Definitions Flashcards
What is Market Failure?
When the price mechanism/free market fails to allocate scarce resources in a productively efficient way
Complete vs partial Market failure?
- Complete = A missing market exists
- Partial = a market exists, but the “wrong” quantity of a good or service is provided
What is a missing market?
-The absence of a market for a good or service
What is a private good?
A good which has the characteristics or excludability and rivalry
What is a public good?
A good which has the characteristics of non excludability and non rivalry
What is productive efficiency?
The level of output at which costs of production are minimised
What is allocative efficiency?
When it is impossible to improve overall economic welfare by reallocating resources between markets
What is marginal utility?
The additional welfare gained from consuming one extra unit of a good
What is marginal revenue?
Addition to total revenue resulting from the sale of one more unit of the product
What are increasing returns to scale?
When total output is rising at a faster rate than the factors of production employed
What are constant returns to scale?
When output rises at the same rate as the factors of production employed
What are decreasing returns to scale?
When output increases at a slower rate than factors of production employed
What is normal profit?
-The minimum profit a firm must make to stay in business, which is insufficient to attract new firms into the market
What is an Oligopoly?
A market/industry containing a few firms
What is a contestable market?
A market in which the potential exists for new firms to enter the market. Perfectly contestable means no entry/exit barriers or sunk costs
