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Microeconomics Examples

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Economics

Have you ever thought about all the microeconomics examples that happen in everyday life? Microeconomics is the study of economics with a spotlight on a person’s or business decision making. John’s decision to open a bakery, for example, will be subject to numerous microeconomics decisions. Follow along to understand more about microeconomics with this story-like explanation.

Microeconomics is the branch of economics that studies the behaviour of individuals, households, and firms regarding their decision-making in the allocation of their scarce resources. It also studies the interaction between these agents.

You can read more in our explanation on Microeconomics.

If you have read our explanation on Microeconomics, you already know that Studysmarter has divided Microeconomics into seven blocks. Let’s revise those quickly before examining the examples.

The seven blocks of microeconomics

  1. Consumer rationality. It assumes that consumers will make rational decisions to maximise utility given the scarcity of resources.
  2. Price determination in a competitive market. Price in a perfect market is determined by demand and supply.
  3. Production, cost, and revenues. This block determines how much production is needed to generate the target revenue considering all the costs poured into production processes.
  4. Market structures. These determine the nature and competition in the market.
  5. Labour market answers the question: is the necessary labour force available?
  6. Market failure. When price mechanisms fail to allocate resources, the market fails.
  7. Distribution of wealth. Income inequality may cause more poverty even if the standard of living is improving.

In light of these seven blocks, let’s now consider some examples.

How does Microeconomics affect the decisions of entrepreneurs?

As we said before, in this explanation we will use the example of John: a young, motivated entrepreneur who wants to start his own bakery.

Microeconomics Examples A bakery where demand and supply of goods happen StudySmarterA bakery like the one John wants to start. Source: Yeh Xintong, Unsplash.

Consumer rationality

John has to make many decisions before opening his bakery. He has to decide the location, size of the shop, range of rent he can afford, budget for equipment, utilities, raw materials, advertising, and running costs before he starts making profits. Here, John is playing a role of a consumer.

According to his total budget, he will allow a certain amount of funds to every requirement. He has to make decisions rationally. He cannot rent out a shop in the high street and compromise his advertising funds. He has to consider the opportunity cost for his decision.

After considering all factors, John has decided to rent out a shop in a busy locality but with comparatively cheap rent. He did not compromise on equipment and raw materials.

Price determination of a commodity in a competitive market

After scanning through the locality, he spotted that there was only one bakery with a higher price range. The other competitors were supermarkets which sell similar products but at much cheaper prices.

John decided to advertise his freshly baked products at a rate cheaper than the high-priced bakery but costlier than supermarkets. Some of the bakery products have ‘inelastic’ demand and thus price is determined by the market competition. Another factor that will affect prices is the prices of raw materials and utilities. John has considered certain monthly expenses before setting prices for his products.

Demand and supply of goods

In a perfect market, price is determined when demand and supply are in equilibrium. If supply is more than demand, the price will decrease and if demand is more, the price will increase.

In our example, John has to check with his suppliers for a regular supply of raw materials at a given price.

Consider blueberry muffins are high in demand at John's bakery. He orders more blueberries from his supplier but due to Brexit, the supplier could not import blueberries from the EU causing scarcity of resources.

Now, John has to buy blueberries from another supplier at higher prices. He may increase the price of blueberry muffins at his bakery by a small margin or bear some profit loss. This is how a change in either demand or supply can affect the price.

Production, cost, and revenues

After considering his expenses and choosing his position, John has to calculate how many products he needs to sell to cover his expenses. He has to consider all ‘sunk costs’ and operating costs. He can then use profits to invest it again in the business.

Market structures: competition and monopoly

The UK has a high index of ‘ease of doing business ’. Considering John is based in London, he has fewer barriers to entry. The UK has a mixed economy and the government has many rules that protect small business owners from high competition due to big players.

John has uniqueness in his products. He has identified his market segment. Along with serving incoming customers in his bakery, he has also decided to cater to requests from business clients. This differentiation from his competition gives John an advantage in this market.

Labour market

John can’t do this alone! He needs dedicated and hard-working staff who is skilled and equally enjoy baking. He may have to run the bakery in two shifts, he will also need a barista, a teller, a cleaner, and a pastry chef. As the labour market may provide John with what he is looking for, he has to match their monetary expectations. This may affect his cost of production.

