Chapters 13 - 15 chug Flashcards
Market economic system
Consumer demand determines what is produced
No government intervention
Those who have the highest incomes influence the market the most
Firms choose how something is produced, what is produced and who to
Privatized industry
Planned economic system
Governments choose what, how and who a product is produced for
Government provides directives to firms
Nationalized industry
Provide basic necessities for free to their citizens
Mixed economic system
Incorporates the functions of planned and market economic systems
Advantages of a market economic system
Incentives to work
Consumers are sovereign and responsive to changes to consumer demand
Consumers have a variety of products
Costs (efficient allocation of resources) and prices (competition) are low
High quality of goods
Disadvantages of a market economic system
No public goods produced (free rider problem)
Lack of interference towards external costs and demerit goods by government
Creations of monopolies cause poor allocation of resources
Advertising distorts consumer choice
Some goods may not be accessed by the needy
Creation of income classes are created
Situations where firms can’t react to consumer demand (workers lack skills, geographical mobility)
Private sector
economic sector owned by individuals and shareholders
Public sector
economic sector owned by the government
Allocative efficiency
When resources are allocated to produce the right products for the right quantity
Productively efficient
When products are produced for the lowest possible cost per unit
Dynamic efficiency
Occurs as a result of innovation and investment over time
Market failure
When goods are not produced at the right quantities at the lowest possible cost. When markets are inefficient
Social benefits
Private benefits + external benefits
Social costs
Private costs + external costs
Private costs/benefits
Costs and benefits for the producer and consumer
External costs/benefits
The affecting of a third-party not involved in the production-consumption process
Merit good
Products the government encourages the use of
(Underconsumed causing market failure)
Demerit goods
Products the government disencourages the use of
(Overconsumed causing market failure)
Public goods
Non-excludable goods produced by the government
Monopoly power abuse
Causes market failure, not responding to consumer demand due to lack of competition
Immobility of resources
Market failure created due to lack of allocative efficiency
Short-termism
Market failure created by economic decisions for benefits in the short-run but negatively affecting the future.
Maximum and minimum prices
To stop the buying of a product
To encourage the buying of a product
(by the government)
GOVERNMENT MEARURES TO PREVENT MARKET FAILURE
Subsidies and taxes (promotes and demotes merit and demerit goods)
Create competition laws (prevent monopolies)
Environmental laws (prevent external costs)
LAWS - Regulation (prevent inefficient allocation of resources)
Nationalization of the private sector (benefit the public and improve the economy)
Direct provision (Governments give essential items like education, housing, food, to those in need) - access to basic necessities
Unfairness (not really market failure but to improve social welfare) - equity
Government failure
Government intervention which can cause economic inefficiency
Benefits and drawbacks of private sector
Will produce high quality for low cost
but may create monopolies
Benefits and drawbacks of public sector
Will be monitored by government and be assessed of all costs and benefits
May have higher costs due to large budget. Also, lack of commercial experience