Timed+essay+in+class


 * Thursday 13th/03/14 **


 * Distinguish between public goods and merit goods (10) **
 * Is it desirable for Governments to provide these goods to ensure an efficient allocation of resources? (15) **

2013 Questions: Markscheme

Simply define, show formulae and give brief examples
 * Carefully explain what PED, CED and YED are meant to measure: **

Businesses make pricing decisions based on total revenue and this is determined by price elasticity of demand. Give examples of pricing decisions eg should increase price if PED inelastic. Knowledge of PED can allow firms to pass on taxes (and subsidies) to consumers if PED is inelastic. If PED is elastic firms must absorb taxes in the form of lower profit margins Price discrimination only possible if some knowledge of different PEDs is had by firms.
 * Discuss the practical importance of price elasticity of demand to businesses and government. **

Governments base decisions about indirect taxes on the price elasticity of demand for products. Governments might consider price elasticity of demand in decisions about tariffs and depreciations/devaluations.

Note that PED may be limited by availability and accuracy of data. PED is not fixed. Also PED shows revenue max not profit max.

Definition of the market mechanism explanation of the signalling function in relation to producers and consumers: // e.g. // as consumers increase their demand for a good (shift of demand to the right) the price of the good and profits rise, acting as a “green light” signal to producers to increase their output (movement along the supply curve); as the supply of a commodity becomes more scarce, supply shifts to the left and the rise in price signals to consumers to reduce their demand (movement along the demand curve); these changes in demand and supply bring about changes in resource allocation explanation of the incentive function in relation to producers: //e.g.// an increase in demand for a product will raise its price and profitability and provide the incentive for producers to supply more/new firms to enter the market; the higher demand for the product will also lead to an increase in demand for labour to produce the product, causing wages to rise, which will in turn provide an incentive for workers to seek employment in that industry; these changes in demand and supply bring about changes in resource allocation use of appropriate diagrams //e.g.// demand and supply
 * What role do prices play in the allocation of scarce resources in a market mechanism **


 * Evaluate the options available for governments to overcome market failures due to demerit goods **

//Definition of demerit good • explanation of forms of government intervention in the market for demerit goods,// e.g. //in terms of//

an increase in indirect taxation and increased regulation (age restrictions, health warnings, banning outright etc) //etc//.) • arguments in support of government intervention, //e.g.// in terms of overprovision of demerit goods, negative externalities, MSC and MSB and resource allocation Difficulties with government intervention, //e.g.// in terms of measuring external costs, also does government intervention reduce  //consumer choice to choose their own consumption patterns (I like fast food and alcohol.....), employment in these// industries, parallel markets (so consumption doesn't fall but revenue goes elsewhere), //etc.// • use of appropriate diagrams //e.g.// MSC, MSB

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