Market failure

It may happen that there is not enough demand for bakery products at a certain price range or there is a shortage of pastry chefs. This may cause fewer sales at the proposed prices.

You may have noticed that many small businesses suffered during the Covid pandemic. Businesses were not able to provide salaries to employees as there was no production and no sales. In such cases, the government may intervene and help correct the market failure.

Distribution of wealth

Income inequality can be a concerning point for small businesses. John has decided on his market segment. His customers are ready to pay a premium for quality bakery products. If income inequality goes on increasing, he may lose his customers or may have to reduce his prices.

Real-life examples of microeconomics

It is evident from the analysis above that microeconomics controls how businesses make decisions.

Market failure examples

To further understand the concepts of Microeconomics, read through the following real-world examples.

Market failure: climate change

Climate change is a significant change in weather over a small period of time. Greenhouse gases are the byproducts of many industrial processes. Some climate change effects are global warming, rising sea levels, storms, and depletion of the ozone layer.

Industries around the world have failed to reduce greenhouse gases and stop climate change. This is a Market Failure. The causes for the market failure are the lack of information or awareness about reducing the emission of greenhouse gases, network effects, and the lack of incentives to innovate using carbon-neutral products and processes. Some governments around the world have taken positive steps to tackle climate change like promoting electric cars.

Market failure in healthcare

Governments highly regulate the healthcare sector. This ensures safe and affordable healthcare services to all. However, high regulations and standards create market entry barriers. This may lead to oligopoly or monopoly in healthcare. There can be negative externalities that disturb the market.

Everyone in healthcare plays an important role. The market will fail if any group, let’s say nurses, go on a strike. You can read more about it in our explanation of Market Failure in Healthcare.

Housing market failure

The housing market can fail due to high house costs, geographical immobilities, environmental factors, and homelessness. The 2008 financial crisis, for instance, began with the relaxed regulations in the housing market.

This allowed for those with poor or no credit history to get loans and mortgages. Many started defaulting on paying back housing loans and the whole system collapsed.

Read more about how the 2008 financial crisis and its effects in our explanation of Housing Market Failure.

Price discrimination example: airline tickets

Price discrimination in airline tickets is a real-life example of microeconomics. The airline industry uses price discrimination and dynamic pricing techniques while setting prices for tickets. Both of these strategies are affected by microeconomic factors.

The price discrimination strategy considers the customers’ purchasing power, the demand for a particular ticket, and the time of the flight (whether is it a busy weekend or unsocial hours). Many airlines charge more for seats with more legroom or business class.

Dynamic pricing takes into account real-time market data. This data includes competitor prices, time of booking, customer behaviour, and remaining seats on an aeroplane.

Microeconomics Examples An airline is a real life example of microeconomics StudySmarterAirlines use price discrimination and dynamic prices to make sure to fill their flights. Source: Hanson Lu, Unsplash.

Market structure examples

An ideal market is a free market without any barriers to entry, with a large number of sellers and a large number of buyers. But real-life situations are far from ideal. Let’s see some examples of the market structures in the UK.

Monopolies in the UK

A firm with over 25% of the market share is defined as a firm with monopoly power. In the UK, big tech companies like Apple, Google, Microsoft, Facebook, and Amazon hold monopolies. Google, for example, controls 70% of the market share of search engines.

The government promotes market competition. It helps keep prices down and the quality of products in check. The government may introduce regulations on mergers or lower the entry barriers. Also, the government protects employees and suppliers from abuse of monopoly powers by nationalization, employment legislation, and legal codes and practices for suppliers.

UK supermarket oligopoly

In the UK, more than 50% of the grocery retail market is captured by four big players: Tesco, Asda, Sainsbury’s, and Morrisons. This is called an oligopoly. Because of oligopoly, consumers get similar products at a similar price in any supermarket.

Nowadays, many consumers are moving towards price leaders such as Aldi and Lidl proving that branding is not as important as pricing in the retail industry.

On the other hand, oligopoly creates high barriers to entry for small players. It becomes difficult for small retail stores to match the prices offered by supermarkets.

