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AQA A-Level Economics > 1.8 The market mechanism, market failure, and government intervention in markets > Flashcards

1.8 The market mechanism, market failure, and government intervention in markets Flashcards

1
Q

Market mechanism

A

the process through which changes in prices allocate resources

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2
Q

Price mechanism

A

changes in price in response to changes in demand and supply have the effect of making demand equal to supply

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3
Q

Functions of the price mechanism (4)

A
  • allocative
  • Rationing
  • signalling
  • incentive
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4
Q

allocative function of price

A

changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand

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5
Q

rationing function of prices

A

rising prices ration demand for a product

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6
Q

signalling function of price

A

Prices provide information to buyers and sellers

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7
Q

Incentive function of prices

A

Prices create incentives for people to alter their economic behaviour; for example, a higher price creates an incentive for firms to supply more of a good or service.

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8
Q

deadweight loss

A

the loss of welfare when the maximum attainable level of total welfare is not achieved. surplus has been lost from one party without being transferred to the other

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9
Q

allocative efficiency

A

occurs when the available economic resources are used to produce the combination of goods and services that best matches people’s tastes and preferences

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10
Q

market failure

A

occurs when the price mechanism fails to allocate scarce resources in a productively efficient way and when the operation of market forces leads to an allocatively inefficient outcome

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11
Q

Partial market failure

A

a market does function, but it delivers the ‘wrong’ quantity of a good or service, which results in resource misallocation

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12
Q

productive efficiency

A

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum

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13
Q

market

A

anywhere where buyers and sellers come together, a price is agreed and a transaction takes place

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14
Q

shortage

A

excess demand in a market which is in disequilibrium

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15
Q

surplus

A

excess supply in a market which is in disequilibrium

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16
Q

equilibrium price

A

price where quantity supplied equals quantity demanded; at this price there is no shortage or surplus

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17
Q

black market

A

anywhere where buyers and sellers come together, a price is agreed and an illegal transaction takes place

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18
Q

minimum price (price floor)

A

a legal limit on how low a price can be charged for a particular good, in a particular market

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19
Q

Effects on a minimum price below equilibrium

A

no effect on price or quantity sold

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20
Q

Effects of minimum price above equilibrium

A

price increases, excess supply

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21
Q

Maximum price (Price ceiling)

A

a legal limit on how high a price can be charged for a particular good, or in a particular market

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22
Q

Effects of Maximum price below equilibrium

A

price falls, excess demand

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23
Q

Effects of maximum price above equilibrium

A

no effect on price or quantity

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24
Q

Missing market

A

the absence of a market for a good or service, most commonly in the case of public goods and externalities

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25
Q

non-excludable

A

good for which the supplier cannot prevent non-payers from obtaining benefits; if it is provided for one person, it is provided for all

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26
Q

non-rivalrous

A

When one person’s consumption of a good does not limit another person’s consumption.

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27
Q

private good

A

a good which exhibits the characteristics of excludability and rivalry

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28
Q

public good

A

a good which exhibits the characteristics of non-excludability and non-rivalry

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29
Q

property right

A

the exclusive authority to determine how a resource is used (e.g. the owner of a chocolate bar has the right to prevent others from consuming the bar unless they are prepared to pay the owner a price)

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30
Q

free rider problem

A

due to the particular properties of a good (non-excludability) consumers can choose not to pay for it but still benefit from it. The result of this is the incentive to provide the good disappears

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31
Q

quasi-public good

A

a good which is not fully non-rival and/or where it is possible to exclude people from consuming the product

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32
Q

Public goods examples

A

-National Defence
-Lighthouses

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33
Q

Tragedy of the commons

A

an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the good is rivalrous, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits

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34
Q

Why must public goods be free?

A

Because public goods are non-rivalrous, when an extra person benefits from the good the benefits available to other people are not reduced. This means the marginal cost of providing the good to an extra customer is zero. In order to achieve allocative efficiency the price must also be this.

