THEME 1 ECON BIG STACK

- All of Theme 1 for edexcel economics

what is a public good

A good that is Non-rival and Non-exclusive

what is the free rider problem

• There is no insentive for people to produce and so it can result in a missing market

what is a Quasi public good

• Could be both public/private

what are the three causes of goverment failure

• conflicting objectives 

• inadaquate information 

• administeritive costs

what is goverment failure

when goverment intervention in market leads to a net welfare loss in comparison to the free market forces

what are the issues with goverment intervention that lead to the failure

• It distorts the price signals 

• adminsterative costs 

• information gaps 

what is information failure in terms of market failure

• Demand would be higher if consumers had more information 

• information and knowladge are imperfect resulting in a missallocation of reacources 

• over consumption of demerit goods 

• under consumption of merit goods 

what is asemetric information

when some party members of a transaction have more information of a product than others

when does a goverment use indirect taxes

When there are negitive externalitys in consumption or production

what are the benifits of Indirect taxes

Increaces cost of production → internilises externalitys → Higher P lower QD → reduces overconsumption

• creates allocative efficency + revenew for goverments

what are the limitations of indirect taxes

• Black markets

• Regressive 

• Levals of tax can be inflatonary 

• Could be price inelastic e.g alcohol

when are subsides used

• When there are positive externalitys in consumption and production

what are the benifits of subsidies

Lowers production cost → lower P higher QD → Increaces consumption + welfare gain

• lower prices 

what are the limitations of subsidies 

• High oppertunity costs 

• setting the leval 

• Price inelastic demand 

what is the minimum price

• The floor price set above equilibrium 

what are the benifits of the minimum price 

• prevents exploiation 

• information failure 

• increaces consumer surplus 

what are the limitations of minimum prices

• black markets 

• excess supply 

• oppertunity cost 

what is an example of a minimum price

Alcohol in scotland

what is an example of a maximum price

new york rent cap

what is the maximum price

• price ceiling [bellow equilibrium]

what are the benifits of a maximum price

• consumption of neccesitys

• reduces information gaps 

what are the limitations of maximum prices

• excess demand

• missalocation 

• shortages = black market 

• cost

what is state provision

direct provision of goods/services by goverment free at point of consumption

what are the benifits of state provision of public goods

• solves free rider issue

• scocialy efficent

• scocial welfare gain

• removes missing market and inequality

what are the limits to state provision

• high opportunity cost 

• high excess demand 

• no price signal 

• inefficeny and information gaps 

what are the benifits of trade + polllution permits

• insentivises firms to reduce emmisions 

• reduces negitive externalitys 

• goverment gains revenew

what are the limitations to permits

• high enforcment costs 

• information gaps 

• unintended consequences 

• inequality

what is an example of the failings of permits

Tata + British steel got free premits to help them compeate with chinease competion

what is an example of a permit

EU emmisions trading system

what are the benifits of providing information

• reduces gaps 

• reduces demand for de merit goods 

• increaces demand for merit goods 

• low cost 

limits to informartion provision

• consumers may ignore 

• time lag 

• costs 

• effectiveness due to PED

what is a regulation

a rule/law enacted by a goverment that must be followed by economic agents to ecourage behavioral change

benifits of regulations

• corrects market failure

• reduces negitive externalitys

• protects consumers

• fixes information gaps

limitations of regulations

• goverment failure 

• opertunity costs 

• black market 

• time lags 

what is market failure

When the price mechanism lead leads to an inefficient allocation of resources and deadweight loss of economic welfare

What is another name for market failure?

Allocative inefficiency

What are the causes for market failure?

• Externalities

• Under provision of public goods

• Information gaps

What is complete market failure?

There is no market whatsoever

What is partial market failure?

Occurs when a market exists, but there is a miss allocation of resources

What are externalities?

Costs and benefits to a third-party created by economic agents undertaking their activity

What are negative externalities?

Costs to a third-party that are not included in the price of the economic activity

• A.k.a. External costs.

What are merit goods?

Good which are better for the consumers than they realise therefore under consumed e.g. vaccinations

What are demerits?

Good which are was for consumers and they realise therefore over consumed e.g. smoking

What are positive externalities?

Benefits to a third-party that are not included in the price of the economic activity

• A.k.a. External benefits.

What are private cost?

The cost of consuming or producing goods/services that have to be paid for by an individual firm for that economic activity

What are social costs?