Competition and markets authority

The Competition and Markets Authority (CMA) is established to help consumers to ensure decent competition. The CMA monitors mergers to avoid monopolies, shield customers from unfair market practices, and fight against market cartels.

One example of how the CMA works is when it opened an investigation into Amazon and Google handling of fake reviews on their platforms. This was done to protect consumers' interests, and avoid misleading reviews or recommendations on certain products or services.

You can read more about how CMA works in our explanation of Competition and Markets Authority.

Labour market examples

Even though the labour market is a macroeconomic concept, it has an impact on the finances of an individual. For example, trade unions work to protect the rights of an individual employee. Highly dissatisfied employees may go on strikes as a last resort for their demands. Let’s see some examples.

Trade unions in the UK

Almost 6.6 million of the UK workers are part of trade unions like Unison trade union, Unite the Union, and GMB. Their main function is to fight for the rights of employees and oppose employers’ malpractices. Trade unions also demand pay raises and other benefits like pension, bonuses, or retirement schemes. Unison’s latest campaign ‘One team for patient care' had the objective of recognizing the combined efforts of all NHS staff during the Covid-19 pandemic.

Royal mail strikes

The Royal Mail is a government-funded postal service. The Royal mail’s growth was stunned by strikes that began to happen in 2003. The Royal Mail privatisation started in 2013 and was completed in 2015.

The privatization did not stop employees from going on strike. The latest strike was in 2017 when the Royal mail decided to stop the pension scheme for their employees. 89.9% of employees participated in the strike. Finally, a sustainable and affordable solution was worked out along with the unions.

Inequality in the UK

Even though London was considered the richest city in Northern Europe in 2018, 9 out of 10 poorest places on the list are in the UK.

The reasons for inequality in the UK are the skills bias from technological change, education, the raised share of capital income, taxation, executive pay, and bonuses, the rise in a scale of in-work poverty, increasing urban-rural and deep regional economic inequalities, and globalisation.

It has been said that the top 1% of households hold 230 times more wealth than the bottom 10% of households.

Read about the consequences of wealth and income inequality in our explanation on Inequality in the UK.

Microeconomics Examples - Key takeaways

  • Microeconomics is the study of economics with a spotlight on a person or business.
  • All microeconomics examples broadly fall into the seven main blocks of microeconomics studies:
    1. Consumer rationality
    2. Price determination in a competitive market
    3. Production, cost, and revenues
    4. Market structures
    5. Labor market
    6. Market failure
    7. Distribution of wealth
  • Some real-world examples of microeconomics include airlines’ price discrimination, the Royal Mail privatisation and strikes, the market failure in housing, healthcare, and climate change, inequality in the UK, how trade unions work, and the supermarket oligopoly.

Microeconomics Examples

Price discrimination in airline tickets is a real-life example of microeconomics. The airline industry uses price discrimination and dynamic pricing techniques while setting prices for tickets. Both of these strategies are affected by microeconomic factors. Price discrimination strategy considers customer purchasing power, demand for the particular ticket, time of flight whether is it a busy weekend or unsocial hours. Many airlines charge more for seats with more legroom or business class. Dynamic pricing takes into account real-time market data. This data includes competitor prices, time of booking, customer behavior, and remaining seats on an airplane.

Market failure in healthcare, price discrimination in airline tickets, market oligopoly, individual income, and saving decisions are some examples of microeconomics.

 The subject of international trade can start at an individual level but may extend to macroeconomic factors that determine the economy between two countries. Hence, international trade cannot be just an example of microeconomics.  

As everyone before making a decision thinks of opportunity costs (knowingly or unknowingly), opportunity cost is definitely studied in microeconomics.

Microeconomics is the branch of economics that studies the behaviour of individuals, households, and firms regarding their decision-making in the allocation of their scarce resources. 

Final Microeconomics Examples Quiz

Question

What is trade union?

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Answer

Trade unions are groups of people (employees/workers) coming together to fight in the best interest of the workers.

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Question

When were the trade unions in the UK decriminalised?

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Answer

In 1867.

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Question

Under whose recommendation were the trade unions in the UK decriminalised?

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Answer

Under the recommendation of the Royal Commission

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Question

In what year was the Trade Union Act passed?

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Answer

1871.

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Question

What are the functions of trade unions in the UK?

