Market failure Flashcards
Factors of productions
The inputs into the production process(Land.labour, capital and entrepreneurship)
Allocative efficiency
the best or optimal allocation of resources from society’s point of view. It occurs when the market is in equilibrium and social surplus is maximized. ( where P = MC)
Marginal Cost
the change in total cost resulting from a change in output of one unit
Resources
the inputs into the production process, the factor of production.
Equilibrium
a market is equilibrium where the quantity supplied
is equal to the quantity demanded.
Producer surplus
the difference between the price a firm is willing to accept for a unit of output and the and the price the consumer actually pays.
Free market
a market where the forces of demand and supply are allowed to operate without any form of intervention.
Surplus
occurs when quantity demand is greater than quantity supplied
Marginal benefit
is the additional benefit received by a person from the consumption of an additional unit of output.
Law of diminishing marginal utility
a theory- stating that the amount of satisfaction gained from the consumption of a good falls as more of the the good is consumed.
Demand curve
a graph that shows the relationship between price and quantity demanded.
Spillover effect
externalities caused by the consumption of a good that affects people who are not directly involved in its production or consumption.
External benefits
Occurs when the production or consumption of a good causes a benefit to third parties.
Marginal social benefit
MSB = Marginal private benefit + Marginal external benefit. it is the additional social benefit generated by consumption or production of an additional unit of output.
Positive externalities
the existence of positive externalities means that social benefit is greater than private benefit.
Private cost
The cost incurred by firms or consumers from their own production or consumption of a good.
Quantity supplied
the amount of a good that firms are willing and able to produce at a given period of time.
Total cost
the sum of total fixed cost and total variable cost .
Diminishing marginal returns to a variable
as more variable factors is added to a quantity of fixed factors the product of each addition unit of the variable factor will, at some point, begin to fall
Short run
A period of time when at least one factor is variable and and the others are fixed.
Social optimum price
is where MSB =MSC.
The value consumers in society place on consumption of the next unit is equal to the cost of resources used to produce the next unit.
Negative externalities
occurs when the production or consumption of a good creates costs that must be paid by third parties. The existence of negative externalities means social cost is greater than private cost.
External cost
Occurs when the production or consumption of a good creates a cost that must be paid by third parties.
