economics of the market Flashcards
what is the basic economic problem
scarcity - economic resources are limited/scarce but wants are unlimited due to greed this causes choices to be made on how to allocate these resources therefore creating opportunity cost
what is opportunity cost
the forgone value of the next best alternative
what are economic goods and what are free goods
economic - have price, use up scarce resources, has opportunity cost
free - no price, doesn’t use scarce resources, has no opportunity cost
questions that scarcity creates
what goods and services should be produced , how they should be produced, and who should receive them.
what are the free types of economy
planned/command, free market, mixed
what is a command/planned economy
government controls all resources and how they are allocated no private sector - everyone works for gov. basically communism
how it answers the questions
what to produce - government decides what they think the population needs
how to produce -government sets the production requirements for companies
who receives produce - everyone gets equal share of the produce
what is a free market economy
no public sector only private sector - all resources are allocated by the price mechanism using demand and supply to set price.
no country has a true free market economy
how it answers the questions
what to produce - decided by what consumers demand
how to produce - businesses will use the most efficient methods of production to maximise profit
who receives the produce - whoever can buy it
what is the price mechanism
demand is set by the consumer, if the demand goes up there will be a shortage
if price rises more companies will want to supply that good
if supply rises more resources will be required to produce
resources are then reallocated to the production of profitable goods away from less profitable ones
what is a mixed economy
a mixed economy is what most countries including the uk have. it has both a private and public sector
what are the 7 types of market failure
- not enough public goods
- not enough merit goods
- oversupply of demerit goods
- too many negative externalities
- not enough positive externalities - a good in which consumers who dont buy it are still benifited by it
- lack of competition/ monopolies
- income inequalities
what is a private good and a public good
private goods are ones that can be sold
public goods are non excludeable i.e. cant stop someone from benifiting and non rival i.e. consuming it does not take away the amount available
e.g. national defence is public good and coffee is a private good
what are the types of efficiency
technical - least possible resources are used to produce each good
allocative - when the rescoutces are used to make what is wanted most
why does a demand curve slope downwards from left to right (normal)
if a good takes up more of someones income they will buy less
if a good is too expensive people are more likely to switch to a substitute
law of diminishing marginal utility - people will not want to buy lots of a good unless its cheap because the more they buy the less joy they get
why can a demand curve slope upwards from left to right
Veblen goods - luxury goods if seen as luxury people want it
speculative goods
Giffen goods - as price increases consumers consume more of them as they are unable to afford alternatives
