Chapter 8 : The market mechanism, market failure and government intevrention in markets Flashcards
What is market mechanism?
The interaction of the forces of demand and supply to determine market prices, market quantities and market equilibrium
What is market failure?
A suboptimal allocation of resources which means the market mechanism is unable to satisfy the wants and needs of consumers
What is market equilibrium?
When nothing is changing and the market is at rest
What is the price mechanism?
How decisions of consumers and businesses interact to determine the allocation of resources
What are the 4 functions of the price mechanism?
- The signalling function
- The incentive function
- The rationing function
- The allocative function
What is the signalling function of the price mechanism?
Prices perform a signalling function as they adjust to demonstrate where resources are required
What is an example of how the signalling function works?
Prices in the price mechanism rise and fall to reflect shortages and surpluses
What is the incentive function of the price mechanism?
Consumers choices send information to produced about their changing needs and wants
What is the rationing function of the price mechanism?
Prices ration scarce resources when there is a shortage. Demand outstrips supply.
What is the allocative function of the price mechanism?
Scarce resources are redirected away from markets where there is a surplus and prices are too high to market where there is a shortage and prices are too low
What is complete market failure?
When a market fails to supply a good or service altogether requiring full government intervention to provide it
What is partial market failure?
When a market functions but does not allocate resources efficiently, requiring corrective policies to fix inefficiencies or inequities
What is a missing market?
A situation in which there is no market because the functions of prices have broken down.
What is the free rider problem?
The tendency for individuals to benefit from a public good or service without contributing to the cost of providing it
Ex. Illegal streaming
What is a private good?
A product that is excludable and rivalrous as they must be purchased before they can be consumed.
Ex. Apple iPhone
What is a pure public good?
A non-rivalrous and non-excludable product that can be used by anyone without purchase.
Ex. Street lighting
