Economics - Theme 1
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Economics - Theme 1 - Leaderboard
Economics - Theme 1 - Details
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| 🇬🇧 | 🇬🇧 |
| Developing Models | - model = a theoretical concept that looks at how different variables interact - they use both qualitative info and statistical data to underpin the theoretical thought process - they use real-world info to aid evidence outcomes - this allows economists to observe how a change in one variable impacts others |
| Assumptions | - economic agents (e.g individuals and firms) are rational & their preferences or choices reflect this - consumers wish to maximise utility - producers wish to maximise profits |
| Ceteris Paribus | - all other factors remain the same - e.g. when economists raise the price of a good or service they make the assumption that all other factors stay the same, such as consumer income - e.g. an increase in price = decrease in demand |
| Social Sciences | - study of human beings and their behaviours and interactions - subjective a lot of the time |
| Natural Sciences | - study of nature - based a lot on data and facts |
| Positive Statements | - objective, fact-based comments, that can be tested - not subjective - allow scientific testing to take place that can be accepted or rejected - e.g. unemployment rate = 8% - it's a fact |
| Normative Statements | - subjective, questionable comments, that are difficult to test - require value judgements - e.g. the government should increase spending to help reduce the employment rate (should = not a fact) |
| Value Judgements | - a statement that has been put forward by an individual that can't be verified factually |
| What is the 'economic problem'? | - people have unlimited wants - there aren't enough resources available to supply all of these wants - creates the economic problem of scarcity - there are finite resources available to supply infinite wants |
| What is economic activity? | - satisfying the wants and needs of society - production of goods and services to satisfy needs and wants - will improve economic welfare (benefit gained from the production of good and services - needs = necessities - wants = desires |
| What are the three basic questions that the economic problem tries to answer? | - what to produce? - how to produce? - who to produce for? |
| Renewable Resources | - ones that can be replenished - e.g. trees can be used for power then replanted - e.g. wind, solar, hydroelectric power, bio-fuels, water, geothermal, wood, plants, animals |
| Non-Renewable Resources | - ones that are in finite supply, and therefore, will eventually run out - e.g. oil, natural gas, fossil fuels, coal, precious metals |
| Sustainable | - resources being used for economic activities in such a manner they won't run out - e.g. not over-fishing, replanting |
| Factors of Production | - labour - the human input into the production process - land - natural resources available for production - enterprise - entrepreneurs organise factors of production and take risks - capital - goods used in the supply of other products - e.g. tech |
| Opportunity Cost | - benefit lost of the next best alternative when making a choice - we have to make choices to allocate resources - always competing alternatives |
| Define external costs and state the link to social costs | - Costs to a third party - social-private=external -> pollution |
| What does MPC stand for? | Marginal private cost |
| What does MSB stand for? | Marginal social benefit |
| What does MSC stand for? | Marginal social cost |
| What is a complete market failure? | When the market is missing |
| What are the causes of market failure? | - externalities - under provision of public goods - information gaps |
| Define private costs | Cost of producing/consuming goods/services that have to be paid for by the individual or a firm |
| What are negative externalities? | Cost to a third party not included in the price of economic activity |
| What is a negative externality of a burger van in the street? | - Air/noise pollution - obesity - litter |
| Define external costs and state the link to social costs | - Costs to a third party - social-private=external -> pollution |
| When does the socially optimum allocation of resources occur? | When marginal social costs are equal to marginal social benefits |
| What does information asymmetry mean? | This occurs when one party has more information than the other in a transaction |
| What are information gaps? | These occur when a buyer doesn't have all of the necessary information necessary to make an informed (and rational) decision |
| What does it mean if a good is non-rival? | Where the consumption of the good does not reduce the amount available for consumption by others |
| Define public goods | One where its use by an individual doesn't stop others from using it whilst its consumption does not reduce the amount available for consumption by others |
| What is the free rider problem? | People finding ways to use a public good without paying, e.g. netflix |
| What are the negative externalities of alcohol sales? | - burden on the NHS - drunk drivers crashing cars - leads to fights - police presence - litter |
| Give an example of a quasi-public good and explain why it's quasi-public | - e.g. a park - it eventually becomes crowded |
| What's the difference between complete and partial market failure? | Complete market failure = no market exists (usually due to the free rider problem), whereas in partial market failure, the market exists but a socially-suboptimal amount is consumed or produced |
| What's the difference between private and external costs? | Private = costs of consuming/producing a good/service to an individual External = costs of consuming/producing a good/service to a third party |
