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
