Edexcel A-Level Economics: Theme 1 - Markets and Market Failure
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Questions and Answers

What is the term for the cost or benefit to a third party not involved in the economic activity?

  • Social cost/benefit
  • Private cost/benefit
  • Market failure
  • External cost/benefit (correct)

In a free market, the government allocates resources.

False (B)

What is the free rider principle?

People who do not pay for a public good still receive benefits from it, so the private sector will under-provide the good as they cannot make a profit.

The incidence of tax refers to the ____________ on the taxpayer.

<p>tax burden</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Free Market = An economy where the market mechanism allocates resources so consumers and producers make decisions about what is produced, how to produce it and for whom Government Failure = When government intervention leads to a net welfare loss in society Habitual Behaviour = A cause of irrational behaviour; when consumers are in the habit of making certain decisions</p> Signup and view all the answers

What is the term for the responsiveness of demand to a change in income?

<p>Income elasticity of demand (YED) (A)</p> Signup and view all the answers

Indirect taxes are levied on goods and services and decrease production, leading to an increase in supply.

<p>False (B)</p> Signup and view all the answers

What is government failure?

<p>When government intervention leads to a net welfare loss in society.</p> Signup and view all the answers

The _____________ occurs when people do not pay for a public good but still receive benefits from it.

<p>free rider principle</p> Signup and view all the answers

What is the term for taxes levied on goods and services that increase production costs and lead to a fall in supply?

<p>Indirect tax (C)</p> Signup and view all the answers

What is the main problem of scarcity?

<p>Wants are unlimited by resources are finite (D)</p> Signup and view all the answers

Division of labour leads to increased productivity.

<p>True (A)</p> Signup and view all the answers

What is the difference between the price the consumer is willing to pay and the price they actually pay?

<p>Consumer surplus</p> Signup and view all the answers

The responsiveness of demand for one good to a change in the price of another good is known as ______________________.

<p>Cross elasticity of demand (XED)</p> Signup and view all the answers

What is an example of an externality?

<p>A company produces a good that creates pollution (B)</p> Signup and view all the answers

Market equilibrium occurs when demand is greater than supply.

<p>False (B)</p> Signup and view all the answers

What is the term for the extra benefit gained from consumption of a good?

<p>Marginal utility</p> Signup and view all the answers

The willingness and ability to take risks and combine the three other factors of production is known as ______________________.

<p>Enterprise</p> Signup and view all the answers

Ad valorem tax is a direct tax imposed on a good.

<p>False (B)</p> Signup and view all the answers

What is the main characteristic of a public good?

<p>Non-rivalry and non-excludability (D)</p> Signup and view all the answers

The price mechanism is a system of resource allocation based on the government's decisions.

<p>False (B)</p> Signup and view all the answers

What is the difference between a positive statement and a normative statement?

<p>A positive statement is objective and testable; a normative statement is subjective and value-based.</p> Signup and view all the answers

The responsiveness of demand to a change in price is known as _________.

<p>price elasticity of demand</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Public goods = Goods that are non-excludable and non-rivalrous Private goods = Goods that are rivalry and excludable Market failure = When the free market fails to allocate resources efficiently Externalities = The unintended consequences of economic activity</p> Signup and view all the answers

What is the term for the value of the next best alternative forgone?

<p>Opportunity cost (C)</p> Signup and view all the answers

A perfectly price inelastic good has a PED/PES of infinity.

<p>False (B)</p> Signup and view all the answers

What is the difference between a producer surplus and a consumer surplus?

<p>A producer surplus is the price difference between what producers are willing to accept and what they receive, while a consumer surplus is the price difference between what consumers are willing to pay and what they pay.</p> Signup and view all the answers

The possibility production frontier (PPF) depicts the maximum ______________ of an economy.

<p>productive potential</p> Signup and view all the answers

What is the term for the laws that address market failure and promote competition between firms?

<p>Regulation (A)</p> Signup and view all the answers

Flashcards

Ad valorem tax

An indirect tax where the tax value depends on the good's value.

Asymmetric information

One party in a transaction has more information than the other, leading to market failure.

Capital

Goods used in production, like machinery or tools.

Capital goods

Goods produced to aid future production of consumer goods.

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Enterprise

The willingness and ability to take risks and combine other factors of production.

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Command economy

The state controls all factors of production, deciding what, how, and for whom to produce.

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Complementary goods

Goods used together, where an increase in one's price decreases demand for the other.

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Consumer goods

Goods bought and used by households and individuals for personal use.

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Consumer surplus

Difference between what a consumer is willing to pay and what they actually pay.

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What is Cross elasticity of demand?

How demand for one good changes in response to a change in another good's price.

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Demand

Quantity of a good consumers are willing and able to buy at a certain price.

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Diminishing marginal utility

Extra benefit from consuming extra units of a good decreases.

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Equilibrium price/quantity

Where demand and supply meet, with no further changes in price or quantity.

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Externalities

Costs or benefits to third parties outside of the market transaction.

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External cost/benefit

Costs or benefits to third parties, not involved in the economic activity.

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Free market

Market mechanism allocates resources, with consumer and producer decisions.

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Ceteris paribus

All other things remaining equal or constant, used when analyzing economic changes.

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Division of labor

Specialization of labor during production, each worker focusing on a specific task.

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Economic problem

Scarcity of resources, where unlimited wants exceed finite resources.

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Efficiency

Optimal allocation of resources, maximizing benefits and minimizing waste.

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Excess demand

Demand exceeds supply when price is too low.

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Excess supply

Supply exceeds demand when price is too high.

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Free rider principle

Benefitting from a public good without paying for it, leading to under-provision.

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Government failure

Government intervention leading to a net welfare loss in society.

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Habitual behaviour

Irrational behavior due to ingrained decision-making patterns.