The total costs of consuming or producing goods paid for society

Private costs + external costs = social costs

What leads to negative externalities?

When private costs are greater than social costs, we have negative externalities.

What are positive externalities?

The difference between private benefits and social benefit benefits

What are negative externalities?

The difference between private costs and social costs

What are private benefits?

The benefits of consuming or producing goods/services that are received by an economic unit, example individual/firm

What does social benefits?

The benefits of consuming or producing goods out of received by society

Social benefits = positive benefits + external benefit benefits

what is the nature of negitive externalitys of production

• Costs to the third party due to actions of producers 

• MSC>MPC 

• msc=mpc+ec

For example Fossil fuels = air polution

• this is due to self intrest of producers leading to overproduction and thus consumption and a missalocation of reacorces

demand stays the same

costs =

suply

benifits =

demand

where do consumers and producers opperate at on externality diagrams

private optimum

what type of externality

negitive externality on production

what is the nature of positive externalitys of consumption

• benifits to third party from conumers actions 

• MSB > MPB

• example vacinations = less spread 

• msb= mpb + positive eb

• this leads to an underconsumption due to self intrest of consumers and a misalocation of reacorces

what externality is this

what is the nature of positive externalitys on producers

• benifits to third party due to producers

• example- training prodrams for employers = other firms

• MSC>MPC

• sc=pc+ec

• leads to under production due to self intrest of the producer

what externality is this?

positive externality of production

negitive externalitys of condumprion

• costs to 3rd party due to consmption of other

• eg. Smoking = efect on NHS and 2nd hand smoke

• MSB<MPB

• SB=PB +negitive EB

• leads to overconsumption due to consumers self interest and misallocation of reacorces

what externality is this?

negitive externalitys on consumers

Ceteris paribus

other variables remain constant/the same

economic goods

resources that are scarce e.g oil

Economic problem

the concept of infinate wants but finate resourced. there is not enough of some recorces causing economic agents to make a decision reluting in trade offs and oppertunity cost

free goods

resources that are not scarce e.g water

how to work out percentage change

new - old / old x 100

Human capital 

value of a workforce

identify 8 factors effecting demand

- marketing 
- seasonal 
- average income 
- simmilar products pricing 
- population structure
- compleamenting products 
- price of good 
- trends

Model

a simplified representation of reality used to provide insight into economic descisions and events

non-renewable resource

cant be replaced in a life time e.g gold

normative statement

a statement that involves a value judgement on what ought to be 

Oppertunity cost

Next best alternative forgone 

physical assets

machinary / non-human tools

positive statement

a statements about what is 

renewable scource

replaceable within our life time e.g wood

scarcity

unlimited demand for the finate resorces of the world 

value judgement

a statement based on your opinion or beliefs rather than facts

what are the four factors of production

Land, labour, Capital and Enterprise

What are the Four functions of money

- money should have a store of value
- deffered payment should allow depts
-medium of exchange
- mesure of value

what are the three assumptions 

Governments wish to maximise welfare, individuals wish to maximise utility and producers wish to maximise profit.

what do we mesure utility with

utils

what factors effect PED

- close substitutes
- cost of substituting for other products 
- brand loyalty 
- degree of neccesity 

What is DEMAND ?

the quantity that consumers are willing and able to buy at a given price at a given time

who belives in more mixed economy 

Maynard kenes

who belived in free market 

adam smith (invisible hand) and Frederic Hayek

who belived in command market

Karl Marx

what is utility

a mesure of satisfaction

what is total utility

total satisfaction

what is the  law of dimminishing marginal utility?

If we consume more and more  units of a particular commodity the utility derived from consumption of addditional unit dimisnishes

what is the  law of demand ?

demand varies inversly with price

what is Product possibility frontier

can be used to show diffrent combinations of output for two products

Specilisation

the production of a limited range of goods by a company or individual

Division of labour

Specilisation by workers who perform different tasks at different stages of production

bennifits of specilisation

- better pay 
- more oppertunitys
- greater economic efficeny 

what are the limmitations to specilisation 

- overdependancy 
- lack or transverable skills 
- boring

what is a capital good

physical assets or resources that are used in the production of goods and services

what are consumer goods

products which satisfy our needs and wants directly

what causeses changes in the maximum ppf

• migration 

• natural hazzards 

• ageing population 

• labour force 

• war + ilness 

what is the oppertunity cost for customers 

how to spend limited time/income