2. The role of markets Flashcards
Specialisation Advantages
Higher output, higher quality
Greater opportunities for economies of scale
More competition, incentive to lower cost
Specialisation disadvantages
Work becomes repetitive, lower motivation
Structural unemployment, skills not transferable
Higher worker turnover for firms
Functions of money
Without money, used to be bartering
Measure of value
A store of value
Allows debt to be created, deferred payment
Derived demand
Demand linked to the demand of another good, bricks and houses
Consumer surplus
below demand above price
Difference in what the pay and what they are willing to pay, increases with a shift in supply
Producer surplus
above supply, below price line
Difference the producer is willing to charge and what they actually charge
compliment goods
negative XED, if one if more expensive, qd of both will fall, close compliments large number
substitute goods
positive XED, price of one tv brand increases, demand for the other goes up
close substitutes, large number
symmetric information
producers and consumers perfect information to make their decision
asymmetric information
unequal knowledge, car dealer knowing a fault that the consumer is unaware of, misallocation of resources,
principle agent problem
managers and shareholders may have different objectives, personal goals, this is asymmetric information
moral hazard
individual takes on a risk when they don’t have full consequence, insurance companies will pay if they crash
free rider
some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs
private good
rival and excludable
quasi public
roads or paths, hard to charge, but are somewhat exclusive
ad valorem tax
percentage added on, inelastic demand, higher gov revenue
specific tax
set tax per unit, more inelastic demand, higher tax burden passed onto customer
subsidy
government pay producer, encourage production
pollution permits
trade able , can sell and buy permits, but reduce incentive to pollute as they have to pay
competition policy
government action to increase competition in markets
information provision
when a government intervened to provide correct information to stop market failure
regulation
laws to adress market failure, promote competition, ban a good, regulatory recycling schemes
excise duty
type of indirect tax
factors affecting elasticity of demand
necessity
substitutes
habit/ addiction
proportion of income spent on it
factors affecting elasticity of supply
time scale
spare capacity
level of stock
barriers to entry
XED
change in QD of X/
change in P of Y
free good
no opportunity cost
joint demand
demand for 2 goods that are bought together
competitive demand
purchase of one means there is less demand for another
composite demand
demand for one good goes up, supply falls for the other
joint supply
2 goods produced from same origin, beef and leather
competitive supply
alternative products that a business could make
public good
non rival non excludable
advantages of planned economy
government know all externalities
can prevent monopoly power
ensure full employment
