1D Flashcards
What is productive efficiency?
Where production takes place using the least amount of scarce resources, producing at minimum long run average costs.
What does productive efficiency imply
-least costly labour, capital and land inputs are used
-the best available technology and the most efficient production processes are harnessed
-wastage of resources in production processes is minimised
Formula=AC=MC
What is allocative efficiency
When society is producing an appropriate bundle of goods relative to consumer preference.
- where an economy allocated its resources to produce a balance of goods that matches consumer preferences.
-consumer satisfaction is maximised
-where the value to consumers of an extra unit of a hood is equal to the cost of producers of the resources used
P=mc
What is economic efficiency
Where both allocative and productive efficiency are allocated.
Where the market successfully allocated and uses resources to achieve both allocative and productive efficiency.
What is market failure
Where the free market mechanism does not lead to a optimal allocation of resources.
MSB does not equal MSC
-resources are not currently allocated to match consumers wants and needs
- wrong quantities of goods are produced
-overconsumption/production, underconsumption/production
What is an information gap
A lack of knowledge about a product results in consumers and producers making decisions that do not maximize welfare.
-All economic agents need perfect information about market conditions to make rational decisions.
-Consumers need full, current and accurate information on prices of the good they want to consume and all private and external costs and benefits.
Asymmetric information
Where some participants in a market have better information about market conditions than others.
-For markets to work perfectly, consumers and producers need the same level of full and accurate information about the good.
-Causes an imbalance and the market can be skewed if this occurs between consumers and producers.
Why does information failure occur
When consumers base their economic decisions on wrong/limited information and so potentially make wrong choices
Reasons for info failure
Inaccurate or misleading information- due to advertising
Incomplete information-lack of knowledge of benefits/harm
Complex information-requires special knowledge to understand
Addiction- Consumers no longer able to form decisions purely based on price.
Information gaps can be seen in insurance markets- Adverse selection- A person at risk is more likely to take out insurance
Moral hazard- A person who has taken out insurance may be likely to take more risk.
All leads to computation problems.
What is a merit good
A good with unanticipated benefits for consumers, which is therefore under-consumed in a free market.
e.g-education, museums, libraries
Merit good steps to market failure
-There is info failure because individuals do not fully perceive the benefits that they will gain from consuming good.
-Therefore the good is undervalued and the D curve is too low.
-So there is underconsumption so too little produced/traded.
There is AI- too few resoruces are allocated to production of too low a quantity.
-MF
What is a demerit good
A good with unanticipated harm for consumers, which is therefore overconsumed in a free market.
e.g alcohol, fags, vapes
More private costs than realised
Demerit good steps to MF
-info failure-individuals do not fully perceive the costs that they will incur from consuming the good.
-Good is overvalued-D curve too high
-Overconsumption-too much produced/traded.
-AI-too many resources allocated to the production of too much of a quantity.
-MF
What is an externality
A cost or benefit that is external to a market transaction so is not included in market prices and has an impact on thrid parties.
What is a third party
An individual who is not directly involved in either the consumption or production of the good.
What is a negative externality
A harmful effect from the consumption or production of a good on a thrid party, the cost of which is not reflected in market prices.
What is a private cost
A cost linked to an economic activity for an individual consumer or producer.
What is an external cost
A cost linked to an economic action for a third party and not reflected in market prices
What is a social cost
The total costs of an economic action
What is MSC
The cost to society of producing an extra unit of a good
Negative externality steps to MF
Negative externality, e.g air pollution, harmful side effect for third parties- local residents, have lung disease due to and increase medical costs.
In market system, external costs for third party not taken into account
Equilibrium price is too low at PFM, so qd too high
Overproduction
Welfare loss ABC
Misallocation of resources
therefore MF
What is a positive externality
A beneficial effect from consumption or production of a good on a third party, which is not reflected in market prices.
What is a private benefit
A benefit linked to an economic action for an individual consumer or producer
external benefit
A benefit linked to an economic action for a third party and not reflected in market prices
Social benefit
The total benefits of an economic action
What is MSB
The additional benefit that society gains from consuming an extra unit of a good.
What is a private good
A good that is rivalrous and has excludability. Consuming good can stop others from consuming. e.g coca cola.
What is a public good
A good that is non rivalrous and non-exclusive in consumption. Consumers can not be excluded from consuming the good, and consumption by one person does not affect the amount of the good available for others to consume. e.g Street lighting, police,
What is non rivalrous
Consumption by one person does not affect consumption of others
What is excludable
Once good is provided, it is impossible to stop consumers from consuming.
What is free rider
An individual who cannot be excluded from consuming a good, so has no incentive to pay for its provision.
What is a Quasi public good
A good that has some of the characteristics of a public good, but not all
