Theme 1: Introduction to markets and
market failure
2 types of indirect taxes - correct answer-Ad valorem taxes are percentages (e.g. VAT)
Specific taxes are a set tax per unit
3 functions of price mechanism to allocate resources - correct answer-Rationing: When there
are scarce resources, price increases due to the excess of demand (demand is greater than
supply). The increase in price discourages demand and consequently rations resources.
Therefore leaving only those who can afford to pay with the effective demand necessary to
purchase the product
Incentive: Consumers can send info to producers about their changing needs and wants.
When demand is high, higher prices act as an incentive to raise production because the
supplier stands to make a higher profit. This also attracts producers to the market because it
can enable higher profits to be earned.
Signalling: Price acts as a signal to consumers and new firms entering the market. The price
changes show where and how resources should be allocated. A high price signals firms to
enter the market because it is profitable. However this encourages consumers to reduce
demand and therefore leave the market. This shifts the demand and supply curves
4 factors of production - correct answer-Land: including all the natural resources in and on it
Labour: the work done by people
Capital: equipment used in producing goods and services
Enterprise: willingness to take a risk to make a profit
Advantages of command economy - correct answer-Low levels of inequality and
unemployment\
Common good replacing profit as the primary incentive of production. Government can tailor
products and services to benefit the common good without regard to profit and losses
Government can set wages and job openings to create an unemployment rate and wage
distribution that it sees fit
Full employment
Zero (suppressed) inflation
Fluctuations avoided
No private exploitation
Externalities can be accounted for in plans
Public goods are produced adequately
Balance between consumption and investment
Advantages of distortions of price signals - correct answer-Farmer incomes remain stable
because fluctuations in the market are reduced. Particularly beneficial in the rural areas,
where farming is a main source of income
Increases consumer welfare by ensuring prices are not in excess
, Advantages of free market economy - correct answer-Most efficient in terms of using their
resources in best possible way to meet needs and wants of consumers
Firms likely to lower their average costs and make better use of scarce resources - overall
output of economy increases
Bureaucracy from government intervention is avoided
Good signaling mechanism for resource allocation (price mechanisms)
Consumers dictate to producers what and how much to produce (consumer sovereignty)
Good incentives - profit motives
Advantages of specialisation & division of labour in organising production - correct
answer-Increases productivity,
Higher output and potentially higher quality since production focuses on what ppl and
businesses are best at,
Greater variety of goods and services produced,
More opportunities for economies of scale - so size of market increases,
More competition - incentive for firms to lower costs - helps to bring prices down
Increases living standards across the world
Leads to higher level of global output and higher living standards
Advantages of specialising in production of goods and services to trade - correct
answer-Can help reduce problem of scarcity in individual countries
Enables countries PPF to shift outwards
Increased competition from abroad - increased incentives to cut prices and be efficient
Advantages of tradeable pollution permits - correct answer-Uses the market mechanism,
therefore efficient
Requires little government intervention, therefore cheap to run
Should benefit environment in the long run, by encouraging firms to use green production
methods
Government would raise revenue through permits, because they can sell them to firms. This
revenue could be inverted in green technology
If firms exceed their permit, they will have to purchase more permits from firms which do not
use their whole permit. Raises revenue for greener firms, who might then invest in green
production methods
Assumptions of PPF - correct answer-A fixed amount of resources are used
There is a constant state of technology
Asymmetric information - correct answer-When there is unequal information between
consumers and producers
Average Revenue Formula - correct answer-Average revenue = total revenue /quantity
Capital goods - correct answer-Used to make consumer goods and services including fixed
plant and machinery, hardware, software, new factories and other buildings.
Causes of government failure - correct answer-Distortion of price signals
market failure
2 types of indirect taxes - correct answer-Ad valorem taxes are percentages (e.g. VAT)
Specific taxes are a set tax per unit
3 functions of price mechanism to allocate resources - correct answer-Rationing: When there
are scarce resources, price increases due to the excess of demand (demand is greater than
supply). The increase in price discourages demand and consequently rations resources.
Therefore leaving only those who can afford to pay with the effective demand necessary to
purchase the product
Incentive: Consumers can send info to producers about their changing needs and wants.
When demand is high, higher prices act as an incentive to raise production because the
supplier stands to make a higher profit. This also attracts producers to the market because it
can enable higher profits to be earned.
Signalling: Price acts as a signal to consumers and new firms entering the market. The price
changes show where and how resources should be allocated. A high price signals firms to
enter the market because it is profitable. However this encourages consumers to reduce
demand and therefore leave the market. This shifts the demand and supply curves
4 factors of production - correct answer-Land: including all the natural resources in and on it
Labour: the work done by people
Capital: equipment used in producing goods and services
Enterprise: willingness to take a risk to make a profit
Advantages of command economy - correct answer-Low levels of inequality and
unemployment\
Common good replacing profit as the primary incentive of production. Government can tailor
products and services to benefit the common good without regard to profit and losses
Government can set wages and job openings to create an unemployment rate and wage
distribution that it sees fit
Full employment
Zero (suppressed) inflation
Fluctuations avoided
No private exploitation
Externalities can be accounted for in plans
Public goods are produced adequately
Balance between consumption and investment
Advantages of distortions of price signals - correct answer-Farmer incomes remain stable
because fluctuations in the market are reduced. Particularly beneficial in the rural areas,
where farming is a main source of income
Increases consumer welfare by ensuring prices are not in excess
, Advantages of free market economy - correct answer-Most efficient in terms of using their
resources in best possible way to meet needs and wants of consumers
Firms likely to lower their average costs and make better use of scarce resources - overall
output of economy increases
Bureaucracy from government intervention is avoided
Good signaling mechanism for resource allocation (price mechanisms)
Consumers dictate to producers what and how much to produce (consumer sovereignty)
Good incentives - profit motives
Advantages of specialisation & division of labour in organising production - correct
answer-Increases productivity,
Higher output and potentially higher quality since production focuses on what ppl and
businesses are best at,
Greater variety of goods and services produced,
More opportunities for economies of scale - so size of market increases,
More competition - incentive for firms to lower costs - helps to bring prices down
Increases living standards across the world
Leads to higher level of global output and higher living standards
Advantages of specialising in production of goods and services to trade - correct
answer-Can help reduce problem of scarcity in individual countries
Enables countries PPF to shift outwards
Increased competition from abroad - increased incentives to cut prices and be efficient
Advantages of tradeable pollution permits - correct answer-Uses the market mechanism,
therefore efficient
Requires little government intervention, therefore cheap to run
Should benefit environment in the long run, by encouraging firms to use green production
methods
Government would raise revenue through permits, because they can sell them to firms. This
revenue could be inverted in green technology
If firms exceed their permit, they will have to purchase more permits from firms which do not
use their whole permit. Raises revenue for greener firms, who might then invest in green
production methods
Assumptions of PPF - correct answer-A fixed amount of resources are used
There is a constant state of technology
Asymmetric information - correct answer-When there is unequal information between
consumers and producers
Average Revenue Formula - correct answer-Average revenue = total revenue /quantity
Capital goods - correct answer-Used to make consumer goods and services including fixed
plant and machinery, hardware, software, new factories and other buildings.
Causes of government failure - correct answer-Distortion of price signals
