(1) Chapter 5 - The Market Mechanism, Market Failure and Government Intervention in Market Flashcards

1
Q

What are the 4 functions of price

A
  • Signalling function
  • Incentive function
  • Rationing function
  • Allocative function
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2
Q

Define SIGNALLING FUNCTION OF PRICES

A

Prices provide information to buyers and sellers

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3
Q

Define INCENTIVE FUNCTION OF PRICES

A

Prices create incentives for economic behaviour (higher prices encourage firms to supply more)

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4
Q

Define RATIONING FUNCTION OF PRICES

A

Rising prices exclude demand for a product

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5
Q

Define ALLOCATIVE FUNCTION OF PRICES

A

Allocating scarce resources away from markets showing excess supply and into markets where there is excess demand

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6
Q

Define MARKET FAILURE

A

Misallocation of of resources in the economy, either completely failing to provide a good/service or providing the wrong quantity

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7
Q

Define MISSING MARKET

A

Where there is no market because of the functions of prices have broken down

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8
Q

Define a PRIVATE GOOD (+ an example)

A

A good that is excludable and rival (an orange)

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9
Q

Define a PUBLIC GOOD (+ an example)

A

A good that is non-excludable and non-rival (a radio programme)

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10
Q

What two defining characteristics do PRIVATE GOODS possess?

A
  • Private property rights: preventing other people from using the good
  • Rivalry: when one consumes the good it cannot be consumed by another
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11
Q

Define a QUASI-PUBLIC GOOD (+ an example)

A

A good that is not fully non-rival and/or where it is possible to exclude people from consuming it

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12
Q

What is an EXTERNALITY

A

A special type of public good which third parties receive it without an option

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13
Q

Define POSITIVE EXTERNALILTY

A

An externality when consumed/produced causes a benefit to a third party, the social benefit is greater than the private

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14
Q

Define NEGATIVE EXTERNALITY

A

An externality when consumed/produced causes a cost to a third party, the social cost is greater than the private

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15
Q

What is a PRODUCTION EXTERNALITY

A

An externality (positive or negative) generated during the production of the good/service

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16
Q

What is a CONSUMPTION EXTERNALITY

A

An externality (positive or negative) generated during the consumption of the good/service

17
Q

What is a MERIT GOOD (+ an example)

A

Social benefits exceed the private benefits, value judgements are used to decide if a good defines as one eg. Healthcare

18
Q

What is a DEMERIT GOOD (+ an example)

A

Social costs exceed the private costs eg Tobacco

19
Q

What is a SUBSIDY

A

A payment made by the government/authority, usually to producers for each good they can produce

20
Q

Define IMMOBILITY OF LABOUR

A

Unable to move from one job to another, usually because they need training or the cost of moving

21
Q

Define GEOGRAPHICAL IMMOBILITY OF LABOUR

A

When workers find it difficult/impossible to move jobs for reasons such as higher housing prices

22
Q

Define OCCUPATIONAL IMMOBILITY OF LABOUR

A

When workers cant move jobs because they lack/cannot develop the skills needed for the new jobs

23
Q

Define EQUITY

A

Fairness/Justness

24
Q

Define INEQUITY

A

Unfairness/Justness

25
Q

Define REGULATION

A

Imposition of rules which restrict the freedom in markets

26
Q

Define TAX

A

Compulsory payment from the society for governments to use to pay for their activities. Also to achieve other objectives like reduce the consumption of demerit goods

27
Q

What is a PRICE CEILING

A

A price above which it is illegal to trade, they can distort markets by creating excess demand

28
Q

What is a PRICE FLOOR

A

A price below which is illegal to trade, they can distort markets by creating excess demand

29
Q

What is GOVERNMENT FAILURE

A

When government intervention reduces economic welfare. leading to an allocation of resources that is worse than the free market

30
Q

Explain the government failure leading to black markets

A

When the government controls the prices too much creating excess demand where producers/sellers want to fulfil, so they’ll sell their products for higher prices

31
Q

Explain further side effects of government supervision

A

When people find alternate ways to buy/consume goods using alternate methods to overcome the government rules eg. avoiding the taxes of tobacco/alcohol by buying it abroad where taxes are less, which could lead to pollution from journeys