Market Economic System Flashcards
Economic system
Way an economy is organized and run including alternative views of how resources are allocated
Market economy
Rely on forces of demand and supply to allocate resources
Mixed economy
Some resources by private firms some by gov
Planned economy
Rely on gov to allocate resources
Adv of market system
- freedom of choice
- incentives
Disadv of market system
- wealth inequality
- environmental issues
- wasteful competition
Market failure
When forces of demand and supply not sufficient
When production or consumption causes additional side effects
Private costs
Actual cost of form individual gov
External cost
Negative spillover effects incurred by third parties
Social costs
True costs of production or consumption
Private + external cost
Private benefit
Benefit of production or consumption by a form or individual or gov
External benefit
Positive spillover effects incurred by third parties
Social benefit
Private + external benefits
Public good
Good and services not provided by firms
Merit good
- cause positive spillover effects
- under consumed
Demerit good
- cause negative spillover effects
- over provided without gov intervention
Maximum price
Gov sets price below Pe to increase consumption
Minimum price
Gov sets price above Pe to increase output
Minimum wage
Gov sets national minimum wage above Pe to make sure workers have decent income
Indirect taxation
To reduce demand for demerit good
Adv of indirect taxation
- reduce quantity demanded
- generate tax revenue for gov
Disadv of indirect taxation
- little impact as demerit goods are inelastic
Subsidies
Encourage consumption
