Government + Market Flashcards
What is general equilibrium
General equilibrium is the optimal allocation of inputs and outputs
-> firms are maximising its profit (producing at minimum ATC)
-> buyers are maximising the utility
what does the general equilibrium cycle reflect?
it reflects all the perfect competition’s assumptions, thus, leading to an ideal market based on laissez-faire (free market structure)
what prevents perfect competition? (5)
inequality
tragedy of the commons
market power
labour unions
(de)merit goods
Explain the general equilibrium cycle (flow of in/outputs)
Consumers to Factor market: supply for production factor
Factor market to Producer: demand for production factor
Producer to Market: products sold
Market to Consumers: products bought
Explain the general equilibrium cycle (flow of money)
Factor market to Consumer: income
Consumer to Market spending
Market to Producer: revenue
Producer to Factor market: costs
Explain the government’s role in the general equilibrium cycle
Government to Factor market & Market: spending
Factor market to Government: resources
Market to Government: products sold
Government to Consumers&Producers: public goods and subsides
Consumers&Producers to Government: taxes
Why does the government intervene?
To prevent market power abuses and provide equilibrium to the strucutre.
Types of Governmental intervention
1. Direct Price Control (2)
- Price floor: sets a minimum legal price
- Price ceiling: sets a maximum legal price
*when supply > demand there is an undesirable rationing mechanisms leading to inequalities
Types of Governmental intervention
2. Indirect Price Control
Imposes taxes on goods and services
Types of Governmental Intervention
3. Market Power (3)
- Antitrust laws
- Regulations
- Public Ownership
All these mechanisms prevent monopolies from taking over
Types of Government intervention
4. Externalities
+ : government invests to positively impact more people (social welfare)
- : government prevents and takes measures against that externality (taxing)
Positive Externalities cause..
(on the graph)
cause social optimal quantity to be greater than the equilibrium quantity
Negative Externalities cause…
(on a graph)
social optimal quantity to be less than the equilibrium quantity
Regarding taxes, what does it mean “inelastic demand curve”
that the supply curve is elastic and therefore the price of the tax will be more paid by consumers rather than by producers
Regarding taxes, what does it mean “elastic demand curve”
that the supply curve is inelastic and therefore the price of the tax will be more paid by the producers rather than by the consumers