| What's the difference between private and external benefits? | Private = benefits of consuming/producing a good/service to an individual External = benefits of consuming/producing a good/service to a third party |
| What's the difference between public and private goods? | Public = non-rival, non-excludable Private = rivalrous, excludable |
| What's the difference between external costs and social costs? | External = costs of consuming/producing a good/service to a third party Social = costs of consuming/producing a good/service to society |
| What are five real-world examples of market failure? | 1. Cement production 2. Fishing 3. Air pollution 4. Methane emissions 5. Plastics production |
| What are five real-world examples of public goods? | 1. Mass transport services 2. public footpaths 3. museums 4. beaches 5. lighthouses |
| What are five real-world examples of markets in which there are information gaps? | 1. Smoking 2. Alcohol 3. Gambling 4. Driving a car 5. Tourism |
| What are five real-world examples of positive consumption externalities? | 1. Flood defences 2. Car sharing 3. Bee-keeping 4. Landscape gardening 5. R & D |
| What are two advantages and two disadvantages of economic agents considering only their private costs and benefits when making choices in markets? | Advantage 1: maximise personal welfare Advantage 2: Rational Disadvantage 1: Might lead to market failure Disadvantage 2: not altruistic |
| What is a real world example of communities affected by negative production externalities? | Alberta tar sands in Canada |
| What is a real world example of businesses affected by negative production externalities? | BP (oil spill) |
| What is a real world example of communities affected by positive consumption externalities? | Oxford (car-sharing/bike-sharing) |
| What is a real world example of businesses affected by positive consumption externalities? | Tesla/Virgin (space exploration) |
| What are four examples of policies used in different countries to reduce traffic congestion? | 1. London, UK - Congestion Charge 2. Athens, Greece - Only cars with certain licence plates can drive into city centre 3. Frankfurt, Germany - Tram system and exclusion zones for cars 4. Los Angeles, USA - Car pool lanes |
| Define free-rider problem | Once a good is provided, others can use it for free and have no incentive to pay |
| Define non-rival | One consumer’s consumption of the good/service does not affect the consumption of another user’s consumption |
| Define non-excludable | When the good is provided, anyone can access it for free. |
| Define non-rejectable | A consumer can’t reject the consumption of a good/service. For example, national defence |
| Define private good | Excludable and rival |
| Define property rights | Private ownership of a particular resource |
| Define quasi-public good | The good becomes rivalrous with a high level of usage |
| Define the tragedy of commons | The over-use of common goods (because it is non-excludable), which leads to the exhaustion of the resources (because it is rival). |
| Is this product rival/non-rival and excludable/non-excludable: free public lecture held at a university? | - rival - non-excludable |
| Is this product rival/non-rival and excludable/non-excludable: a forest used by people to collect firewood? | - non-rival - non-excludable |
| Is this product rival/non-rival and excludable/non-excludable: e-bikes available to hire in a city centre? | - rival - excludable |
| Is this product rival/non-rival and excludable/non-excludable: seats for a match in a premier league football stadium? | - rival - excludable |
| What are three real-world examples of the free rider problem in markets? | 1. lighthouses 2. street lights 3. firework display |
| Why are public goods often regarded as an example of complete market failure? | Public goods lead to complete market failure because the non-excludability of them results in the free-rider problem. If consumers can use the goods/service for free then businesses will earn no revenue, and therefore no profit, and so are not incentivised to provide the service/good at all. |
| What are four goods/services where technological change has made them more excludable? | 1. pay per view 2. automatic ticket barriers at train stations 3. different operating systems preventing sharing of info across devices/systems 4. the internet - for those without access it is increasingly difficult to use banking, mapping etc |
| What are five goods/services where technological change has made them less excludable? | 1. Wifi hotspots 2. Existence of Amazon and Etsy gives small firms a chance to sell without their own website 3. Price apps for farmers in developing countries makes it easier to be a farmer and to get the ‘right’ price 4. Taxi firms – Uber and Addison Lee etc 5. Home delivery food e.g. Deliveroo |
| What are three examples of where local communities have acted to finance and provide services that are public good in nature without the government acting as a direct supplier? | 1. Johannesburg, SA - policing 2. Harlow, UK - street lights 3. primary schools - fireworks event |
| What are three arguments for and three arguments against the UK government increasing spending on flood defences for communities? | FOR: 1. Increases attractiveness of area for tourism 2. Increase investment in the area 3. Protects people’s houses (keeps house prices high) AGAINST: 1. Expensive (pushes Government into deficit) 2. Opportunity cost of expenditure 3. Often protecting lowest-income areas (low value housing/businesses) despite being very expensive project. |
| Define asymmetric information | One economic agent has more information about a certain good/service than another economic agent |
| Define symmetric information | All economic agents have identical information |
| Outline George Akerlof’s “Theory of Lemons” and how it can cause problems in the market for second-hand products such as used cars and household appliances | In the 2nd-hand market for cars, seller know the difference between peaches (good cars) and lemons (bad cars). As a result, they will lie and try to sell more lemons to consumers – lying that they are peaches. |
