive. Inferior good if negative.
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What is a Normal Good ?
A good which QD increases as income increases.
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What is a Inferior Good?
A good which QD decreases as income increases.
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What is Cross Price Elasticity of Demand?
The responsiveness of QD of one good proportion to price of another.
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What is the formula of Cross Price Elasticity of Demand?
%change in QD of good X/ %change in price of good Y. Elastic if greater than +1 and less than-1. Inelastic if between-1and+1.
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What is a Substitute?
A rise in price of one good leads to a rise in QD of another.
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What is a Compliment?
A rise in price of one good leads to a fall in QD of another.
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What is Supply ?
Quantity of goods that sellers are prepared to sell at any given price over a period of time.
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What causes a shift in Supply to the Right?
Cost of production decreases, Greater productive efficiency, Improvement in technology, Price of other goods, Government legislation,
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What is Producer Surplus?
The difference between the price the producer is willing to sell the product and the actual price it was sold for.
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What is Price Elasticity of Supply?
The responsiveness of changes in QS to changes in price.
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What is the formula for Price Elasticity of Supply?
%change in QS / %change in price. Elastic if more than 1. Inelastic if less than 1.
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What are the Determinants of Price Elasticity of Supply?
Availability of substitutes, Time, Government Reulation
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What is Equlibrium?
Where demand is equal to supply.
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What is the Rationing Function?
Scarce resources will be rationed to those who can afford it.
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What is the Signalling function?
Act as a signal to those in market about market conditions
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What is the Incentive Function?
Price of good or service acts as a incentive to buyers and sellers.
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What is a Indirect Tax?
A tax on Expenditure.
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What is the Incidence of Tax?
The burden of tax on the tax payer. This can depend elasticity of demand and supply.
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What is Ad Valorum Tax?
The tax levied on increases in proportion to the value of the tax base.
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What is a Subsidy?
A grant given by government to encourage production or consumption of a particular good or service.
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Why do Consumers act Irrationally?
Consideration of the influence of other people's behaviour. The importance of habitual behaviour. Consumer weakness at computation.
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What is Market Failure?
When markets don't function efficiently or equitably.
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What are Positive Externalities?
The total welfare gain to third parties. So when marginal social costs are greater than marginal private costs, assuming marginal private costs are equal to marginal social costs.
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What are Negative Externalities?
The total welfare loss to third parties. So when marginal social costs are greater than marginal private costs assuming marginal private benefits are equal to marginal social benefits.
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What are Public Goods?
Goods which possess characteristics of non-rivalry and non-excludability.
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What is the Free Rider Problem?
Where someone receives the benefit of a public good but allows others to pay. .
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What are Information Gaps?
Where the buyer or seller doesn't have complete information, or there is asymmetric information.
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Why do Governments intervene in markets?
To attempt to correct market failure through indirect taxes, subsidies, maximum and minimum prices, regulation and trade pollution permits
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What is a Maximum Price?
Maximum price a good can be sold at so everyone can afford it, as has positive externalities.
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What is a Minimum Price?
A minimum price a good can be sold at to internalise negative externalities, often set above equilibrium.
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What is Regulation?
Government set rules and policies to close information gaps
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What are Trade Pollution Permits?
Caps set by government for the maximum pollution a business can make. Which businesses can trade between themselves. To try to internalise negative externalities.
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Why does the State provide Public Good?
As will not be provided by the free market, as demand and supply never intersect.
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What does the State provide Information?
To ensure there is little asymmetric information to try and provide information about negative externalities. To reduce information gaps
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What is Government Failure?
Where government intervenes in the market, which leads to a net welfare loss in society.
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Why do Government Fail?
A distortion of price signals, Unintended consequences, Excessive administration costs, Information gaps, Conflicting objectives, Politician maximising their own welfare.
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Other cards in this set

Card 2

Front

What are Positive Statements?

Back

Statement that can be proven either true or false

Card 3

Front

What are Normative Statements?

Back

Preview of the front of card 3

Card 4

Front

What are Real Values?

Back

Preview of the front of card 4

Card 5

Front

What are Nominal Values?

Back

Preview of the front of card 5
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