Definitions
Diagrams
Calculations
Adv/Disadv
Random
100
Opportunity Cost
The next best alternative given up for making a choice
100
Increase in effective advertisement
Increase demand curve (shift right) -> Price increase, Quantity increase
100
Calculate the disequilibrium when the product is priced at $30
Excess demand of 1400 units
100
State one disadvantage of the market economic system
1. Firms will only produce goods and services if they are profitable, may not produce goods due to free rider problem
2. Firms will only supply products to consumers who are able to pay for them
3. Resources will only be employed if it is profitable to do so
4. Harmful goods may be produced if it is profitable to do so
5. Some firms (monopolies) may restrict competition, mislead consumers and charge them very high prices
100
If the PED of a good/service is 2.0, should the firm increase or decrease price to increase their revenue?
Decrease
200
Price elasticity of demand
Measures the responsiveness of quantity demanded to a change in price
200
Increase government subsidies for the good
Increase supply curve (shift right) -> Price decrease, Quantity increase
200
The original price for chocolate was $10 and original quantity was 120. The firm increases the price to $12, leading to a decrease in quantity sold to 80.
Calculate the PED for chocolate, state if it is price elastic or price inelastic
PED = -1.67, Elastic demand
200
State one advantage of the government using subsidies to correct market failure
1. Lower price and encourage consumption
2. Create social benefits for merit goods
200
Give one example of a merit good and one example of a de-merit good. Explain what their external benefit/cost is.
e.g.
Merit good: Vaccination, External benefit: Less likely people around the consumer becomes sick as they are vaccinated
De-merit good: Cigarettes, External cost: Second-hand smoking, people around the smoker may gain respiratory damage
300
De-merit goods
Goods that create external costs to third parties when consumed or produced
300
Diagram with an inelastic demand and a perfectly elastic supply
Demand curve more vertically straight, Supply curve completely horizontal
300
When the price of a chair increases from $120 to $140, the quantity supplied increased from 150 to 275.
Calculate the PES for the chair, and state whether the chair has elastic or inelastic supply
PES = 5, elastic supply
300
State one advantage and one disadvantage of a price ceiling (max price)
Advantage: Poor can afford basic necessities
Disadvantage: Some consumers might not have the access to the necessity.
May form black markets
Producers may close company/lay off workers as they do not have enough revenue to cover cost of production
300
State the determinants of PES
Time taken to produce the good/service
Ability to store
Spare capacity available
Flexibility of factors of production
400
Nationalisation
Transfer of ownership and control of a firm from private to public sector
400
Decrease in the price of a substitute and increase in indirect tax for the product
Decrease demand AND supply -> Price undetermined, quantity decreases
400
The PES for carrots are 0.5.
The original price was $10 and original quantity was 850. Due to a rise in demand, price increased to $14.
Calculate the new quantity supplied of carrots
New quantity = 1020 carrots
400
State one advantage and one disadvantage of a price floor (min price)
Advantages:Reduce consumption of demerit goods
Ensure low income group earn enough wages
Ensure farmers who produce goods that are not profitable but a necessity will earn enough
Disadvantage: Creates a surplus (excess supply)
firms might not earn enough profit in the end because of low consumer demand
400
State the determinants for PED
Availability and closeness of substitutes
Degree of necessity
Time to make decisions
Proportion of income spent
Habit forming goods
500
Market Failure
When market forces of demand and supply are unsuccessful in allocating resources efficiently and causes external costs OR benefits
500
Price ceiling (minimum price) diagram
Min price ABOVE equilibrium, Qs > Qd (Surplus/excess supply)
500
The PED of the product is -1.25
The original price is $40 and original quantity is 120. After a change in price, the quantity decreased to 90.
Calculate the new price of the product.
New Price = $48
500
State two advantage of privatisation
1. Competition may result in greater choice and lower prices
2. Private firms are more efficient that the public sector as they prioritise profits
3. The sale of state-owned assets can raise short-term revenue for the government
500
Analyse why public goods causes a market failure in the market economic system
Public goods: Non-rival and Non-excludable, consumers do not have to pay to consume the produce -> Creates the free-rider problem
As public goods are non-excludable, firms cannot make any profit by producing it -> firms will not produce public goods in the market system as they prioritise maximising profits.