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Incidence of tax

The tax burden on the taxpayer, who ultimately bears the cost.

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Indirect tax

Taxes on goods and services, shifting production costs onto consumers.

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Inferior good

Demand decreases as income increases.

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Market failure

The free market fails to allocate resources optimally, creating inefficiencies.

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Market forces

Mechanisms that adjust prices based on supply and demand.

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Minimum price

A floor price that firms cannot charge below, set by government for protection.

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Mixed economy

Combination of free market and government control over resource allocation.

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Model

A testable hypothesis, often mathematical, to explain economic phenomena.

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Negative externalities of production

Social costs exceed private costs in production.

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Non-excludability

A characteristic of public goods where people can't be prevented from using them.

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Non-renewable resources

Resources that cannot be replenished at the same rate as consumption.

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Non-rivalry

One person's use doesn't prevent others from using the good.

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Study Notes

Economic Concepts

  • Ad valorem tax: An indirect tax imposed on a good where the value of the tax is dependent on the value of the good.
  • Asymmetric information: A situation where one party has more information than the other, leading to market failure.

Factors of Production

  • Capital: One of the four factors of production; goods which can be used in the production process.
  • Capital goods: Goods produced in order to aid production of consumer goods in the future.
  • Enterprise: One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.

Market Concepts

  • Command economy: An economy where all factors of production are allocated by the state, deciding what, how, and for whom to produce goods.
  • Complementary goods: Goods that are used together, where an increase in the price of one good leads to a decrease in demand for the other good.
  • Consumer goods: Goods bought and demanded by households and individuals.
  • Consumer surplus: The difference between the price the consumer is willing to pay and the price they actually pay.
  • Cross elasticity of demand (XED): The responsiveness of demand for one good to a change in the price of another good.

Demand and Supply

  • Demand: The quantity of a good or service that consumers are able and willing to buy at a given price at a given moment in time.
  • Diminishing marginal utility: The extra benefit gained from consumption of a good generally declines as extra units are consumed, explaining why the demand curve is downward sloping.
  • Equilibrium price/quantity: Where demand equals supply, so there are no more market forces bringing about change to price or quantity sold.

Market Failure

  • Externalities: The cost or benefit a third party receives from an economic transaction outside of the market mechanism.
  • External cost/benefit: The cost or benefit to a third party not involved in the economic activity, the difference between social cost/benefit and private cost/benefit.

Market Structure

  • Free market: An economy where the market mechanism allocates resources, so consumers and producers make decisions about what is produced, how to produce it, and for whom.

Other Concepts

  • Ceteris paribus: All other things remaining the same.
  • Division of labour: When labour becomes specialized during the production process to do a specific task in cooperation with other workers.
  • Economic problem: The problem of scarcity, where wants are unlimited, but resources are finite, so choices have to be made.
  • Efficiency: When resources are allocated optimally, so every consumer benefits and waste is minimized.
  • Excess demand: When price is set too low, so demand is greater than supply.
  • Excess supply: When price is set too high, so supply is greater than demand.
  • Free rider principle: People who do not pay for a public good still receive benefits from it, so the private sector will under-provide the good as they cannot make a profit.
  • Government failure: When government intervention leads to a net welfare loss in society.
  • Habitual behaviour: A cause of irrational behaviour, when consumers are in the habit of making certain decisions.
  • Incidence of tax: The tax burden on the taxpayer.
  • Indirect tax: Taxes levied on goods and services, which increase production and lead to a fall in supply, although this is often partially, or fully, passed onto consumers.### Economic Concepts

Inferior Goods

  • An increase in income leads to a decrease in demand
  • Example: buying inferior goods like cheap bread when income increases

Market Failure

  • The free market fails to allocate resources in the best interest of society
  • Results in an inefficient allocation of scarce resources

Market Forces

  • Forces that act to reduce prices when there is excess supply and increase prices when there is excess demand in a free market
  • Help to allocate resources efficiently

Minimum Price

  • A floor price that a firm cannot charge below
  • May be set by governments to protect consumers or producers

Mixed Economy

  • A system that combines elements of capitalism and socialism
  • Both the free market and the government allocate resources

Model

  • A hypothesis that can be tested and proven or disproven by evidence
  • Tends to be mathematical, whereas a theory is in words

Negative Externalities of Production

  • The social costs of producing a good are greater than the private costs
  • Example: pollution caused by a factory

Non-Excludability

  • A characteristic of public goods, where someone cannot be prevented from using the good
  • Example: national defense, where everyone benefits regardless of payment

Non-Renewable Resources

  • Resources that cannot be replenished or replaced at a level equal to consumption
  • Example: fossil fuels, minerals, and metals

Non-Rivalry

  • A characteristic of public goods, where one person's use of the good does not prevent someone else from using it
  • Example: a public park, where many people can use it simultaneously

Demand and Supply

Normal Goods

  • Demand increases as income increases
  • Example: buying more expensive bread when income increases

Price Elasticity of Demand

  • The responsiveness of demand to a change in price
  • Can be measured using the PED formula

Price Elasticity of Supply

  • The responsiveness of supply to a change in price
  • Can be measured using the PES formula

Perfectly Price Elastic Good

  • PED/PES = Infinity; quantity demanded/supplied falls to 0 when price changes
  • Example: a perfectly competitive market with many substitutes

Perfectly Price Inelastic Good

  • PED/PES = 0; quantity demanded/supplied does not change when price changes
  • Example: a life-saving medicine with no substitutes

Possibility Production Frontier (PPF)

  • Depicts the maximum productive potential of an economy, using a combination of two goods or services
  • Shows the opportunity cost of producing one good over another

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Flashcards covering Theme 1 of Edexcel A-Level Economics, introducing markets and market failure.

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