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

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

    What is the main problem of scarcity?

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

    Division of labour leads to increased productivity.

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

    Market equilibrium occurs when demand is greater than supply.

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

    What is the main characteristic of a public good?

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

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

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

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

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

    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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