Economics Of The Market Flashcards
Describe the problem of scarcity
Scarcity is the problem of unlimited wants faced with finite resources.
It is a universal problem that affects all economies
It is permanent
scarcity of a resource can change if wants or the amounts available change
What’s the impact of scarcity on organisations
Organisations only have access to finite resources to make their products and services. E.g competing for skilled labour or natural resources, therefore increasing costs
Organisations may need to make a choice that can compromise their profit levels e.g. up-skill staff through training or purchase up-to-date technology such as computers
Methods to reduce scarcity
Discovering new resources like new oil reserves
Specialisation of workers will increase their output and therefore improve efficient use of finite resources
Substitution of resources, this will help reduce the pressure on finite resources, e.g. use machinery instead of labour
Reduce the population’s wants through education of sustainability
Improve geographical mobility e.g. help people find work in other parts of the country
Describe the allocation of resources in a planned economy
The government owns all resources and therefore is in complete control of how resources are allocated
Prices and incomes are decided the government so that every member of society is equal
The government sets quotas for each factory and allocates the necessary resources
Describe the allocation of resources in a market economy
The goods which are produced are decided by consumers I.e what products they want to buy will be manufactured
How the goods are produced is decided by manufacturers as they want to maximise profits while keeping costs low
Resources are reallocated to the manufacturing of more profitable products
BECAUSE if the price increases, the product is more profitable to make therefore more manufacturers will want to make that product increasing supply
- Describe & explain types of market failure
One type of market failure is the non-provision of public goods which is when it is impossible to sell them at a profit, therefore private sector will not supply them at all. (EXPLAIN) This is because when one consumer uses them, it does not diminish the amount available for the next consumer. Examples of public goods street lighting and public parks.
- Describe & explain types of market failure
The under-provision of merit goods is when goods which provide a social benefit are underproduced as in a market economy the private sector will only supply them to the point that they are profitable. (EXPLAIN) Because not all individuals can purchase the goods privately due to their disposable income. Examples of merit goods are education and healthcare.
- Describe & explain types of market failure
The over-provision of demerit goods is when in a market economy the private sector will supply demerit goods in abundance as they are very profitable. (EXPLAIN) this is because of low production costs but they have high social costs as they tend to be addictive. Examples of demerit goods are alcohol and tobacco.
- Describe & explain types of market failure
Another type of market failure is the overproduction or consumption of goods with negative externalities by private sector organisations. (EXPLAIN) This is because the cost of production will not take account of the impact of negative externalities on third parties. Examples of this are pollution and environmental damage.
Explain using a production possibility diagram, what is meant by economic growth.
Economic growth is an increase in the total amount of goods/services produced in an economy over time. The curve moves outwards because of an increase in the production capacity.
This is because the country has found a way of expanding its resources or improves the resources it already has through technological development, more resources or higher quality goods.
This is measured by increases in Gross Domestic Product.
Explain opportunity cost, using a PPC diagram.
Opportunity cost is the value given up in order to chase something else. Opportunity cost arises because as production of one good increases, quantities of the alternative good are sacrificed.
For example, from diagram: as consumer goods rise from 60 to 80 the opportunity cost is the 10 capital goods sacrificed.
Explain Economic Efficiency, using a production possibility diagram
Economic efficiency point A on the curve is where, allocation of resources maximises the production of goods and services, and all waste is minimised.
Compare scarcity with a shortage
Scarcity is the problem of unlimited wants whereas a shortage is where demand exceeds supply
Scarcity is permanent whereas a shortage is temporary
With scarcity wants are never fully satisfied due to human nature whereas a shortage is cured by a rise in price and/or increase in supply.
Scarcity is a universal problem whereas a shortage is limited to a certain market.
- Describe & Explain types of market failure
Another type of market failure is the underproduction or consumption of goods/services with positive externalities by private sector organisations. (EXPLAIN) This is because the good/service is not profitable as they tend to be free for some individuals to consume AND because organisations won’t provide them unless they receive some subsidies. Examples of positive externalities are unprofitable bus routes and vaccines.
- Describe & explain types of government intervention
The government will set in and provide merit goods such as education and healthcare as well public goods such as street lighting and healthcare.
- Describe & Explain types of government intervention
Setting a legally imposed maximum price because this protects the price mechanism from kicking in.
Used to protect low income consumers.
To be effective the maximum price must be set below the equilibrium price because demand is greater than supply I.e. there is a shortage.
Example: maximum price for rental properties
- Describe & explain types of government intervention
Set a legally imposed minimum price
Used to:
give producers a guaranteed income, to encourage production, Reduce consumption and Prevent monopoly power.
To be effective the minimum price must be set along the equilibrium price because supply is greater than demand I.e. there is a surplus.
Examples: minimum pricing of alcohol
- Describe and explain types of government intervention
Taxation is when the government imposes taxation in order to raise revenue and discourage consumption.
Examples:
VAT increase - manufacturers received selling price less VAT, therefore, manufacturers costs increase so supply falls.
Tax on demerit goods e.g. cigarettes - increases cost to consumer, therefore demand falls, therefore reduces social costs.
Increase on income tax - redistribution wealth/reduce poverty.
Increase council tax - ensures the cost of public goods are covered.
- Describe and explain types of government intervention.
Providing subsidies is when financial assistance is provided by the government.
Used to encourage production/consumption of specific goods/services.
Examples:
Electric cars, at one point up to £5,000 subsidies were available on the purchase of new electric cars. Currently subsidies are available on the installation of charging points.
Agricultural subsidies are used worldwide, a current UK example is improving farm productivity grant, can apply for £25,000-£500,000 for robotic/automated equipment.
Describe what is meant by joint supply AND example.
Joint supply is when the supply of one good is directly related to another.
Products that have joint supply are made from the same resources.
For example if there is an increase in supply of beef there will be an increase in supply of leather.
Describe what is meant by competitive demand AND give an example.
Products that have competitive supply are alternatives to each other and are known as substitute goods.
Demand for one good can replace demand for another good as consumers can achieve equal satisfaction from a substitute product.
For example if there is an increase in demand for Pepsi the demand for Coca Cola will decrease.
Describe what is meant by joint demand AND give an example.
Products that have joint demand are bought together and are known as complementary/interdependant goods.
The demand for one good is directly related to another.
For example if there is an increase in demand for toothbrushes there will be an increase in demand for toothpaste.
Describe what is meant by competitive supply AND give an example.
Products that have competitive supply are produced from the same resources but only one product is produced resulting in an opportunity cost.
For example if there is an increase in supply of potatoes there will be a decrease in supply of carrots, the former uses their field to grow one or the other