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Answer

1.  Collective Bargaining

2. Safeguarding

3. A bridge between employers and employees

4. Ensuring better working conditions

5.Demand higher pay

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Question

Trade Unions in the UK are evenly distributed among private and public sectors. True or false?

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Answer

False

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Question

When was the New Trade Union Act passed?

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Answer

In 2016.

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Question

When was the New Trade Union Act in the UK implemented?

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Answer

The Trade Union Act, 2016 was implemented on 1 March 2017.

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Question

Name any four trade unions in the UK.

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Answer

  1.  GMB
  2. Unison
  3. Unite
  4. British Medical Association
  5. Prospect
  6. Communication workers union

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Question

Which trade union started the campaign #StopTheBritishGasFire in the UK?

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Answer

GMB

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Question

What was the campaign #StopTheBritishGasFire all about?

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Answer

Many companies, including British Gas, ASDA, councils, schools and many more, are resorting to firing and rehiring. They cut the pay by up to 15% and change the terms and conditions of the contract for the current employees.

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Question

What is the total number of workforce in the trade union in the UK?

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Answer

The recent reports (as of May 2021) show the total workforce in the trade union in the UK has reached 6.6 million.

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Question

What do trade unions work for? 

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Answer

Trade unions also work to demand higher pay and get other benefits like pension, paid holidays, bonus, retirement schemes, etc. 

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Question

Which act in the UK regulates the Labour Law?

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Answer

The Trade Union and Labor relations (Consolidated) act 1992 is an act that regulates labour law. 

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Question

There has always been growth in the trade union members in the UK since it was made legal. True or false?

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Answer

False

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Question

What is strike action?

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Answer

Strike Action refers to the stopping of work by the group of employees for a brief period of time which may be a few hours to a few days or even months.

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Question

What are the reasons why Royal Mail is going on strike?

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Answer

The following were the reasons for the Royal Mail strike:

  1. Modernization Plans by the Royal Mail

  2. Job security and working conditions

  3. Privatization of Royal Mail

  4. Closure of the pension scheme

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Question

What was the Royal Mail Pension Strike?


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Answer

Royal mail was giving defined benefits of pension as per the defined benefit scheme as agreed with CWU after the strike in 2013. However, in April 2017, Royal mail announced to close the benefit scheme post March 2018. 

However, this move was condemned by its own employees and the Communication Worker Union and 48 hours strikes were announced on 19th October, 2017. The strike was voted for by almost 110,000 workers.

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Question

What was the amount Royal Mail was paying as pension a year until 2018?


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Answer

Royal mail paid about £ 400m a year as a pension

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Question

What was the reason for the 2007 strike?

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Answer

Royal Mail wanted the flexibility of workers in the work levels and to increase automation to bring costs under control. 
CWU were of opinion that employees are treated as slaves and work burden increased to an unacceptable level

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Question

How was the 2007 Royal Mail Strike resolved?

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Answer

On October 12th, 2007, The CWU and Royal mail reached to the conclusion which decided to phase out Spanish practices. Also, Royal Mail offered CWU members who wished to continue work can do so at other offices to avoid conflict with striking members.  

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Question

What was the reason for the 2009 strike?

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Answer

Fear of introduction of walk sequencing machines which may make thousands of full-time workers redundant. 

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Question

What was the reason for the 2013 strike?


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Answer

Privatization of postal service at GBP 3bn.

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Question

What was the reason for the 2017 strike?


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Answer

Royal mail announced to close the defined benefit scheme post-March 2018. 

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Question

How was the 2009 Royal Mail Strike resolved?


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Answer

A pay rise of 6.9% spread across 3 years was offered.

Also, retain 75% of the workforce as full-time and reduce work hours from 40 to 39.

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Question

How was the 2013 Royal Mail Strike resolved?


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Answer

Increase of 9.06% in basic pay over 3 years and 5 years of job security, pensions and other conditions was given to the employees

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Question

How was the 2017 Royal Mail Strike resolved?

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Answer

A sustainable and affordable solution was worked out along with the unions.

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Question

What are Defined benefits?

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Answer

Workers who pay into a defined benefit scheme are guaranteed income for life which is based on their final salary, or career average pay. The income is usually adjusted for inflation, and often provides benefits for next-of-kin.

