Chapter 13-15 Flashcards
Define Market Economic System
Where individuals and firms drive the economy on the basis of demand and supply without state intervention
Define public sector
the part of the economy controlled by the government
Advantages of the market economic system (5)
Consumer sovereignty
Choice
Low price + good quality
Efficient allocation of resources (Price mechanism, punishing inefficent firms, incentive for resources to move in response to changes in demand)
strong incentives
Disadvantages of market economic system (6)
Failure to take full account of costs/benefits
May be lack of competition (monopoly, high price + low quality)
may be immobility of resources
lack of information
inequitable/unequal distribution of resourecs
public goods not provided
Define market failure
when market forces fail to allocate resources efficiently
Define social cost
The total costs to a society of an economic activity
Define private cost
costs bome by those directly consuming or producing a product
Define external cost
Cost to third parties
Equation for determining social cost
Social cost = private cost + external cost
Define social optimum output
the level of output where social costs equals social benefit and society’s welfare is maximised
What role does external costs have in production for firms? (2)
firms only consider their private costs and ignores the external costs
external costs not paid for by anyone
What role does external costs have in production for firms? (2)
firms only consider their private costs and ignores the external costs
external costs not paid for by anyone
What would happen to the level of output if the firm had to pay the full social costs?
decrease
Equation for social benefit
Social benefit = private benefit + external benefit
Define private benefit
benefit to consumer from consumption
Define external benefit
Benefits to third parties from the consumer’s consumption of the good
Role of external benefits in consumption for consumers? (2)
individual considers their private benefits only and ignores the external benefit
external benefits not factored into the decison making process
What would happen if the consumer considered the full social benefit of consuming
consumer would consume more
not
not
Causes of market failure (6)
Overconsumption of demerit goods
underconsumption of merit goods
Information failure
Immobility of resources
Public goods
abuse of monopoly power
Define mixed economic system
Involves elements of a free market system with some government intervention.
Advantage of mixed economic systems (7)
Monopoly power can be reduced, promoting competition
Public goods provided by government
Government ensures access to important public services
Government provides social safety net
Government can influence consumption decisions
Still is strong incentives to work/set up a business (possible to earn+ keep money)
Income inequality can be reduced
Define redistributive spending
taxing the rich and giving money to the poor
How do governments intervene in an economy? (7)
Price controls
Subsidies
Indirect taxes
Competition policy
Enviromental policies
Regulations
Nationalisation and Privatisation
