1
Q
What are models?
What are the downsides?
Why are models used?
A
-Economic models are a simplification of reality to explain how the economy works.
there are too many variables so assumptions have to be made.
- they can help to show the past
- Made decisions about the future
2
Q
Why is economic difficult to make experiments?
Is economics a science?
A
- It is difficult to set up experiments to test hypothesis. As when the economist collects data there are variables that are always changing.
- Therefore it can be argued that economics is not a science as human behaviour cannot be reduced to scientific law, however behaviour of groups can be predicted.
3
Q
What are the three assumptions of rational decision making?
What goes against this?
What is a behaviour economists?
A
- Consumers aim to maximise personal utility
- Rational consumer is called homo economicus
- Producers aim to maximise profits
- Governments aim to maximise social welfare
Amos Tversky
4
Q
What is the equilibrium point in price determination?
What are the two other equilibriums?
A
-Where no market forces are bringing about change. Price equilibrium supply = demand.
Market clearing as all products supplied are bought.
- Excess demand this is when the price is below eq as this will mean quantity supplied is lower than quantity demanded.
- Excess supply is when price is above equilibrium this is when price is above market clearing and quantity supplied is greater than quantity demanded.
5
Q
How to show excess demand and excess supply on a diagram?
A
- Excess demand. Put price below equilibrium price. Triangle between two prices is excess demand and show that quantity demanded is greater than quantity supplied
- Excess supply. Put price above equilibrium price and triangle between two prices.
6
Q
What is the price mechanism?
A
-In a free market economy the price mechanism allocates resources. Prices rise when consumers want to buy more than is supplied.
7
Q
What are the three types of price mechanism?
A
- RATIONING FUNCTION- way of rationing goods as when prices rise, some may no longer afford the product and some cannot afford or some are not willing. The limited resources can be rationed to those who can afford/ who value most highly.
- SIGNALLING FUNCTION- The price mechanism acts as a signal as to where resources should be allocated. When prices rise, producers start manufacturing more. The change in price indicates to producers that the market conditions have change
- INCENTIVE FUNCTION- Incentive to work hard, buyers realise the more money they have the more they can buy. Also acts as an incentive for producers to produce more.
8
Q
What is an example of the price mechanism locally, nationally and globally?
A
- The coronavirus pandemic caused there to be little food on shelves, the price of food had to increase, to ration off the excess demand.
- The price of housing differs in the UK as London has a high population relative to the rest of the UK prices rise to ration off the excess demand.
- 1973 OPEC oil embargo, OPEC decreased supply of oil and this caused the price of oil to increase to ration off the excess demand.
9
Q
What is demand?
A
The ability and willingness to buy a particular product at a given price?
10
Q
- What causes a movement along the demand curve?
2. What causes a shift in the demand curve?
A
1-A change in price
2-A change in any of the factors that impact demand.
11
Q
What are the conditions for demand? (PAITT)
A
- Population- if the population increases it is likely that demand will increase.
- Income- for most goods if income increases people will buy more. However, does not apply to all goods.
- Taste/fashion if something becomes more fashionable demand will increase.
- Seasons- demand for some products will be impacted by the weather.
- Advertising a good advertising
12
Q
What is the law of diminishing marginal utility?
A
- The utility gained from consuming an additional unit will decrease as more is consumed.
- This explains why the demand curve is downward sloping as utility decreases at higher quantities, this means they are less likely to pay high prices for high quantities.
13
Q
What is PES?
A
- % change in quantity supplied / % change in price.
- Responsiveness of supply to a change in price of the good.
14
Q
What are the numerical values of PES?
A
-PES = 1 unitary elastic percentage change in price will cause a percentage change in quantity supplied of the same proportion.
-PES > 1 relatively elastic a % change in price will cause a greater than % change to quantity supplied.
-PES between 1 and 0 relatively inelastic. % change in price will cause a % change in quantity demanded less than the change in price.
PES = 0 a change in price has no effect on output.
15
Q
What does the different PES look like on a diagram?
A
- Inelastic PES vertical line
- Elastic PES horizontal line
16
Q
What are the factors influencing PES? how to remember them?
A
PSSST
- Availability of factors of production, eg labour may need to be trained.
- SUBSTITUTES, how quickly can a producer switch to producing something else
- STOCKS- if a firm has stockpiles of goods it will be more price elastic.
- SPARE capacity- if a firm is producing below spare capacity, more elastic.
- TIME- PES will be more inelastic in the short run.
17
Q
What is supply?
A
The ability and willingness to produce a good or service at a given price level at a particular moment in time.
18
Q
What does a change in price do to supply?
A
- Increase in price causes an extension in supply
- Decrease in price causes a contraction in supply.
19
Q
How is supply shifted?
A
-Changes to any of the conditions of supply
20
Q
What are the conditions of supply?
A
- Costs of production- increased costs causes supply to shift to left.
- prices of other goods-
- Weather
- Technology
- Taxes and subsidies
21
Q
Why is the supply curve upward sloping?
A
- If prices are higher there is more chance for profits so supply more,
- Higher prices will encourage new firms to enter
- To increase production you need to use up more resources which will cost more
22
Q
What is market failure?
A
-When the free market fails to allocate resources efficiently and leads to a net welfare loss.
23
Q
what are the types of market failure?
