(1) Chapter 5 - The Market Mechanism, Market Failure and Government Intervention in Market Flashcards
What are the 4 functions of price
- Signalling function
- Incentive function
- Rationing function
- Allocative function
Define SIGNALLING FUNCTION OF PRICES
Prices provide information to buyers and sellers
Define INCENTIVE FUNCTION OF PRICES
Prices create incentives for economic behaviour (higher prices encourage firms to supply more)
Define RATIONING FUNCTION OF PRICES
Rising prices exclude demand for a product
Define ALLOCATIVE FUNCTION OF PRICES
Allocating scarce resources away from markets showing excess supply and into markets where there is excess demand
Define MARKET FAILURE
Misallocation of of resources in the economy, either completely failing to provide a good/service or providing the wrong quantity
Define MISSING MARKET
Where there is no market because of the functions of prices have broken down
Define a PRIVATE GOOD (+ an example)
A good that is excludable and rival (an orange)
Define a PUBLIC GOOD (+ an example)
A good that is non-excludable and non-rival (a radio programme)
What two defining characteristics do PRIVATE GOODS possess?
- Private property rights: preventing other people from using the good
- Rivalry: when one consumes the good it cannot be consumed by another
Define a QUASI-PUBLIC GOOD (+ an example)
A good that is not fully non-rival and/or where it is possible to exclude people from consuming it
What is an EXTERNALITY
A special type of public good which third parties receive it without an option
Define POSITIVE EXTERNALILTY
An externality when consumed/produced causes a benefit to a third party, the social benefit is greater than the private
Define NEGATIVE EXTERNALITY
An externality when consumed/produced causes a cost to a third party, the social cost is greater than the private
What is a PRODUCTION EXTERNALITY
An externality (positive or negative) generated during the production of the good/service
What is a CONSUMPTION EXTERNALITY
An externality (positive or negative) generated during the consumption of the good/service
What is a MERIT GOOD (+ an example)
Social benefits exceed the private benefits, value judgements are used to decide if a good defines as one eg. Healthcare
What is a DEMERIT GOOD (+ an example)
Social costs exceed the private costs eg Tobacco
What is a SUBSIDY
A payment made by the government/authority, usually to producers for each good they can produce
Define IMMOBILITY OF LABOUR
Unable to move from one job to another, usually because they need training or the cost of moving
Define GEOGRAPHICAL IMMOBILITY OF LABOUR
When workers find it difficult/impossible to move jobs for reasons such as higher housing prices
Define OCCUPATIONAL IMMOBILITY OF LABOUR
When workers cant move jobs because they lack/cannot develop the skills needed for the new jobs
Define EQUITY
Fairness/Justness
Define INEQUITY
Unfairness/Justness
