1.1 Nature of economics Flashcards
Define PPF
shows the maximum possible output of 2 goods or services
an economy can achieve when all resourcse are fully and efficiently employed
at the lowest possible cost
Free market economy
What did Hayek believe
- No government intervention
- Free markets are efficient in matching S and D via market mechanism of Signalling, Incentives, Rationing, Allocation (SIRA)
- This leads to shortages (excess demand) and surpluses (excess supply) eradicated
What do producers decide in a free market economy
- How much they produce
- For whom
- And at what price
Free market economy
View on consumers
- Rational economic agents
- Make decision to maximise utility and welfare
- Compute their best outcomes
Free market economy
View on firms
- Aim to maximise consumers utility
- Partake in actions to benefit consumers via invisible hand of free market self interest
Adam Smith= invisible hand
Free market economy
Example of invisible hand
Firms interest for a healthy population so
* People live longer
* Spend more of their income on their goods and services
Free market economy
How is allocative effiency achieved by firms
Firms will decrease infomation gaps and utilise market reseach to understand fully the needs and preferences of consumers and in competitive markets use this to meet customer needs via lower prices
Free market economy
Benefits of allocative efficiency achieved my firms
- Leads to innovation and invention of new G+S
- Cheaper provision to satisfy consumers
- Firms reap the benefits via higher profit
Says Law
Expansion of proft maximising firms will itself increase demand for resources and labour allowing workers to earn more wages to spend.
This model requires no govt intervention
Free market economy
Schumpeter theory on why free market economy is better
- Monopolies dont need to be regulated
- If they are not able to keep up with changing consumer preference, and new technology= creative destruction
- They will lose their market power
- Considering unintended consequences, regulatory capture and govt failure= each graph shows deadweight loss
Adam Smith
What is the Invisible hand
The self regulating behaviour of the market place
Individuals seeking to maximise their personal gains will lead to an efficient allocation of resources
This self interest benefits society as a whole
Disadvantage of free market approach
Without government intervention, there would be missing markets.
The free rider problem would mean most economic agents would rely on others to provide public goods like education, defence, and street lighting.
These goods would be under consumed and have positive externalities, and self-interest would prevent a free market alone to provide adequate public good provision.
This would inevitably affect the lowest income earners the most and increase inequality.
It’s the poorest that have the most income elastic demand and so are important for the success of a free market.
Disadvantages of free market approach in terms of consumers irrational behaviour
Firms take advantage of consumers irrational behaviour (habitual infomation, inertia and weakness at computation) via advertising and cookies to get consumers to buy things they dont need , adding to waste, fast fashion industries and choice overload.
Disadvantages of a free market approach providing healthcare
- Healthcare is a positive consumption externality and has a potential welfare gain
- Healthcare is underprovided in the free market
- On externality graph, it shows a sub-optimal allocation of resources in healthcare which requires government inervention to correct market failure
- Inequality of access to healthcare developing from unequal distribution of income in free market economies. Govt would be required to mitigate the worst excesses in this healthcare sector
- Firms have profit incentive, may allocate resources ahead of patients needs
- Monopolies- firms may become the sole supplier of a product and then exploit conumers by charging higher prices, higher than free market equilibrium
3 marks
Explain how Bitcoin fulfils one function of money, apart from as a medium of exchange.
A measure of value (1) e.g. prices can be measured in
satoshis (1) people can compare prices of goods and
services (1)
OR
A store of value (1) when an individual saves bitcoin (1)
they are confident they will receive the equivalent value
back (1)
OR
A standard of deferred payment (1) when an individual
loans another person bitcoin (1) they are confident they will
receive the equivalent value back (1)
