Chapter 8 Flashcards
Profit signalling mechanism
The means by which resources are allocated in a market economy. High levels of profit in specific market attract more resources. Losses drive them away, to some better use.
Market
Any medium in which buyers and sellers interact and agree to trade at a price.
Allocation of resources
How resources are shared out/distributed in an economic system.
Monopoly power
Businesses that are big enough to behave like a monopoly, have some control over prove and can maintain some barriers to entry.
Market failure
When a market does not efficiently allocate resources to achieve the greatest possible customer satisfaction. (The allocation of resources is such that a relocation would make some people better off)
Allocative efficiency
When resources are used to yield the maximum benefit to everyone. It is impossible to redistribute them without making someone worse off.
Public good
Something that the free market will not provide at all. There is no incentive for a producer to supply it, it is impossible to charge for it and make a profit and it is impossible to prevent anyone else from consuming it for free.
Non-rivalrous
If one person consumes a good it does not affect or reduce the amount left for someone else to consume. E.g. If I walk under a street light and benefit from the light, that doesn’t mean the next person has less light.
Non-excludable
It is impossible to prevent people who have not paid for a good from consuming it. For example, I might pay for the light outside my house, but I can’t prevent people from using the light.
Free rider problem
When public goods are under provided or not provided at all because individuals are able to consume the good by paying little or nothing towards the cost.
Public sector
The part of the economy that is controlled or owned by the government and funded from tax revenue.
Private sector
The part of the economy that is controlled or owned by individuals, or companies that are owned by individuals.
Merit goods
Can be provided by the private sector, but the quantity that the free market provided is lover than the optimum level for society. They are under provided by the market mechanism.
Demerit goods
Ones that are overproduced by the free market, in quantities that are above optimal level for society as a whole. They are generally thought to be bad for society at large.
External costs
Costs or negative side effects imposed on a third party who is neither the producer not the consumer.
External benefits
Benefits or positive side effects enjoyed by a third party who is neither the producer nor the consumer.
Social costs
The total costs of producing goods and services and are calculated by adding together the private and external costs.
Social benefits
The total benefits of producing goods and services and are calculated by adding together the private and external benefits.
Externalities
Positive or negative effects on third parties.