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35
Q

externality

A

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

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36
Q

socially optimal output

A

output where marginal social benefit = marginal social cost; also known as allocatively efficient level of output; if output occurs at any other level, a market failure exists

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37
Q

social cost =

A

private cost + external cost

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38
Q

social benefit =

A

private benefit + external benefit

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39
Q

third party

A

someone not directly involved in a transaction, separate from the seller (first party) and the buyer (second party)

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40
Q

negative externality

A

a cost that is suffered by a third party as a result of an economic transaction

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41
Q

positive externality

A

a benefit that is enjoyed by a third-party as a result of an economic transaction

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42
Q

production externality

A

when production of a good or a service imposes external costs or benefits on third parties outside of the market without these being reflected in market prices.

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43
Q

Consumption externality

A

When consumption of a good or service imposes external costs or benefits on third parties outside of the market without these being reflected in market prices

44
Q

Describe a positive production externality diagram

A

MSC<MPC

45
Q

Describe a Negative Production Externality diagram

A

MSC>MPC

46
Q

Describe a Positive Consumption Externality diagram

A

MSB>MPB

47
Q

describe a negative consumption externality diagram

A

MSB<MPB

48
Q

imperfect information

A

where economic agents are not completely and immediately aware of costs, benefits, or prices that are relevant to their decisions, such as the extent of external costs and benefits

49
Q

information gap

A

the difference between the perceived and true values of a cost, benefit or price

50
Q

merit good

A

A good, such as healthcare, for which the social benefit of consumption is greater than the private benefit of consumption. An information gap often exists so consumers underappreciate the benefit of consumption

51
Q

demerit good

A

a good, such as tobacco, for which the social costs of consumption exceed the private costs. This is often due to an information gap which causes consumers to overappreciate the benefit of consumption.

52
Q

asymmetric information

A

When one party to a market transaction possesses less information relevant to the exchange than the other

53
Q

Adverse selection

A

the tendency of those who are at the greatest risk to take out insurance

54
Q

factors of production

A

Inputs into the productive process; land, labour, capital, enterprise

55
Q

factor immobility

A

when factors of production cannot move between different markets

56
Q

unemployment

A

occurs when a person who is actively searching for employment is unable to find work

57
Q

geographical immobility of labour

A

when workers are unwilling or unable to move from one area to another in search of work

58
Q

occupational immobility of labour

A

occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develop the skills required for new jobs

59
Q

income

A

the flow of money a person or household receives in a particular time period

60
Q

wealth

A

the stock of everything which has value that a person or household owns at a particular point in time

61
Q

equality

A

everyone is treated the same; a completely equal distribution of income means that everybody has the same income

62
Q

equity

A

everyone is treated fairly

63
Q

progressive taxation

A

a tax for which, as income rises, a greater proportion of income is paid

64
Q

income tax threshold

A

the level of income above which people pay income tax

65
Q

means-tested benefits

A

benefits claimable depending on the person’s income

66
Q

universal benefits

A

benefits claimable of right and not dependent on a person’s income

67
Q

absolute poverty

A

the state of being deprived of basic human needs

68
Q

relative poverty

A

the state of having an income below a specified proportion of average income

69
Q

national minimum wage

A

A minimum wage or wage rate that must by law be paid to employees, though in many labour markets the wage rate paid by employers is above the national minimum wage.

70
Q

distribution of income

A

how income is divided between rich and poor, or between different groups in society

71
Q

distribution of wealth

A

how wealth is divided between rich and poor, or between different groups in society

72
Q

resource misallocation

A

when resources are allocated in a way which does not maximise economic welfare

73
Q

complete market failure

A

the absence of a market for a good or a service

74
Q

monopoly power

A

the power of a firm to act as a price maker rather than a price taker

75
Q

indirect taxation

A

a tax which can be shifted by the person legally liable to pay the tax onto someone else, for example through raising the price of the good being sold to the taxpayer. they are normally levied on spending

