Economics Response Guide

Last updated Jun 14, 2023 Edit Source

• Use correct diagram
  • Illustrate both curve shifts on diagram and refer to the diagram when explaining the curve shifts
    • e.g. demand falls from D$_0$ to D$_1$ as seen on the diagram
    • Use arrows on your diagram and make sure to label every curve!
• Explain the shift for demand/supply
  • Refer to diagram
• Explain the outcomes for price and quantity
  • Price and quantity can’t always be determined, you must state this
  • e.g. when demand and supply both increase, we cannot determine the effect on price

• Define tax or subsidy (depending on the question)
  • e.g. ‘Subsidies are payments from the government to firms’
• Discuss the impact of a tax or subsidy on price, quantity and surpluses (CS, PS, DWL)
  • Example for Subsidies:
    • Decrease in price for consumers and increased benefit to producers from the revenue determined by price and the money obtained from the subsidy
      • Results in an increase in both consumer surplus and producer surplus
    • The benefit from the additional CS and PS is less than the cost to governments from providing the subsidy
      • This results in a deadweight loss due to the inefficient allocation of resources
• Diagram Example (Subsidy):

• Remember to always use a diagram and refer to points on the diagram throughout your response
• Using assessment 3 as an example (negative production externalities affecting the MSC curve)
  • Define market failure
    • e.g. ‘Market failure is when resources are allocated inefficiently in a market leading to resources being lost to society’
  • Define and Explain MPC, MPB, MEC, MSC
    • MSC = MPC + MEC
    • Define negative production externality
      • Give examples of negative production externalities briefly
        • You get marks for explaining using theory, not by piling on evidence
    • At market output MSC is greater than MPC reflecting MEC
  • Explain external cost is not captured in the market
    • MPC $\neq$ MSC
    • The price is lower than it should be due to the true cost not being reflected in the market
  • Overproduction leads to overallocation of resources → Inefficiency
  • Inefficiency results in deadweight loss (DWL) (refer to diagram)
    • Explain DWL briefly