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What are the defined contributions?


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Answer

Workers who pay into a defined contribution scheme pay into a savings pot, which is used to buy a pension when they retire. The size of the pot is determined by the performance of the stock market.

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Question

How much pay rise was by the royal mail offered after the 2013 strike?

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Answer

9.06% Pay rise was offered to its employees over a period of 3 years

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Question

Explain the term market failure.

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Answer

Market failure is a situation in which transactions involving some products in a free market are inefficient. Here, the benefits and costs of the transaction are not limited to the supplier and consumer but spill over to third parties. This spillover leads to an inefficient distribution of resources.

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Question

What is climate change?

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Answer

Climate change is the significant changes in weather patterns over a period. A major cause of climate change is the emission of greenhouse gases from various market processes involving the burning of fossil fuels.

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Question

What are the consequences of climate change?


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Answer

The consequences of climate change as market failure are hard to predict over the long term. We can predict, however, that climate change will be mostly experienced by underdeveloped nations and future generations. 


These consequences include:


  • Thinning of the ozone layer. This causes more heat rays to reach the earth.

  • More severe storms.

  • Increased sea levels. 

  • Droughts and health challenges. 

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Question

What are externalities?

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Answer

Externalities occur when organisations make decisions that only consider their costs and profit, but not the effects of producing their goods and services on society.

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Question

Name three market failures causing climate change.


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Answer


  • A market failure due to the little information on the reduction of greenhouse gas emissions. 

  • Network effects.

  • Little or no incentive for innovation on low-carbon products.  

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Question

What do economists regard as the major cause of climate change as a market failure?



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Answer

The inability of organisations to account for greenhouse gases released to the atmosphere during production and consumption processes.

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Question

Explain how a drive towards low-carbon innovations can be achieved.



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Answer

This can be achieved by providing subsidies and incentives to bodies that are investing in these innovations.

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Question

 Name three possible solutions to combat climate change due to market failure.



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Answer

  1. Increasing the cost of processes that release greenhouse gases into the environment.

  2. Encouraging a drive towards low-carbon producing innovations. 

  3. Providing policy support to the generation of new networks. 

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Question

Explain the role of the government in increasing the cost of the market of processes that release greenhouse gases. 


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Answer

Economists have suggested government intervention by introducing policies that increase the cost of the processes that release greenhouse gases into the environment. 


In a move to avoid biases, the cost of carbon release during industrial or household processes should be uniform. This can be achieved through the introduction of carbon emission taxes or emissions trading schemes.

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Question

Name one way the emissions of greenhouse gases can be reduced.


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Answer

Regulation of processes releasing greenhouse gases into the environment is currently the best method to reduce greenhouse gas emissions. 

Show question

Question

Suggest a way to boost the drive toward low-carbon emitting innovations.


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Answer

This can be achieved by providing subsidies and incentives to bodies that are investing in these innovations.



Show question

Question

Complete the statement: 

Market failure occurs when ______________ affect societal welfare.


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Answer

free market processes

Show question

Question

What is a monopoly?

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Answer

A monopoly is a market situation where one company has a dominant position in an industry or sector, which enables them to exclude all other viable competitors. 

Show question

Question

List three real-life examples of monopolies in the UK.

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Answer

Any three from:

Microsoft

Google

Facebook

Apple 

Amazon

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Question

In the UK a firm needs a minimum of 75% of the market share to be a monopoly. 

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Answer

True

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Question

Monopolies are illegal in the UK.

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Answer

True

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Question

List some of the anti-monopoly policies in the UK.

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Answer

Breaking up of monopolies. 

Regulation of mergers. 

Lowering entry barriers. 

Price controls. 

Performance and quality controls. 

Profit controls. 

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Question

In what ways does the UK government promote competition?

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Answer

Rendering help to small businesses.

Through privatisations and deregulation. 

Punishing anti-competitive practices. 

Competitive tendering. 

Show question

Question

What UK government body is in charge of regulating monopolies? 

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Answer

Competition and Market Authority (CMA)

Show question

Question

What UK legislations regulate monopolies and monopoly power?

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Answer

The Competition Act of 1998 and the Enterprise Act of 2002.

Show question

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