76
Q

subsidy

A

a payment made by the government to a producer

77
Q

state provision

A

the government providing a good

78
Q

regulation

A

imposition of rules, controls, and constraints, which restrict freedom of economic action in the market place

79
Q

provision of information

A

providing missing information (e.g. TV adverts on the dangers of drinking)

80
Q

monopoly policy

A

policy regarding markets with a high firm concentration ratio

81
Q

government failure

A

occurs when government intervention leads to a net welfare loss compared to the free market solution

82
Q

5 sources of government failure

A
  • regulatory capture
  • imperfect information
  • conflicting objectives
  • administration costs
  • unintended consequences
83
Q

regulatory capture

A

occurs when regulatory agencies act in the interest of regulated firms rather on behalf of the consumers they are supposed to protect.

84
Q

conflicting objectives

A

in attempting to achieve one outcome, another is sacrificed

85
Q

administration costs

A

expenses associated with the management and execution of a policy

86
Q

unintended consequences

A

outcomes that are not the ones foreseen and intended by a purposeful action

87
Q

intellectual property right

A

the exclusive authority to determine how an intangible resource that is the result of creativity is used. These rights include copyrights, patents, and trademarks

88
Q

Patent

A

gives its owner the right to exclude others from making, using, selling, and importing an invention for a limited period of time, usually twenty years

89
Q

Copyright

A

the exclusive authority to determine how creatuve works are used

90
Q

trademark

A

the exclusive authority to determine how symbols or words legally representing a firm or product are used

91
Q

Royalty

A

a sum paid to a patentee for the use of a patent or to a copyright holder for each copy of a work sold and/or publicly performed

92
Q

Dispersed knowledge

A

no single agent has information as to all of the factors which influence prices and production throughout the system

93
Q

Moral hazard

A

the tendency of individuals or firms, once insured against some contingency, to behave so as to make that contingency more likely

94
Q

Command-and-control

A

a regulatory approach whereby the government “commands” pollution reductions (e.g. by setting emissions standards) and controls how these reductions are achieved (e.g. through the installation of specific pollution control strategies)

95
Q

Tradable pollution permits

A

each firm is given a permit to produce a given level of pollution. If less than the permitted amount is produced, the firm is given a credit. This can then be sold to another firm, allowing it to exceed its original limit.

96
Q

The competition and markets authority (CMA)

A

government agency responsible for advising on and implementing UK competition policy

97
Q

Competition policy

A

the part of the government’s microeconomic policy and industrial policy which aims to make goods markets more competitive. It comprises policy toward monopoly. mergers and restrictive trading practices.

98
Q

merger policy

A

policy regarding the joining together of firms which may create markets with a high firm concentration ratio

99
Q

restrictive trading policy

A

policy regarding choices firms make to restrict competition

100
Q

consumer inertia

A

the tendency of some consumers to buy or continue buying a good, even when superior options exist

101
Q

State franchise

A

the government sells the right to provide a good or service, periodically issuing a license to a firm to operate for a fixed period of time. After this period of time, there is a competitive bidding process for the license. The government can renew the license, or grant it to a new firm.

102
Q

Advantages of privatisation (3)

A
  • If the firm is loss-making, privatisation will reduce the size of the Public Sector Net Cash Requirement (PSNCR)
  • forces down average cost due to competitive pressure - economies of scale
  • selling assets raises revenue for the government
103
Q

Disadvantages of privatisation (2)

A
  • changes objective to profit maximisation, increasing the prices charged
  • short-term profit maximising neglects long-term growth
104
Q

Nationalisation

A

the transfer of industries, firms or other assets from private ownership to public ownership

105
Q

privatisation

A

the transfer of industries, firms, or other assets by public ownership to private ownership

106
Q

Alternative approaches to the problem of monopoly (7)

A
  • compulsory breaking up on monopolies
  • use of price controls to restrict monopoly abuse
  • taxing monopoly profits
  • rate of return regulation
  • state ownership of natural monopolies
  • privatising monopolies
  • deregulation and the removal of barriers to entry

AQA A-Level Economics (14 decks)

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