| What are three real-world examples of asymmetric information in markets? | 1. Fake watches 2. Horsemeat scandal 3. Extra virgin olive oil (often not extra virgin (or even ‘olive’) oil) |
| What are five real-world examples of where individuals may suffer from a lack of information when making choices in markets (not necessarily involving asymmetric information)? | 1. University choices 2. Buying off eBay/gumtree 3. Going to a new hairdresser 4. Kebab van 5. payday lending |
| What are five examples of interventions in markets designed to improve the quantity and quality of information available to consumers when making decisions/choices? | 1. Customer reviews 2. Inspections by regulators 3. 14-day ‘cool off’ periods 4. Certificates of authenticity 5. Transparent labelling |
| What's the difference between specific and ad valorem indirect taxes? | Specific tax is a per unit tax (same tax per unit). Ad Valorem is a percentage tax (percentage of final price) |
| What's the difference between maximum and minimum prices? | Maximum price is set below the free market equilibrium and a minimum price is set above. |
| Give an example of a specific tax | Air passenger duty is £13 |
| Give an example of an ad valorem tax | Beer duty - multiply the bulk litres by the ABV of the product |
| What are the top three taxes that bring in the most annual tax revenue for the UK government? | 1. income tax - £800 billion 2. national insurance contributions - £157 billion 3. VAT - £130 billion |
| Identify 3 benefits and 3 drawbacks of the soft drinks levy introduced into the UK in 2018 | Advantage 1: Reduces consumption Advantage 2: Makes healthier alternatives relatively cheaper (and increased demand) Advantage 3: Firms reduce sugar content Disadvantage 1: Increases price to consumers Disadvantage 2: PED may be inelastic (ineffective) Disadvantage 3: Levy is small (ineffective) |
| Identify 3 benefits and 3 drawbacks of introducing a carbon tax in a country such as the UK | Advantage 1: Reduces consumption Advantage 2: Firms invest in alternative “green” technologies Advantage 3: Negative externalities are reduced Disadvantage 1: Increases price to consumers Disadvantage 2: Increases costs of production for other firms that use them as a raw material (cost push inflation in the economy) Disadvantage 3: Businesses may leave the UK (resulting in loss of jobs) |
| How does the incidence of tax on consumers and producers vary as the PED for the good being taxed varies? | As PED becomes more price inelastic, the burden of a tax shifts further onto consumers and away from producers |
| Define bail out | A firm on the verge of bankruptcy is given enough money to avoid bankruptcy |
| Define minimum producer price | A guaranteed price at which that the Government will buy up any excess supply |
| Define tax relief | A fall in the tax rate |
| Draw a diagram showing the effects of a producer subsidy on the levels of consumer and producer surplus | Both producer and consumer surplus should increase |
| Draw two diagrams in the spaces below, one showing the effect of a producer subsidy when demand is price inelastic and in the second diagram, when demand is price elastic. In both cases, show the effects of a subsidy on equilibrium prices and quantities | When demand is price inelastic, the incidence of the subsidy on consumers is very large and the incidence on producers very small |
| Identify three benefits and three drawbacks of the UK government reducing the scale of subsidies to the UK farming industry after the UK leaves the European Union Common Agricultural Policy | Advantage 1: Farmers should become more dynamically efficient Advantage 2: Farmers should become more productively efficient Advantage 3: Government saves money Disadvantage 1: Prices rise for consumers Disadvantage 2: Farmers may not be competitive. They may see a fall in sales and make a loss Disadvantage 3: Farmers may leave the market |
| Identify three benefits and three drawbacks of the UK government subsidising renewable energy | Advantage 1: Prices should fall to consumers (increase consumer surplus) Advantage 2: Costs of production across the economy should fall. Exports are more competitive Advantage 3: Incentivises more firms to enter the market Disadvantage 1: Expensive Disadvantage 2: Firms are protected from competition and therefore are likely to be inefficient Disadvantage 3: May not reduce prices by a significant amount |
| What are five examples of industries/markets in which a maximum price has been imposed? | 1.Rent control (Copenhagen) 2. Mobile roaming (EU) 3. Danish Krone – currency (Denmark) 4. Pay (CEO bonuses in UK) 5. Water (Greece) |
| Identify three benefits and three drawbacks of a government introducing a system of rent controls (i.e. a maximum price on rented housing) | Advantage 1: Price should be lower Advantage 2: Low-income households can afford housing Advantage 3: Equitable policy (brings people out of poverty) Disadvantage 1: Suppliers (landlords) do not wish to rent their houses as there is less opportunity to make a profit Disadvantage 2: May lead to excess demand (shortage) Disadvantage 3: May lead to the formation of a black market |
| Identify three benefits and three drawbacks of a government introducing minimum prices for alcoholic drinks | Advantage 1: Price should be higher, reducing consumption Advantage 2: Fixes market failure (of negative externalities) and leads to more efficient allocation of resources Advantage 3: Does not require taxation Disadvantage 1: Prices are higher leading to a reduction in consumer surplus Disadvantage 2: Regressive (high price affects lowincome households much more) Disadvantage 3: Alcohol is PED inelastic, therefore it may not be effective |