A
- externalities- An externality is a cost or benefit a third party receives from a transaction that they are not involved in. This results in an under or overproduction of goods.
- Information gaps- Homo Economics is assumed to have perfect information. As a result of the limited information consumers may not always make rational decisions.
- Under-provision of public goods.- Public goods are nonrivalrous and non-excludable which leads to the free rider problem. The free market cannot ensure these goods are provided eg Street lights.
24
Q
What are the types of government intervention?
A
- Price controls
- Government legislation and regulation
- Direct provision of information or goods
- Taxes and subsidies.
25
What is a price control and what does it do?
-a legally imposed price at which the good cannot go above or below
26
What is a min price control?
- the min price is set above the equilibrium price.
| - Causes a surplus and government may purchase.
27
What are the advantages and disadvantages of min price control?
- They can be set where MSB=MSC so can allow for the consideration of externalities.
- Producers know in advance the price that they will receive.
DIS
if min price is set too high there will be surpluses each year
-Encourages over production which leads to inefficient allocation of resources.
28
-What is max price control?
- This is when a legally imposed price is set below the equilibrium which it cannot go above.
- Results in shortage of product.
29
What are the advantages and disadvantages of max price controls?
- ADV, can allow more people to afford the product
- Help prevent increase inflation
DIS- distortion of price signals which causes excess supply and demand.
- difficult for gov to know where to set the price
- Both may lead to the creation of black markets.
30
How do price controls lead to black market?
- Max prices have been implemented in Manhattan in the form of rent controls on properties.
- Scotland min price has been imposed on alcohol to target binge drinking.
31
Why are buffer stocks used and what do they do?
-They are used for commodities that have volatile prices.
-Government sets a price ceiling and price floor.
When price goes above the ceiling the government sell
When the price goes below the ceiling the government buy.
32
What are the advantages and disadvantages of buffer stocks?
-Advantages
Reduces instability of farmer incomes
-Ensures employments
-Helps to plan investment
Disadvantage
- Price floor is set too high so gov is always buying
- Expensive to buy and administer buffer stock.
33
What is state provision of public goods?
What is the link to state provision of goods to context?
- this is when the government intervenes to provide goods that are non-rivalrous and non-excludable which leads to free-rider problem so they will be under provided in free market.
- streetlights
34
What are the advantages and disadvantages of direct provision of public goods?
ADV-
This corrects market failure by providing important goods which would have not otherwise been provided
-The goods may have positive externalities.
DIS
- Expensive and has high opportunity cost for government
- Since the market is not involved the government may get the incorrect combination of goods.
35
What is provision of information?
What are the advantages and disadvantages of provision of information?
-this is when the government intervenes to provide information when it may be asymmetric.
ADV- Helps consumers to act rationally, which allows the market to work properly.
Disadvantages-
- This can be expensive for the government to do
- The government may not always have the correct information.
36
What are examples of provision of information of goods?
- Quit smoking adverts on cigarette packets
| - Traffic light system on food.
37
What are indirect taxes and what are the types?
- Ad valorem and specific
- VAT and excise duties.
-Internalises the externality and reduces supply.
38
1. What are tradable pollution permits?
| 2. What is an example of country using pollution permits?
- This is when the government gives out a fixed supply of permits to firms that allow them to pollute a certain amount.
- This gives them an incentive to decrease costs as the permits can be sold
- If the firm goes beyond permits they can be hit with legal action.
2. US sulfur trading scheme which decreased sulfur emissions by 40%.
EU emissions trading scheme decreased by 21%
39
What are the advantages and disadvantages of tradable pollution permits?
- ADV
- Since the government caps the pollution permits, it is guaranteed that pollution will fall.
- The government raises tax revenue
- DIS
- Difficult to set number of permits.
- Needs a coordinated approach
- Raise costs for businesses which will be passed onto consumers.
40
What is the diagram for an indirect tax?
What is the difference between V.A.T diagram and excise duty tax.
How do you analyse diagram?
supply and demand shift supply in.
Skewed shift for V.A.T
Go to new equilibrium and go down to the initial supply curve. Box on top is consumer burden, box below is producer burden.
-Triangle to the right is deadweight loss to society.
41
What are the advantages and disadvantages of indirect taxes?
- ADV
- internalises the impact of the externality
- Raises revenue for government
DIS
- Regressive
- depends on the PED for the product.
42
How do you analyse a subsidy diagram?
-Go to new equilibrium go up to old supply curve.
| Producer surplus on top consumer surplus on the bottom.
43
What is a subsidy?
-Subsidy is a form of government support financial or otherwise to encourage consumption of a good.
44
What are the advantages and disadvantages of a subsidy?
What are examples of subsidies?
- Society reaches the socially optimum output where welfare is maximised.
- Can prevent the under production or underconsumption of goods.
DIS- high opportunity cost to governments
-Subsidies can cause producers to become inefficient.
2016 energy companies received subsidy of 891 million for biofuel subsidies.
45
What is regulation?
What are the advantages?
What are the disadvantages?
-When government passes legislation
- ADV most people adhere to the law.
- Sends out strong messages about the ethical nature of certain actions.
DIS- can be expensive to enforce laws eg 1 billion is spent a year on drug laws.
-can be seen as red tape and could discourage.
Econ micro advanced information
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