Chapter 4 Terms

Question 1

Market Mechanism

Answer 1

The use of market prices and sales to signal desired outputs (or resource allocations).

Question 2

Market Failure

Answer 2

An imperfection in the market mechanism that prevents optimal outcomes.

• supply and demand did not lead us to the best point on the PPC curve
• opens the door for government intervention
• need to change mix of output
• produced more or less of something we really needed

Question 3

Four causes of market failure?

Answer 3

• Public Goods
• Externalities
• Market Power
• Inequity

Question 4

Private good

Answer 4

A good or service consumed by one person, not by everyone

• I consume blueberry pancakes, but Riley does not
• once I eat my pancake, no one else can have it because its already gone.
• completely private good

Transaction and product are completely private

Question 5

Public good

Answer 5

Good or service that is consumed by one person, but benefits multiple people

• I buy a iHome and we all can use it to play music
• Scottsville opens a Walmart, everyone can use it
• snow removal, prisons, airport security

Question 6

Free rider

Answer 6

Individual who pretends to have no demand or desire for a public good, hoping someone else will get it so they get it for free.

-paying for flood control for a village, one pays and all benefit

Question 7

Externalities

Answer 7

All costs or benefits caused by a third party

-cigarette smoking=bad health to both smokers and non-smokers

Question 8

Whenever externalities are around….

Answer 8

Market prices aren’t a good measure of a products value to society

-smoking is bad

Question 9

Because of externalities not measuring a products true value to society…

Answer 9

Market failure can happen because we will underproduce goods that benefit us and over produce what is bad

Question 10

Math formula for social demand is…

Answer 10

Market demand +- externalities

-smoking for example: isn’t beneficial so we subtract its costs to society from the demand

Question 11

Social demand curves shows us….

Answer 11

How much society would be willing/able to pay for (cigarettes) from “both sides of the coin” (smokers &nonsmokers)

Question 12

External benefits:

Product can generate external benefits, not just costs

Answer 12

College: students get benefit from education which is why they are willing to pay a lot of money

-society benefits from student education, not just the student

Question 13

If a product yields external benefits…

Answer 13

Social demand is greater than market demand

-social value exceeds market price (external benefit)

Question 14

A lot of externalities can lead to market failure by…(2)

Answer 14

• Overproducing goods with external costs

- Underproducing goods that have external benefits

Question 15

If externalities are present, the market won’t produce optimal mix of output.

To get optimal mix of output we need….

Answer 15

Government intervention

Question 16

Monopoly

Lorax

Answer 16

Only one producer of a good or service

-can be money hungry and charge a lot

Question 17

Monopoly is the most severe case of…

Answer 17

Market power

Question 18

Market power

Answer 18

Any situation where someone can alter the market price of a specific good

Question 19

Relief of misery (helping needy) is a……good

Answer 19

Public good

Question 20

If the micro-economy fails, we know that we are at the wrong point on the……….curve, or we are distributing goods wrong.

Answer 20

Production possibilities curve

PPC

Question 21

Unemployment

Answer 21

Not enough labor available for the population

Market has failed if this happens

Question 22

Inflation

Think of balloon blowing up

Answer 22

Price of goods an services increase

Question 23

Government failure

Answer 23

Government doesn’t help us move closer to economic goals

Question 24

Issue of government failure encompasses 2 questions

Answer 24

Efficiency: are we getting service needed from government?

Opportunity costs: are we giving up too much to get services from government?

Question 25

Public choice

Answer 25

Theory: emphasizes the role of self-interest in public decision making

Question 26

Optimal Mix of Output

Answer 26

The most desirable combination of output attainable with existing resources, technology, and social values.

• choosing what all we should/can produce based off what everyone wants/needs
• if healthcare is demanded, and people offer to buy more of it if it is sold at a certain price, then we will provide more healthcare
• market prices direct resources from one industry to another, moving us along the PPC curve