The Nature of Economics
What assumptions do economists make about producers and consumers?
Consumers are utility maximising
Firms are profit maximising
Explain three reasons why the demand curve slopes downwards.
The substitution effect
The income effect
Law of diminishing marginal utility
Which elasticity is concerned with substitute and complementary goods?
Draw multiple supply and demand diagrams which show the impact of:
a) increase in price of substitute good
b) increase in price of a complementary good.
XED
True or false: public goods are provided by the government.
False!
They don't have to be - you wouldn't use this as a definition of a public good. Use the main characteristics which are: Non-excludable, non-rival
Name three forms of government regulation (with a real example for each one)
Bans/limits/caps/compulsory action
What is the economic problem?
Wants are infinite and resources are limited. Due to this scarcity, choices must be made regarding how goods are allocated.
What to produce? How to produce and for whom to produce?
Name three factors that could lead to an outward shift in supply.
Decreased cost of production/increased productivity of workforce/decrease in indirect tax/new technology/appreciation in ER (decreased cost of imported materials), subsidies, deregulation
Name all four elasticities and their equations.
PED (% change QD/ % change P)
YED (% change QD/ % change Y)
XED (% change QD for good A/ % change P for good B)
PES (% change QS/ % change P)
What information gap might exist between a dentist and a patient?
Patient knows more about their health history, dentist knows more about dental health practice.
Draw a fully labelled diagram to show the impact of the introduction of an ad valorem indirect tax
Cause the supply curve to shift right and become steeper than the original supply curve (tangential shift).
Explain the four functions of money.
1. Unit of Account: Money provides a common measure for comparing the value of different goods and services, making it easier to determine what something is worth.
What is the difference between an extension/expansion in demand and an outward shift in demand?
Extension/expansion: caused by a decrease in price of that good
Outward shift: a positive change in conditions of demand (increased price of a substitute or decreased price of a complement/increase real income/positive advertising/decreased interest rates)
Give an example of a good with a negative YED. Briefly explain why it has this YED value.
Any inferior good (a rise in real income leads to a fall in demand for the product) e.g. bus travel.
What is the difference between MSC and MPC?
Marginal social cost/marginal private cost.
The cost to the individual involved in the production or consumption of the good versus the cost to the individual PLUS third parties not involved in the production or consumption of the good (difference is the negative externality!)
What would happen if a minimum price was set below the free market price?
Nothing!
What is the difference between a movement along the PPF and shifts in a PPF?
Movement along: a change in the combination of two goods being produced.
Shifts: A change in the productive possibility of the economy (shift out = found new resources/improvements in technology...)
Define the law of diminishing marginal utility.
As a consumer has more of a good, the additional satisfaction (utility) they derive from consuming it decreases (total utility increases, but at a diminishing rate). Therefore, they are willing to pay less for each additional unit.
What is wrong with the following sentence: 'the market for apples is elastic'?
It is imprecise to describe a product as being elastic or inelastic. You must describe the elasticity in terms of a relation to something else: supply, demand, income or another good.
Using an example, explain why the free rider problem may occur.
Public goods by definition are non-excludable. Once a public good is provided it is impossible to prevent people from using it, and thus impossible to charge for it. E.g. flood defences - once provided, it will provide protection against flood damage for everyone in the vicinity regardless of whether or not they have financially contributed to its provision.
Name three forms of government failure
Distortion of the price mechanism
Unintended consequences
Excessive administrative costs
Define opportunity cost, and draw and explain a numerical example using a PPF.
The next best alternative that is forgone when a choice is made.
Define producer and consumer surplus and draw a supply and demand diagram showing these areas
Consumer surplus: the difference between how much consumers are willing to pay and what they actually pay for a product.
Producer surplus: the difference between the actual price received and the price producers are willing to supply the good for.
What is the resultant impact on total revenue of a price increase if demand for the good in question is price:
1. Inelastic
2. Elastic
3. Perfectly elastic.
1. Increase in revenue.
2. Decrease in revenue.
3. Elimination of revenue.
Explain, using an example, how market failure might lead to the under consumption of a good.
Asymmetric information - one party in the transaction has superior information to the other - consumers don't have enough information to make rational decisions which would maximise their utility (e.g. underconsumption of measles vaccinations)
Positive externality - the good is under-consumed as marginal social benefit exceeds the marginal private benefit e.g. vaccination programmes. The individual fails to consider the marginal social benefit when making their consumption decisions (focused only on maximising their own utility).
Explain 3 potentially negative impacts of the introduction of a minimum price on alcohol
Unintended consequences: for "hard to reach", problem drinkers the higher price of alcohol hasn't deterred them from drinking but has seen them cut back on food and heating.
Limited effectiveness - setting the right minimum price: 50pence per unit has been effective in reducing alcohol-related harms however, as time passes, its effectiveness is likely to decrease as the cash price level is eroded by inflation in real terms.
Unintended consequences: potential for shifts to illicit alcohol or drugs consumption, cross border purchasing, and increased crime.