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Microeconomics > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What is the signalling function of prices

A

Prices provide information to buyers and sellers

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2
Q

What is the incentive function of prices

A

Prices create incentives for people to alter their economic behaviour e.g a higher price creates an incentive for firms to supply more of a good or service

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3
Q

What is the rationing function of prices

A

Rising prices ration demand for a product

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4
Q

What is the allocative function of prices

A

Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into market in which their is excess demand

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5
Q

What is market failure

A

When the market mechanism leads to a misallocation of resources in the economy either completely failing to provide a good or service or providing the wrong quantity

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6
Q

What is complete market failure

A

A market fails to function at all and a missing market results

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7
Q

What is partial market failure

A

A market does function but it delivers the wrong quantity of a good or service which results in resource misapplication

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8
Q

What is a missing market

A

A situation in which there is no market because the function of prices have broken down

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9
Q

What is a private good

A

A good such as an orange that is excludable and rival

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10
Q

What is an excludable good

A

People who are unprepared to pay can be excluded from benefiting from the good

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11
Q

What is a rival good

A

When one person consumes a private food the quantity available to others diminishes

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12
Q

What is a public good

A

A good such as a radio programme which is non excludable and non rival

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13
Q

What is a quasi public good

A

A good which is not full non rival and or where it is possible to exclude people from consuming the product

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14
Q

What is an externality

A

A public good in the case of an external benefit or a public bad in the case of an external cost that is dumped on third parties outside the market

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15
Q

What is a positive externality

A

An external benefit that occurs when the consumption or production of a good cause a benefit to a third party where the social benefit is greater than the private benefit

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16
Q

What is a negative externality

A

An external cost that occurs when the consumption or production of a good causes costs to a third party where the social costs is greater than the private cost

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17
Q

What is a property right

A

The exclusive authority to determine how a resource is used

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18
Q

What is the free rider problem

A

A free rider is someone who benefits without paying as a result of non excludability. Customers may choose not to pay or a good with the result that the incentive to provide the food through the market disappears

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19
Q

What is a production externality

A

An externality generated in the course of producing a good or service

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20
Q

What is a consumption externality

A

An externality generated in the course of consuming a good or service

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21
Q

What is a merit good

A

A good such as health care for which the social benefits of consumption exceeds the private benefits. Value judgments are often unloved in deciding that a good is a merit good

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22
Q

What is information failure

A

Occurs when people make wrong decisions because they do not possess or ignore relevant information. Very often they are myopic about the future

23
Q

What is social benefit

A

The total benefit of an activity including the external benefit as well as the private benefit

24
Q

What is a subsidy

A

A payment made by government or other authority usually to producers for each unit of the subsidised good that they produced. Consumers can also be subsidised e.g bus passes

25
Q

What are demerit goods

A

Good such as tobacco for which the social costs of consumption exceeds the private costs. Value judgement are involved in deciding that a good is a demerit good

26
Q

What is social cost

A

The total cost of an activity including the external cost as well as the private cost

27
Q

What is a moral hazard

A

The tendency of individuals and firms once insured against some contingency to behave so as to make that contingency more likely

28
Q

What is immobility of labour

A

The inability of labour to move from one job to another either for occupational reasons or for geographical reasons

29
Q

What is competition policy

A

The part of government’s microeconomic policy and industrial policy which aims to make goods markets more competitive. It comprises policy toward monopoly, mergers and restrictive trading practices

30
Q

What is competition and markets authority

A

Government agency responsible for advising on and implementing uk competition policy

31
Q

What is public ownership

A

Ownership of industries, firms and other assets such as social housing by central government or local government. The states acquisition of such assets is called nationalisation.

32
Q

What is privatisation

A

The transfer of assets from the public sector to the private sector

33
Q

What is regulation

A

The imposition of rules and other constraints which restrict freedom of economic action

34
Q

What is deregulation

A

The removal of previously imposed regulations

35
Q

What is regulatory capture

A

Occurs when regulatory agencies act in the interest of regulated firms rather on behalf of the consumers they are supposed to protect

36
Q

What is a tax

A

A compulsory levy imposed by the government to pay for its activities. Taxes can also be used to achieve other objectives such as reduced consumption of demerit goods

37
Q

What is a price ceiling

A

A price above which it is illegal to trade. Price ceilings or maximum legal prices can distort markets by creating excess demand

38
Q

What is a price floor

A

A price below which it is illegal to trade. Price floors or minimum legal prices can distort markets by creating excess supply

39
Q

What is government failure

A

Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free market outcome

40
Q

What are the functions of prices?

A

Signalling
incentive
rationing
allocative

41
Q

What are the advantages of the price mechanism?

A

promoting consumer sovereignty
providing it operates in the way through cost reduction the price mechanism leads to a productively efficient allocation of resources
By redistributing resources into the production of goods and services that people wish to buy the price mechanism achieves an allocative efficient outcome

42
Q

What are the disadvantages of the price mechanism?

A
  • imperfectly competitive markets favour producers
  • monopoly the operation of the price mechanism leads to an outcome in which firms exploit their producer sovereignty
  • price mechanism is value neutral has no regard for equality and the fairness or otherwise of allocation of buying power between different income groups
43
Q

allocative efficiency could only occur if:

A
  • there were competitive markets for all goods and services
  • there were no economies of scale
  • markets were simultaneously in equilbrium
44
Q

What are two important points are there to remember about perfect competition?

A
  • in the absence of economies of scale perfect competition would be more allocatively and productively efficient than monopoly
  • in perfect competition the “consumer is king”
45
Q

When might monopoly be preferable?

A
  • When the size of the market is limited but economies of scale are possible
  • under certain circumstances firms with monopoly power may be more innovative than firms that are not protected by entry barriers
46
Q

What are the three different parts of competition policy?

A

Monopoly policy
merger policy
restrictive trading practices policy

47
Q

What strategic approaches could be used to deal with the problem of monopoly?

A
  • compulsory breaking up of monopolies
  • use of price controls to restrict monopoly abuse
  • taxing monopoly profits
  • the rate of return regulation
  • state ownership of monopoly
  • privatising monopolies
  • deregulation and the removal of barriers to entry
48
Q

What independently undertaken restrictive prices are there?

A
  • decisions to charge discriminatory prices
  • refusal to supply a particular resale outlet
  • full line forcing whereby a supplier forces a distributor that wishes to sell one of its products to stock its full range of products
49
Q

What are the arguments to justify privatisation?

A
  • Revenue raising
  • reducing public spending and the government borrowing debt
  • promotion of competition
  • promotion of efficiency
  • popular capitalism
50
Q

What are the arguments against privatisation?

A
  • monopoly abuse
  • short-termism wins over long termism
  • selling the family silver
  • the free lunch syndrome
51
Q

What are the advantages of regulation?

A

necessary to protect

  • consumers from harmful products and to maintain quality standards
  • workers from labour market exploitation
  • the environment
  • child and old people from exploitation and abuse
  • people from self-harm
52
Q

What the two main justifications of dereuglation?

A
  • promotion of competition and market contestability through the removal of artificial barriers to entry
  • the removal of red tape and bureaucracy which imposes unnecessary costs on economic agents
53
Q

What reasons are there for government failure?

A

Pursuit of conflicting policy objectives
administrative costs
the law of unintended consequences

Microeconomics (8 decks)

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