Free Market System Flashcards
What is consumer surplus?
The difference between what a consumer is willing to pay for a product and what the consumer actually pays
What is producer surplus?
It measures the difference between the price producers are willing to sell at and the price they actually receive
What is community surplus?
It is consumer surplus + producer surplus
What does the free market lead to in a perfect world?
Optimal allocation of resources
What are advantages of a free market system?
It maximises the community surplus
What are disadvantages of a free market system?
Monopoly power, externalities, public goods, merit goods, income inequality
What is monopoly power?
When a firm dominates a market
What are externalities?
Spill-over effects which occur outside the market and are not reflected on the price
How might externalities be a positive thing?
New motorway reduces transport costs or parks (people will use for leisure)
How might externalities be a negative thing?
Pollution, as producing products can cause waste
What are public goods?
Non-excludable and non-rival goods, e.g. lighthouses, street lights, army
What are merit goods?
Undervalued by individuals, e.g education
Why does the government intervene?
Because of the existence of market failures and market imperfections
What are government intervention methods?
Direct provision of goods and services, legislation and regulation, subsidies and tax and providing information to promote particular forms of behaviour
What can monopoly power lead to?
Too higher prices for consumers, poor service to customers and too less investment in research and development
