1.1 The Market System Flashcards
Reasons why consumers may not maximise their benefit
- Consumers are not very good at measuring the benefits of their decisions
- Consumers have habits that are hard to give up
- Consumers have societal influences and are influenced by herd mentality
Reasons why businesses may not maximise profits
- Businesses are focused on growth
- Businesses are focused on customer satisfaction
- Businesses are completing charitable work
Reasons why the demand curve shifts
- Price of complements
- Advertising
- Tastes and preferences
- Population
- Average income
- Price of substitutes
Reasons why the supply curve shifts
- Subsidies
- Technology
- Indirect taxes
- Natural factors
- Costs of production
Factors that influence PED
- Time to react
- Availability of substitutes
- Proportion of income
- Degree of necessity
Factors that influence PES
- Availability and mobility of factors of production
- Availability of stocks
- Spare capacity
- Time needed to react
Benefits of using PED
- Useful for considering taxes/subsidies (for governments)
- Useful for considering price adjustments to increase total revenue (for firms)
Drawbacks of using PED
- Can never calculate accurately
- Other metrics may be more useful for decisions, e.g. inflation/CPI, situation in the economy
Benefits of knowing YED to businesses
- Can adjust quantity supplied according to situation of the economy
- Can adjust costs (e.g. lay off workers before upcoming recession if it is a normal good)
Aims of private sector organisations
- Survival
- Profit maximisation
- Customer satisfaction
- Growth
- Social responsibility
Aims of public sector organisations
- Provide public goods and merit goods
- Improve the quality of services
- Allow for social costs and benefits
- Minimise costs
- Profit (in some cases)
Reasons for market failure
- Externalities
- Lack of competition
- Missing markets
- Lack of information
- Factor immobility
Features of public goods
- Non-excludable
- Non-rivalrous
Benefits of privatisation to consumers
- High quality (due to financial incentives)
- Reasonable prices (for growth)
- More innovation (for growth)
Drawbacks of privatisation to consumers
- Higher prices (incentive for profit)
- Less innovation (cut costs)
- Low quality (cut costs)
Benefits of privatisation to workers
- Training for specialised skills resulting in higher future pay (division of labour)
- Potential for higher wages and improved working conditions (firms want to compete for skilled labour)
Drawbacks of privatisation to workers
- Possibility of unemployment (cut costs)
- Lower wages and worse working conditions
- Workers become too specialised (division of labour, increase productivity)
Benefits of privatisation to businesses
- Chance to earn a profit
- Investment from shareholders
Drawbacks of privatisation to businesses
- Diseconomies of scale
- Chance of profit loss and losing business/having to close down
Benefits of privatisation to the government
- Initial revenue from the sale of the firm
- Revenue from the firm’s taxes
- Allows them to focus on other parts of the government
Drawbacks of privatisation to the government
- Too much money spent advertising it to find a buyer/not enough revenue generated from sale
- Newly privatised firms are weak and subject to hostile takeovers that may become monopolies that harm consumer interests
Usefulness of government regulation in dealing with externalities
- Imposes financial burden on company, disincentivises breaking the rules
- Acts as a deterrent/warning to other firms
Drawbacks of government regulation in dealing with externalities
- Costs the government money and time to police activities
- No guarantee to work, fine may not be enough and firms may still have profited
